Republic First Bancorp, Inc. (FRBK) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to the Second 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 Vernon Hill. Vernon Hill, you may begin.
Vernon Hill: Thank you. Good morning to each of you. With me is, CFO, Frank Cavallaro; Andy Logue, President of Republic Bank. So I'll go through the press release, then we'll open it to the floor. Power of Red had a great quarter in Q2. For the quarter income was 5.9 million or $0.08, up 136% over the second quarter of last year. For the six months income was 13 million or $0.17 a share that's 500% over the first half of last year.
Frank Cavallaro: $916 million, or 25%.
Vernon Hill: And this growth per store in the core deposit was counting our new stores only it was 34 million in store when you add all the stores including the ones we haven't converted yet, if the growth was 29 million per branch. PPP loans were important in the first half of this year. Frank, add on those.
Frank Cavallaro: Yes, if you exclude the PPP loans from our loan growth, loans grew $252 million, or 13% to 2.1 billion. We continue to see the pay downs and payoffs of the PPP loans. So we extracted that when we presented these numbers.
Vernon Hill: A lot of our new business development still is fed by the PPP loans we made last year, we're seeing a lot of new accounts and clients from the PPP program. Asset quality remains great. Our non-performing declines slightly to 0.26. And we point out to you, if I had this right, Frank, only one borrowing customer is deferring.
Frank Cavallaro: That's correct.
Vernon Hill: Okay. I'm onto the second page, it just shows you the first part of it is growth in assets, loans and deposits for the quarter, while the year-to-year assets grew 21%, loans grew 1% but loans actually PPP was 13 and deposits grew 25%. On the income side, which is also on page two for the quarter, the top line grew 24%, non-interest expense only grew 14%. And we had the same look for the six months where the top-line grew 48% and non-interest expense only grew 11%. We're focused on this idea of jaws growing the top line substantially more than our non-interest expense. Frank, go ahead, PPP –
Frank Cavallaro: Yes. We just wanted to update on the PPP loans. In total, after round two, we did nearly a billion dollars in PPP loans making us one of the top lenders in the entire country if you compare the PPP loans to our total portfolio. To-date through the date of this release, almost $600 million of those loans have been forgiven by the SBA and paid back. So we continue to collect the outstanding balances there. We still have $13 million in fees remaining on these loans that we will amortize and recognize in future periods and as we said in the past more than half of the applications we got during the first round of PPP were from businesses that were not customers at the time, and many of them have switched their primary relationship to Republic since.
Vernon Hill: Going down -- on Page three, the second part of the board's margin improved for the six months by 16 points to 2.80. It was primarily a decline in the cost of funds. Right, Frank?
Frank Cavallaro: That's the main driver for six months.
Vernon Hill: Our model produces very high growth in core deposits. at a very low cost of funds. That has always been our model. Two stores -- go ahead we open one store this year and we have one about to open they are Deptford, New Jersey and Ocean City. Frank about mortgage.
Frank Cavallaro: Mortgage continues to produce for the 12-month period over the last 12 months, the mortgage team has originated more than $800 million in loans and that's a record high for this group. It's a good mix of new home purchases, as well as refinancings, but we continue to see strong volumes out of the mortgage team.
Vernon Hill: And our book value per common share grows each quarter, it ended this quarter at $4.62 as compared to 4.34. Go ahead, Frank anything on the next page, you want to highlight.
Frank Cavallaro: The next page just gets into more detail the income statement for the three-month period. As Vernon mentioned, we increased net income to $5.9 million for the three-month period ended June 30. The operating leverage is a big driver in the improvement there. Net interest income increased to 30.6 million. We are seeing some fees recognized through PPP, but we're getting growth in interest earning assets as we continue to grow the balance sheet. And the margin for the three month period, compared to last June increased to 264 compared to 255. There is some movement or some noise in there related to the PPP amortization but that will work itself out in the coming quarters.
Vernon Hill: And the same numbers for a six month period.
Frank Cavallaro: Yes, for the six months similar trends, we continue to improve revenue at a greater rate than the non-interest expense. The overall net interest income after tax was $13 million, or $0.17 a share. It’s a 578% increase, if you compare it to the six month period ended June 30 of last year.
Vernon Hill: You can see on this six month chart, the power of jaws top line for six months grew 38% non-interest expense only grew 11%. And we only earned 1.9 million in the first six months of last year. And that compares to 13 million for this year. The power of our momentum is getting stronger and stronger. Deposit type on Page six, Frank.
Frank Cavallaro: We grew deposits as we said by 25% year-over-year we highlighted, one of the highest growing percentages is demand non-interest-bearing accounts that grew 15% year-over-year. We saw growth quarter-to-quarter as well. We continued to see new count relationships open and we continue to get business from the effects of the PPP loan program.
Vernon Hill: The loan breakdown is on Page seven, Frank.
Frank Cavallaro: In the loan table, we put a subtotal in the loan table to show you growth year-over-year, excluding PPP loans. Loans grew 13%. If you compare June 30, this year to June 30 last year, that's consecutive quarters for us with double-digit loan growth, which is a real testament in this loan environment. We continue to see the wind down of the PPP loans. June 30 of last year, we had over 650 million that's down to 380 million as of June 30, 2021.
Vernon Hill: Okay. Asset quality, pardon me, I got cold, go ahead.
Frank Cavallaro: Yes. Asset quality remains strong, we continue to monitor it closely. As we come out of the effects of the COVID environment, non-performing assets to total assets has shrunk 0.26%. We had no charge offs at all during the quarter. And the allowance for loan losses to total loans, excluding PPP is 0.75 basis points.
Vernon Hill: The allowance for the non-performing loans 134%.
Frank Cavallaro: Yes.
Vernon Hill: Okay. The capital ratios are on Page eight. Anything you want to say about that?
Frank Cavallaro: The leverage remains at 7.28, we continue to keep an eye on that. Overall, total capital 13.30. That's a strong level, the year-over-year growth in capital was driven by the capital raise that we did last August, the preferred stock offering that we did.
Vernon Hill: Anything else?
Frank Cavallaro: Those are the highlights for the quarter.
Vernon Hill: Andy, anything?
AndyLogue: No.
Vernon Hill: All right. We'll open the floor. Fire away, guys.
Operator: Thank you. We will now begin the question-and-answer session. And our first question comes from Frank Schiraldi from Piper Sadler.
Frank Schiraldi: You mentioned Vernon, you mentioned the growth rates for the new stores in terms of deposits, and growth is pretty strong in the existing branches as well.
VernonHill: Yes, you're right.
Frank Schiraldi: You talked about the new branches as important being advertisers, required for growth. And just wondering how you determine what you need in terms of branch density in a given geography versus what you would need in 10 or 20 years ago? And then, if you could talk about that build out particularly interested in kind of the New York City geography?
Vernon Hill: Yes. Okay. That's a good question. We're going to build out in the markets we had at Commerce. The end Commerce at 440 offices of 480. Today, you probably half as many as that, because of the online, the digital, but you definitely need stores. And you can see our stores are producing. As to the New York market Commerce had 250, in the metro, New York market, Long Island, Westchester and Northern New Jersey. We're probably happy in Metro New York with half of that, maybe somewhat less. But I can't quite tell, but generally, where I'm looking to put in roughly half of what we had at Commerce, but is amazing how these new stores are growing. And as you pointed out, they're bringing the older Republic branch growths with them as the brand gets stronger in the market.
Frank Schiraldi: And when do you think in terms of getting back, you opened in a couple in Jersey this year? When do you think you'd get back to growing or putting up branches in New York City? And what's sort of the kind of the annual rate you foreseeing there?
Vernon Hill: We have two in New York City and Manhattan now. Our branch growth rate is not as much as I would like, you all know, I love to build stores, but we're growing so much per branch, that capital has trouble keeping up with it. But I think next year, you're going to see us do, this is a guess guys, so don't hold me to it, we will do somewhere in the four to five new stores next year. And two or three of those will be in the metro New York market.
Frank Schiraldi: Okay, great. Thanks for the color.
VernonHill: But, Frank, just let me put that in perspective, Commerce was building one store a week. And we would like to build more, but we you know, with the margin being compressed, we have to get the expenses under control. But you pointed out at our gross per store, this is a giant number. I've never had growth per store, even at the peak of Commerce like this.
Frank Schiraldi: And then in terms of the loan growth, you talked about New York City providing a really good opportunity for growth. Just wondering if you could talk about the size of those loan balances at this point in New York, and how much of the core growth is being driven in terms of loans by that geography?
Vernon Hill: Yes. What's the outstanding loans in New York, 160 or something like that? I think 160 New York is probably great. Even though we have a smaller branch presence, we have a strong group on Long Island and Manhattan. So it's driving a disproportionate share maybe half of our loan growth for the bank. I think I'm going to see just what we saw at Commerce, New York Metro will drive the growth of this Loan Bank -- of the loan growth in this bank for a long time. And over time, you'll see it being a disproportionately high. Not only did we get at Commerce and at Republic, more loan demand up there, but the pricing is better in Metro New York, than it is in Metro LA. We will start breaking that out maybe at the end of the year, but I expect to see our loan growth being driven out of the Metro New York market.
Frank Schiraldi: Got you. Just a couple of quick if I could modeling questions, Frank service fees on deposits were down linked quarter, I guess it was a very strong first quarter. But I wonder if you can just talk about what a good run rate might be obviously, as deposits grow, I'd expect that line item to grow as well.
VernonHill: Got it. This is grid 17. We have it. We got it, Frank.
Frank Cavallaro: So what you're seeing in the second quarter, I think is a more normalized run rate in the first quarter. We told we announced last year that we signed a deal with Visa to convert all our ATM and debit cards and there was some upfront money that we received that went into that first quarter. So now in the second quarter, we're fully converted. And we're operating on what we think is more of a normal.
Vernon Hill: So the second quarter is your normal run rate.
Frank Cavallaro: Correct.
Vernon Hill: As New York, rather as you get more bigger, actual accounts and you get cash management fees, New York will drive everything up higher. Of course, that's offset by the higher expense side. So we have to balance those things out.
Frank Schiraldi: Got you. Okay. And then, lastly, just on the PPP. Frank, I know you have 13 million in fees left to be taken in? What were the fees that were brought in through income through NII in the second quarter?
Frank Cavallaro: About 4.7 million in the second quarter?
Vernon Hill: Really? Is that low?
Frank Cavallaro: Yes.
Vernon Hill: Remember, the SBA was backed up. So it got really slow. they've written there for a while. We're starting to see the wind down of the first round and what we're waiting for other forgiveness applications for the second round to start to come through. So then we'll see more acceleration and maybe the latter part of this year, early next year.
Operator: And your next question comes from Mike Perito from KBW.
Mike Perito: I wanted to ask a question, just piggybacking on something you said earlier, Vernon to one of Frank's question. I guess, what's the updated or unchanged? Maybe, but maybe you could just refresh us? How do you guys kind of think about the math of that dynamic? I mean, obviously, the balance sheet growth is really strong. But the capital ratios are under a little pressure because of that, but I know there's definitely momentum to open more stores and drive more growth and the brands being really well received. Just wondering maybe if you can just kind of flush out or just think about that math behind that and how to kind of continue this growth engine, while not making sure that the capital doesn't become a burden like it was, 12 plus months ago.
VernonHill: Yes. You have to balance all those things out, Mike. And you know, what better than I do as well as I do. So first of all, you start with your deposit growth in the stores you have now without factoring into the new store growth. And we're going to need over the time, we're not saying now, but growth capital, we're going to have to raise gross capital, we keep up these rates as we did at Commerce.
Mike Perito: Got it. Thanks. And so I guess just to follow up on that. I mean, would your expectation be that there's no external capital needs for the remainder of this year?
Vernon Hill: I'm not willing to say we do or do not need capital. We're balancing that out. But in the next 12 months, for sure, we're going to need some more growth capital. And part of the problem is the flat curve, even though we're making more money, you're not making much as we should with the normal yield curve. So capital requirements, if we didn't open any new stores, the growth in this last quarter would be almost the same, wouldn't it? Frank?
Frank Cavallaro: Correct. The one store that we did open didn't open till very late in the quarter. So the growth is still being driven by the existing stores.
Vernon Hill: And Mike, when I looked at the old days of Commerce and we did the models, obviously, we were much more advanced. It's the growth in deposits per store that really drives it.
Mike Perito: Yes. And that was going to be my next question. As I mean, not the loan growth has done really solid, I mean, think it's been, if we just out PPP, it's been double digits for four quarters now since that first quarter at the onset of the pandemic. But you guys are still having to park a decent amount of money right in cash and in a bond book. And so, I guess just more succinct way of asking, Frank, I mean, what do you think we can expect from the NIM here? It sounds like loan pipelines are solid. I mean, are you hopeful to maybe get that loan deposit ratio inflecting? Or is there just too much deposit growth momentum for that to happen really anytime soon?
Frank Cavallaro: Yes. I mean, it's difficult to say, depends on the shape of the yield curve. We're expecting it to stay at least where it is right now. If you take out the impact of the PPP fees and interest on those loans as they pay down. But we're not expecting it.
Vernon Hill: Margin in the second quarter went up, right?
Frank Cavallaro: If you compare the second quarter of this year with the second quarter of last year it did go up.
Mike Perito: Sorry, go ahead, Vernon.
Vernon Hill: What we found in New York at Commerce is the lending book over funds itself. So the more loans you make in that market, the more deposits grow. And that was somewhat of a surprise to us. And we're seeing that same thing here. So we can -- when you talk -- when we talk about growth per store, we tend to think about small business, middle size and the consumer business, but when you're making bigger commercial loans, particularly in the Manhattan market, you get -- it's not a smooth path, but you'll see that they generally over fund themselves.
Mike Perito: And yes, I was just going to clarify something with Frank, that the NIM x PPP is, is it running mid 230s today, is that ballpark where you have it, just want to make sure I'm thinking about the right way.
Frank Cavallaro: I would say if you pull those numbers out, I'd say it's a little bit higher than that.
Vernon Hill: Mike, take it out, we will tell you it should be around 2.5, 2.6 without PPP.
Operator: And we have no further questions. I'll turn the call back over for final remark.
Vernon Hill: All right, thank you all. Call me or Frank if you need something after the call. Thank you. Cheers. Bye-bye.
Operator: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
