Republic First Bancorp, Inc. (FRBK) on Q3 2021 Results - Earnings Call Transcript
Operator: Welcome to the Third Quarter 2021 Earnings Conference Call. My name is Richard 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 that this conference is being recorded. I will now turn the call over to Frank Cavallaro, Chief Financial Officer. Mr. Cavallaro, you may begin.
Frank Cavallaro: Good morning. Thank you for joining us on the earnings call for Republic First Bancorp, Inc. This morning I'm joined by Vernon Hill, our Chairman and Chief Executive Officer and Andy Logue, our President and Chief Operating Officer. At this time, I'll turn the call over to Vernon for some opening remarks.
Vernon Hill: Welcome to our Q3 call. Thank you for being on. The third quarter and our nine months of this year has been specially strong as our Power of Red model continues to show increasing momentum in all of the markets we serve. Frank would you once please?
Frank Cavallaro: Yes, we'll start with the earnings for the nine-month period ended September 30. Our earnings grew to $19 million or $0.25 a share compared to just $1 million or $0.02 a share a year ago. For the three months period we recorded income of $6.1 million compared to a net loss of $1 million a year ago at this time. The improvement in earnings has really been driven by the strong growth in revenue as we also continue to maintain focus on cost control initiatives which were refer to as the jaws effect. Revenue increased by 30% for the nine-month period and interest expense -- noninterest expense increased by just 9% in the same period. Deposits have grown more than $1 billion over the last year. We reached $5 billion in assets for the period ended September 30, that's 27% growth year-over-year. Our new stores are currently growing deposits at an average rate of $42 million a year and also has combined with the legacy stores included are growing at $33 million a year. We're pleased to report that we're achieving this deposit growth while simultaneously decreasing our cost of funds. The cost of funds dropped 36 basis points during the third quarter of this year compared to 59 basis points in the third quarter of last year. Loans have also grown strongly. Excluding the effect of the PPP loans which are now paying off, our loan portfolio grew by $296 million or 15% to nearly $2.3 billion for the period ended September 30. And asset quality remained strong as we grow these loans our ratio of nonperforming assets to total assets has dropped to just 25 basis points at September 30. We're also pleased to report that all of our loan customers that were deferring loan payments during the COVID pandemic have all returned to contractual payments as of September 30.
Vernon Hill: Frank let me -- I want to add one other item that is not on the first page and we're pleased the nine months of 2021 versus the prior year our net interest margin went up $27 million year-to-year, of that we're getting positive results on volume from our gross which produced $16 million of the $27 million growth and the rate environment also helped us the way we have our asset liability structured for and that produced almost $11 million in increased net interest margin. So we're pleased to say we're getting positive performance on both growth and the rate. Frank?
Frank Cavallaro: On the next page of the release we put a table in that shows you our asset, loan and deposit balances, including and excluding the PPP effect. As you're aware we were a strong participant in the PPP loan program beginning last year when it was first rolled out. We continued that early this year as we got involved in the second wave of that program. We're now seeing the loan balances related to PPP continue to pay down, so we presented balances and growth with and without those to make it clear that our balance sheet continues to grow excluding that effect. In addition to the PPP short-term borrowings that we were utilizing are also we're no longer utilizing that program because it has expired. The table below that is the, is a more detailed summary of the income statement. We talked about net income for the nine months and the quarter earlier, but we're also reiterating here that the jaws effect, the revenue increase for both the three and the nine-month period are strong 18% for the third quarter in revenue growth versus 4% in interest growth. We also note in this table that we broke out noninterest expense yes. In this table we also draw out, a year ago we had a charge, a one-time charge for goodwill impairment. So when we're doing this comparison, we separate that out to be able to see that and the change in expenses are on an apples-to-apples basis.
Vernon Hill: Some additional highlights include the net interest margin improvement year-over-year. For the nine-month period ended, we recorded a net interest margin of 271 compared to 253 a year ago at this time and that's again driven by not only the volume improvement, but the rate as we continue to see a decline in the cost of funds. So this again reflects the power of the model we have, the loss ratio model before from us. We get this tremendous deposit, core deposit growth with a very low cost of funds. People are switching to us for convenience and service, not for rate. The magic of our model in our past banks and this one is again very high core deposit growth with a low cost of funds. Frank?
Frank Cavallaro: We're also reporting that we've got 32 store locations opened as of today. We've got a store under construction in Ocean City which we expect to complete during the fourth quarter and there are additional sites that we're pursuing for next year. Our residential mortgage division, Oak Mortgage is continuing to drive strong volumes. They've done more than $700 million in the loan originations over the last 12 months, were existing customers with both refinancings as well as purchase of new homes. The total risk based capital ratio was 12.53% and the leverage ratio was 650 as of September 30 and our book value per share increased to $4.4 and $0.67 compared to $4.33 a year ago. The following pages dives further into the income statement. We break out both the three month comparison, as well as the nine-month comparison. We talked about the improvement in the revenue versus noninterest expense. We've also stated in the release that we've got an additional $9 million in deferred PPP fees that will continue to be recognized over the life of the loans in future periods. For the nine-month period we saw tremendous growth in net income. Net income for the nine-month period was $19 million or $0.25 a share compared to about just $1 million a year ago to the Power of Red and the model that we're running continues to generate results across the board, not just in the balance sheet, but on the income statement as well.
Vernon Hill: And our earnings for the quarter were $0.25 a share versus $0.02 a share in the third quarter of 2020 correct?
Frank Cavallaro: That's correct.
Vernon Hill: And I want to make a point here in case some of you have missed it. We have no goodwill on our balance sheet at all. We had one small goodwill item that we wrote it off, so this is the bank book I believe no goodwill is that right?
Frank Cavallaro: That's correct.
Vernon Hill: Go ahead.
Frank Cavallaro: The following page we get into a great our deposits. We talked about this strong growth in deposits more than $1 billion year-over-year. We like to highlight that one of the fastest growing categories within deposits group is the noninterest-bearing deposits. Those deposits over the last 12 months grew nearly $300 million or 28%, but we are seeing deposit inflows across the board as we rollout the model and continue to win fans over throughout the markets. The following page has a lending table. We break out the loans by type. We segregate the PPP loans at the bottom, so you can see the declining balance is there. The forgiveness process continues, but we've seen strong growth in not only our commercial loans, we've got residential mortgage growth, commercial real estate. We're significantly seeing 15% growth in this environment something we're proud of and we continue to see pipelines build as we go into the future.
Vernon Hill: And our Metro New York portion has already begun to contribute a substantial amount in loans and deposits.
Frank Cavallaro: The following page has a table on asset quality. We mentioned the nonperforming assets to total assets has dropped to just 25 basis points. Our allowance for loan losses to total loans has increased to 77 basis points and the allowance compare to nonperforming loans or the coverage ratio has grown to 133%. Finally, the last table is a capital table listing out our capital ratios at both the holding company and the bank level. The leverage ratio at the holding company is at 6.50%, but all of our other ratios continue to remain strong and above the well-capitalized levels that we require from a .
Vernon Hill: Thank you, Frank. Andy?
Andrew Logue: No I'm good.
Vernon Hill: All right, can we open the floor up for questions please?
Operator: Thank you. First question on the line comes from Mr. Frank Schiraldi from Piper Sandler.
Vernon Hill: Good morning.
Frank Schiraldi: Just I wanted to start with growth. You know, obviously the last 18 months has been pretty unique from just an industry and a macro standpoint. Frank, you mentioned the 27% growth year-over-year, just wondering your thoughts given all that you know, the new store openings are coming down in 4Q and next year. Is that 20% to 30% growth, is that still a reasonable expectation of future growth or has the macro environment, the stimulus, just kind of been such a tailwind in the short-term?
Vernon Hill: Frank and honestly with a strange year in PPP was very important, not just for the loans we made, but the new business relationships we created. Frank will give you the percentage number, but we project that growth in a slightly different way. We project it in deposit growth pursuer just like I did at . Particularly as we expand in the Metro New York market where our growth numbers were higher ours being commerce. I think the numbers we're using is what generally what we predict going forward. Frank, I got that right?
Frank Cavallaro: Yes, you are correct and you know what we'll say that the new store growth obviously helps us, but we only opened one new store to date this year and just two last year. So we're seeing momentum build across our footprint. The PPP loan program had a big effect as Vernon said on helping us drive this business and to improve our brand, but we're feeling, new relationships across the board on both the consumer and the commercial side. So we think that to answer your question, that that is sustainable.
Vernon Hill: So Frank, some that are not familiar with this overestimate, the expensive and the impact of growth in these stores, we like new stores because it helps us go into new markets, but certainly you need to lessen the stores that we had in years past. But if you look at our models and our numbers that you had, you'll see the growth is coming in deposits from the existing per store growth. And new stores, while they’re important to us, they are a much smaller percentage of our growth numbers and the losses for the new stores the first month they’re open are a very small number in our total expense base, because the bank keeps growth above.
Frank Schiraldi: Okay. Great, thank you. And then just in terms of the capital, obviously that that comes up a lot in conversations and how big a constraint is that on growth? What are your thoughts on capital in terms of a potential timing and size of a common raise to boost those levels? And is there a specific kind of ratio that you're looking at on the capital side that you want to stay above as we get into 2022 here?
Vernon Hill: Right, why don’t we talk about the percentages the ratios cap cost ?
Frank Cavallaro: Yes, as we mentioned our team when they released this had list out all the ratios, the leverage ratio is one that we monitor closely because that's driven by the asset side, not just risk weighted, but average assets. So, we're below 7% on the leverage ratio and we’re clearly aware that the total risk-based capital also in the 12% range is one that we monitor closely and keep an eye on. It’s something that we're aware of, we’re in tune with what we need to do. We want models on a regular basis to assess what the needs are, but our goal is to continue to stay above that well capitalized threshold.
Vernon Hill: And at these growth rates Frank, we can't look at the capital numbers now, we have to look what we need going forward with these growth rates. But let me answer the question that you really answered. All of you on this call know this is a growth bank and a growth model and sometimes growth companies need capital to support the growth, and we do sometimes too. We've done two or three relatively small capital raises. We hope to conclude a small equity raise in the fourth quarter of this year. But although we cannot predict the years ahead, our current models do not reflect the need for an additional equity raise through 2025.
Frank Schiraldi: Okay, and any further colour in terms of 4Q raise in-terms of, you said small, you guys have done on the convertible thought $50 million, I think a year ago. Is that sort of a size range you're thinking or what sort of level do you think you need in a 4Q range?
Vernon Hill: Yes, I don't want to commit to a number, Frank. I want you to write and I’ll give you a number. But sort of that let’s say 30 to 60 or something, but generally around that range is the additional growth capital. We are certainly not going to be larger than the preferred range.
Frank Schiraldi: Okay, and then yes, just so I have it right, once you do that sort of raise then you feel like you guys are okay in terms of the capital you will be generating internally for the next few years until 2025.
Vernon Hill: Yes, three to four years, the models and we run back all the banks to a million different ways. We don't see any need for any equity raise for the next three or four years. Like all these models, as everybody on the call knows, this model, is a model -- is a projection, but that's the way we see it right now.
Frank Schiraldi: Okay, great, thank you for all the colour.
Vernon Hill: Thank you, Frank.
Operator: Thank you. Our next question on the line comes from Mr. Michael Perito from KBW.
Vernon Hill: Good morning, Michael.
Michael Perito: I wanted to stick on that capital topic for a second. So, I mean if we, and I appreciate the specifics, it's helpful, but is still -- I mean, is it fair to assume then as we move forward here, i mean you guys, I mean you’ve driven about 32 points of efficiency improvements since year end 2019. I mean to not need additional equity, it would kind of, and you can't either have to slow the growth or drive more material efficiency improvement. It doesn't seem like you guys expect any growth to slow. So, is it fair to say that you guys kind of continue to expect to move at a more moderate pace on store openings and continue to drive efficiencies down during that time period post equity raise?
Vernon Hill: Well, you ask about three things here, Mike. So let me, Frank is going to give you the answers to all, but let me repeat what I said earlier. The number of store openings is a decreasing percentage of our store base, and the initial opening losses on these stores is a decreasing number of our bank expenses and profits, so new stores will have a much more minimal effect on the bottom line than you've seen in the first few years. Frank?
Frank Cavallaro: Yes, Mike as we mentioned earlier, we also talk about our focus on the improvement in revenue as a greater percentage compared to the improved -- the increase in noninterest expenses, so that is a focus and that drives better efficiency. We talked previously on earlier calls about our focus on technology, so we think there's some enhancement and improvements there that are for us. So, it's really all the things that you mentioned together and you know as Vernon mentioned, this is just a model thing could change, if we grow faster, way faster than we expect then this could be a different answer, but as of right now, and in the foreseeable future, in the models that we’re running, we think that that is a fair statement.
Vernon Hill: To make it even clearer Michael, everybody knows, I love to build new stores, and in this world, we need half as many or maybe less than that. At commerce we had over 400 stores in these same markets we’re serving with Republic and we certainly need substantially less than that. And you're going to see fewer new stores and fewer total stores and we use them primarily to expand into the new markets. But think about this, what I still figured, we are opening fewer stores, new stores on a larger existing store base really helps the expense side.
Michael Perito: Got it. And then just any more insights you’re willing to share? I mean, I know you guys did the convertible preferred last time, but just the comment here obviously is a little tough at the current multiple. I mean is it the thought that the priority really is to boost the CET 1 ratio and that's why you guys are electing on the common or is there some other thought process behind electing to use the common equity potentially in the fourth quarter?
Vernon Hill: Yes, and we have no debt, we have almost no debt here. So, obviously we look at all the ways to do a common, we did a preferred debt. This minimal amount of common we plan to raise will solve our capital needs. Total capital is where I think it affects us the most. Right? Yes, as well as the leverage, it helps all the ratios, the common is the best. I mean to be clear our models tell us this equity raise is all we need to keep up this growth rate.
Michael Perito: Okay got it. Thank you and then just one last one from me, on the NIM Frank, I was curious if you could provide any kind of near term thoughts you have? I mean, may be a little colour on what you're buying in the bond book and at what yield, and where you think that could the overall NIM could trend over the next few quarters here, assuming the loan growth continues to be robust?
Frank Cavallaro: Yes the steepness of the yield curve is clearly the thing that helps us there and something that we focus on every day. In the bond portfolio, it's no secret you're seeing yields out there between 150 and maybe 2% on the high end today, based on the type of safe securities that we buy. We built up a little bit excess cash over the last quarter because we're selectively waiting for the right strategy, the right timing, and the right strategy to come to us. But that's -- steepness of the curve is really the answer. That helps us, things only get better. If it inverts on us again then things are a different answer.
Vernon Hill: One way to look at it Michael, you might remember back in the days of Commerce, which had a lower loan to deposit number than we have at Republic, and we would often report our loan to deposit ratio plus our mortgage back secured number and when you combine them at Republic those two numbers are 70% loan to deposit. That's our loan portfolio plus our mortgage back securities.
Michael Perito: Got it. Nope that's it. Thank you, guys. I appreciate it.
Vernon Hill: Thank you.
Operator: Thank you, . Our next one comes from Abbott Cooper from Driver Management. Please go ahead.
Abbott Cooper: Thanks. Just a followup on that last point. I looked back at Commerce Bancorp's results for the last year you were CEO in year ending 2006. The yield on securities then was 5.36. Your leverage ratio 6.18. What are your models? And I'll get to the capital raise in a minute, but like you say, the models show that you won't need a capital raise for some time, what are your assumptions in there about yields on securities?
Vernon Hill: Frank?
Frank Cavallaro: Yes, we use conservative assumptions. We don't expect that the curve, that the interest rates are what's going to drive our revenue. The one thing that we can control and we will focus on is loan growth. That obviously, improving the loan to deposit ratio will enhance or help our margin. So as we expand into new markets, that will be a focus for us.
Abbott Cooper: Okay, well, and how are you going to do that?
Vernon Hill: The way you always build loan books, particularly in the new markets, you go out and recruit teams of lenders that have clients in it.
Abbott Cooper: Yes, that's not really, that's not your model, right? I mean, you guys keep talking.
Vernon Hill: No, it's 100% our model. When Commerce went to New York from scratch, and we were attacked by the whole world, we created over time a $25 billion bank in Metro New York and the loan portfolio was built by recruiting other lenders from other banks within those markets. That's exactly how we did it at Commerce and that's what we're doing right now.
Abbott Cooper: Okay, but you still had, you just pointed out that your loan to deposit ratio at Commerce was much lower than what it is now. So it's not like you're, growing that, right?
Vernon Hill: Because that deposit growth at Commerce in total raw numbers was higher than we're seeing now of it. So you asked me how we do it? We go out and recruit teams of loan people and we build a loan book from the market. We did it in Metro New York once and we're doing at Metro New York now. I wouldn't be surprised if in several years, Metro New York was the largest market or this bank.
Abbott Cooper: And then just on to this capital raise, so I get based on annualizing this quarter 6.4% return on equity. If I look at what your cost to capital equity is just on Bloomberg, it's 12%. If you do a capital raise this fourth quarter, you're likely doing it at a significant discount to book value. If you can't earn the cost of capital and the capital that you have now, why are you going to dilute existing shareholders by raising more?
Vernon Hill: Because this is the cheapest way for us to keep -- to raise capital as we grow this model. Everything you say about the math is true. This is the cheapest way.
Abbott Cooper: Yes. So like what is, I guess, my kind of biggest overall question is you haven't mentioned profitability once. Do you care about profitability? And do you care ?
Vernon Hill: We have achieved profitability multiple times we've talked about it.
Abbott Cooper: You mentioned increases in earnings; you don't -- have mentioned how much it costs to get those earnings.
Vernon Hill: We're not getting anywhere with that discussion. We talked about our process, the last time, hold on, let me, allow me to answer. Allow me to answer. We've talked about our profits. We've talked about our rate, our NIM growth in both rate and volume. I don't know and we've showed you how our expense growth has slowed and we're getting this positive jaws effect. That's our model; grow the top line quicker than we grow the expense.
Operator: Thank you. Next question on line comes from Mr. from the Entry Incorporated . Please go ahead.
Unidentified Analyst: Hi I am a bit troubled as well about the capital raise is such a significant discount to tangible book value. How would you handle that offering? Would it be a traditional secondary offering or would it be a rights offering where existing shareholders would be able to basically dilute themselves out? And then secondarily, has Vernon considered purchasing shares, all of the shares in the secondary at book value?
Vernon Hill: If we do have an offering in the fourth quarter and Vernon Hill buys or buys at the same price as everyone else.
Unidentified Analyst: Would it be a rights offering or a traditional offering?
Vernon Hill: We haven't really determined the exact form yet, but we will get back to you on that.
Unidentified Analyst: Yes, it just doesn't seem to make much sense to me to raise capital at such a discount to book value when you could potentially sell the company to somebody that's in a stronger capital position that could then succeed with the growth plans that you have it just doesn’t make any sense to us. So we would strongly hope that you'd think about things before you do it.
Vernon Hill: We think about everything. We've been down this road before. Our goal is to create higher value over a long period of time, just like we did in Commerce. Remember, the Commerce returned 20, let me finish, please, Commerce returned 23% a year. So I don't -- there was a somewhat better rate environment in part of those times. But our goal is to create increasing value over a period of time. And when you say our shares are being diluted with a small equity offering we do, it personally gets diluted the most is me.
Unidentified Analyst: Yes, it's a very different world today than it was when Commerce was around. You're living in the past and look at what went on with Metro. I don't think that the results were great. Thank you for your time.
Frank Cavallaro: First of all, that's completely unfair. What happened to Metro has nothing to do on our model. It has to do with the banking system in Britain and the European banking system. It had nothing to do with our basic model. And I forgot your other comment. We are not living in the past. We are providing our customers with the best of online digital branches. Our business is much more commercial. Clients and it was consumer clients at Commerce. We can always debate whether we were living in the past, but we certainly do not agree with that. Thank you.
Operator: And I'm showing no further questions in queue.
Vernon Hill: Okay, thank you very much for your time. We appreciate the questions and we look forward to our next call. Thank you all. Have a great day. Bye-bye.
Operator: And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
