Republic First Bancorp, Inc. (FRBK) on Q4 2021 Results - Earnings Call Transcript
Operator: Welcome to the Fourth Quarter 2021 Earnings Conference Call. My name is James, and I'll be your operator for today's call. And also note that this conference is being recorded. I'd now like to turn the call over to Frank Cavallaro, Frank, you may begin.
Frank Cavallaro: Thank you. Good morning, and thank you for taking the time to join us this morning for our fourth quarter earnings call. Today, I'm joined by Chairman and Chief Executive Officer, Vernon Hill; and President and Chief Operating Officer, Andy Logue. Before turning the call over to Mr. Hill, I'd like to inform you that Republic First Bancorp intends to file a proxy statement and related proxy materials with the SEC for our 2022 Annual Meeting of Shareholders. In connection with this meeting, certain directors and officers will participate in the solicitation of proxies from our shareholders in advance of the annual meeting. Shareholders are strongly encouraged to carefully read the proxy statement and all other related materials filed with the SEC in their entirety when they become available. They will contain important information about the 2022 annual meeting. As you may know, a dissident shareholder has recently stated its intention to launch a proxy contest at this year's annual meeting. We will not comment on the proxy contest today or take any suggestions, questions regarding the proxy contest on the call. At this time, I'd like to turn the call over to Mr. Hill to begin the review of our financial results.
Vernon Hill: Good morning to all. Thank you for spending time to join this call. We are pleased to report on the Republic Bank's fourth quarter financial result, which brings to a close a very successful year, our Power of Red campaign expansion campaign is going strong. We not only achieved asset, loan and deposit growth far above the industry average, but we also saw a dramatic improvement in profitability during the current year. Earnings improved approximately 400% year-over-year as a result of our efforts to drive top line growth at a greater growth rate than our expense growth. We are -- we look forward to the year ahead. We are excited about the opportunities for growth, and we see unfolding in 2022 that we can continue our growth plan. We plan to deliver significant enhancement to our technology platforms in 2022. We remain committed as ever to delivering the best experience -- the best experience to our customers across every delivery channel, including in-store, online, mobile and by phone. With that, I'll go along with some comments about quarter four. As I said earlier, fourth quarter in the year was an excellent quarter for us. If you had the press release, on the first page, the main items are shown there. For the 12 months ending December of this year, net income grew 398% to $25.2 million or $0.33 a share. Earnings per share for the year grew -- what's the percentage, Frank?
Frank Cavallaro: Earnings per share year-over year grew approximately…
Vernon Hill: 420 or something.
Frank Cavallaro: Yes, earnings per share grew 371% year-over-year.
Vernon Hill: Net income for the fourth quarter was great, increased to $6.1 million or $0.08 a share compared to net income of $4.1 million or $0.05 a share for the fourth quarter of last year. The improvement in earnings was driven by strong growth in top line, while we continued our focus on cost control. Revenue grew 26% year-over-year and noninterest expenses grew only 4%. We use this effect of the -- jaws effect and we're focused on maintaining this result. Deposits, it was another great year for deposits. Deposits increased for the year at $1.2 billion or 29%, grew to $5.2 million at the year-end. The new stores we opened this year on our Power of Red campaign are growing branch deposits at the average rate of $41 million a year. The average deposit growth for all of our stores, including the new stores and the current stores averaged $37 million a year in deposit growth. There's a further breakdown of deposit growth, further back. But the important number is on Page 6, demand deposits grew year-over-year 39%. We attained this growth despite driving our overall cost of funds down. Our cost of funds for the year decreased to 0.35% compared to 0.54% in the fourth quarter of 2020. Excluding the impact of PPP loans, loans grew apples-to-apples, 18% for the year to $2.4 billion. Asset quality has always been very strong here and continue to be strong. Our nonperforming assets declined to 0.24% compared to 0.28% in 2020. No loan customers on loan payment deferral. All customers that were granted deferral during the PPP stage have resumed contractual loan payment. Going on to Page 2, which just shows you another chart in -- growth in assets, loans, deposits and so forth. It shows you growth fourth quarter compared to third quarter and the 12-month growth. On the top of Page 3, it just shows you another chart that shows you the top line for the last 3 months of the year compared to the same period last year grew 17%, where expenses grew 10%. But for the full 12 months, the effect was much more dramatic. Top line grew 26% and noninterest expenses only grew 6%. Our net interest margin on Page 3 grew 17 bps this year to 2.68 as our cost of funds declined. We presently has 33 stores opened including our brand-new store in Ocean City, which just opened, and we expect to open in the area of 2% to 4% for the balance of this year. Residential mortgage, Oak Mortgage residential mortgage division has been a strong income producer for us, and they originated almost $600 million in new mortgage loans in the last 12 months of this year. Risk capital and our regulatory capital, Frank, why don't you go do the capital.
Frank Cavallaro: At the end of the year, the total risk-based capital was 11.76% and the leverage ratio was at 606. Both numbers still above the well-capitalized threshold and we continue to monitor those. The book value per common share increased to $4.67 compared to $4.41 a year ago at this time. Go ahead, Vernon.
Vernon Hill: I got to call it because I'm having more trouble than normal. Yes. On Page 4, you can see the financial results. Page 4 is for quarter 4. Is there anything we haven't addressed, Frank?
Frank Cavallaro: You've commented already on the tremendous growth year-over-year in both the quarter and the year in bottom line net income growth. We would like to mention that during the fourth quarter, there were some elevated expenses. We're incurring some direct cost as we prepare for our technology transformation that we mentioned earlier, that's coming up in the mid-part of 2022, some nonrecurring legal and professional fees that impacted the fourth quarter as well. So we continue to manage expenses as closely as possible, but sometimes there are onetime effects that impact us.
Vernon Hill: Thank you. On Page 5, these are the comparison income results for the 12 months. Go ahead, Frank.
Frank Cavallaro: 12-month year-over-year, as mentioned in the beginning, net income grew 398%. Earnings per share grew to $0.33 a share compared to $0.07 a year before. We love to talk about this jaws effect, the impact of growing revenue at a much faster rate than we're growing noninterest expenses that we recurrence and has been one since 2019.
Vernon Hill: On Page 6, as I said earlier, we break it down at the deposit baseline. Tight demand deposits, again, was our highest growing segment deposits, as I said earlier, they grew 39%. Lending on Page 7. As I said earlier, loans grew 18% year-over-year, and it shows here the growth by type. This is excluding the PPP loan effect. Asset quality on Page 8, we talked earlier. Asset quality remains excellent and has been. The bottom of Page 8, capital -- Go ahead, Frank.
Frank Cavallaro: Yes. This is just more detail on our capital ratios. We mentioned the leverage and the total risk-based capital already. The tangible common equity did fall below 5%. If you factor in the conversion of preferred shares that could occur in the future, that increases almost 100 basis points up to 5.75. I think it's worth mentioning at this point that during our last earnings call, we did mention the possibility of completing a capital raise in the fourth quarter, which would be to support our growth and expansion strategy. As the quarter progressed, we made the decision that it would be in the best interest of not only the bank but our shareholders to do that raise at a time that would be most optable from a stock price perspective. So we'll continue to monitor market conditions and assess alternative strategies as we get into '22. But at this time, we are comfortable with our capital levels at the levels they're at today.
Vernon Hill: Thank you. That's all we have from us. We'd like to open the floor now, please. Could you give us your name and firm when you start, please?
Operator: Our first question comes from Frank Schiraldi of Piper Sandler.
Frank Schiraldi: On the expenses, you mentioned in investment in technology. Just wondering if you can guys can provide any color on either expense growth in 2022 or obviously, you guys talk a lot about the jaws effect, perhaps frame it that way in terms of should that continue to accelerate the increase of revenues minus the increased expense --
Vernon Hill: Let me just summarize what we are doing, and then Frank can talk about the effect on the expenses. Frank, go ahead. We're talking about a major partial technology change. It brings us a new core system, new fintech and gives us a tremendous tech platform to keep up with all the new things that are coming. Frank, why don't you talk about the income effect?
Frank Cavallaro: Yes. So the deal that we entered into and the enhancement of technology obviously provides expense benefits in the future. But as we do this implementation and conversion, there are some upfront expenses that we need to absorb as we go through the conversion process. So you see some of that effect in the fourth quarter, that will continue in the first quarter as we continue to do the conversion. But again, when we put these systems in place, the technology will provide us benefits, and we expect to see a decline or a levelling off of our technology cost.
Vernon Hill: We believe this will have a tremendous positive effect on the bank, not only in the way we deliver and the tech, but overtime we believe it's going to produce a tremendous cost savings.
Frank Schiraldi: Okay. So should the jaws effect accelerate into 2022 from 4Q?
Frank Cavallaro: We do all the job -- we think it's all the expense side, Frank, and we expect to continue to monitor that. We're hoping to see more like the year-to-date effect as we go forward. The top line of the revenue is, as you know, so much impacted by the -- not just interest rate environment, but really the shape of the yield curve and the steepness of it. So if we get help from the yield curve, yes, it will enhance. If it flattens or inverts, we're not -- we keep reading the same things that you do about what the Fed is going to do this year. that will unfold as we get into the latter part of this year.
Vernon Hill: But it is true, Frank, you're willing to say, as long as the yields’ in the long bonds, move up
Frank Cavallaro: The steepness of the curve and that effect will definitely help us, yes.
Frank Schiraldi: Okay. And then I wondered maybe if you could frame how much flexibility you have in terms of the timing of any capital raise. And would you be -- consider slowing balance sheet growth here in 2022 if the pricing isn't to your liking?
Vernon Hill: Well, that's just something we have to consider. There's lots of things about raising capital, the growth rates, the price, what it does to the book value. We have to balance all these things out. I would say while we're growing at these rates, Frank, we have actually slowed our growth rate down. If you notice, our new store count is down in the last few years as we're slowing it down. It's being offset by the growth per store. But it's a balance of those things. We're just going to have to look at all the facts at the time to make a decision, and we'll keep everybody up to date.
Frank Schiraldi: Okay. And then in terms of the branches this year, you said you got the 1 opened in January and then you said 2 to 4 more. Is that right?
Vernon Hill: I think it's in the 2 to 4 range? 2 to 4 range.
Frank Cavallaro: 2 under construction and potentially others that are in different stages.
Frank Schiraldi: Got you. Okay. And just finally, you talked about some of the -- you talked about alternative strategies. You talked about it in the release as well. Just wondering if that could include a capital rate other than common? I mean, are you still looking at potentially more preferred? Is that something in possibility for 2022?
Vernon Hill: I don't think we – we’re not looking at any more preferred in the near future. One of the things that we don't know, some of the preferred will start to convert the common, the convert price is $3 a share and the stock price in the market is approaching $4. So that's another factor that we have. Our common needs maybe met as some of the preferred is converted to common. But I don't see any plan to do any more preferred certainly in the next year or two.
Frank Schiraldi: Okay. And then just lastly for me. Would an alternative can be a consideration of partnering up with another bank? Or are the models just so different that's less likely here?
Vernon Hill: Look, we have to look at all the paths we might take. We are focused on shareholder value over the long term, not just in 1 quarter or 1 year. As you know, our model is very different and distinct, and we have no plans to do anything in that area, but it's something we have to watch for.
Operator: Our next question is from Michael Perito of KBW.
Michael Perito: Frank obviously touched on a couple of my questions, but I do have a couple more I wanted to hit on. First, just on the increasing conviction around higher short-term rates near term. I was wondering if you guys -- obviously, if we look back at commerce, historically, the deposit betas are very strong. I know when you guys kind of first rebooted with Republic, if I recall, there was a lot of public funds type deposits that really came over quite quickly. But my guess is you guys have diversified quite a bit over the last 2 years with deposits growing up towards $5 billion now. I was just wondering if you can maybe walk through the portfolio a little bit and what your deposit beta expectations are if we do get multiple hikes this year. My guess is they're fairly low, but we'd love to just hear from you and how you guys dissect the portfolio.
Frank Cavallaro: Yes. So Mike, you're right. When we first started this transformation, it wasn't just public funds, it was brokered CDs and Internet and wholesale sources of funding. And we've removed all of that from our deposit base. What we have now is a great mix of consumer commercial -
Vernon Hill: And actually commercial is our largest class of deposits, right? Frank, I'm sorry, and that's unusual for our model, that's not what we had at commerce. This bank has grown primarily on commercial deposits.
Frank Cavallaro: In the release, we stated that the commercial deposits are 44% of the total deposit base. The thing that we love and Vernon mentioned once or twice on the call was that the fastest -- 1 of the fastest-growing segment percentage-wise is noninterest demand deposits. So obviously, they're the ones that we like. But we do factor in low betas. We do have some public funds in our base, but we see those public pharma relationships as core relationships. It's not just hot money that comes in spatial rate, it's the full operating relationship of those entities.
Vernon Hill: And just let me make that point again, Mike, you've heard this before. It's not big money, it's not hot money. These are very similar to corporate cash management accounts. And it's always been an important part of our model. We want to be the banker for the local town, school board, et cetera, in our markets, and it's one of the reasons our growth rates are so high. Because if you're the bank for the local school board in town, you're de facto bank for that to.
Michael Perito: Got it. And are you guys -- if we assume that the quarter end balance sheet holds fairly steady here and we do indeed get a 25 basis point hike in March. Frank or Vernon, are you guys able to provide some context around what you think the immediate impact of that would be, particularly given the cash balances, which presumably are going to be a little heavy for the foreseeable future here?
Vernon Hill: Well, I'll let Frank answer, but let me give you the general answer. They've helped us already, Mike, because as you know, the long rates have gone up, I think at 180 to 110, that's very helpful to us. As you know, our loan-to-deposit base is lower than we would like, and we invested in mortgage backs primarily. And frankly, we are seeing higher yields in the mortgage backlog.
Frank Cavallaro: We definitely are. And to go back to Mike's original question, 1 move of 25 basis points --
Vernon Hill: Where? On the end? The short or the end?
Frank Cavallaro: 25 basis points on the short end by the Fed, the Fed funds, we don't think has a significant effect. 1 or 2, maybe 3 limited. You could go back, Mike, when you saw in 2018 and '19 when the Fed started adding 25 and 50 and the Fed funds rate got up over $2.25, $2.50, that's when the yield curve flattened and inverted at times. And that's a problem for not just us but for almost every bank in the industry.
Michael Perito: All right. So I mean -- sorry if I misinterpreted that. But if we get a couple of short-end hikes in the next 6 months, you don't think you will have a significantly positive impact on the margin?
Vernon Hill: Positive if the short end goes up. Go ahead, Frank.
Frank Cavallaro: We don't believe that there will be a significant impact on on the margin. But again, it's all based on the steepness of the curve, the shape of the curve.
Vernon Hill: There is a long end -- you can see the reaction when the long end gets higher. And that's what we're seeing almost every day now.
Frank Cavallaro: If those bumps move to 10 and longer yields, then yes, we're thrilled and that will help us significantly. It just depends on the speed, the pace and the way that the economy and the market reacts. Is there anything else, Michael?
Michael Perito: No. That's it.
Operator: And we have no more questions.
Vernon Hill: We have no more questions. All right. Thank you all for your support. It was a great year in the past year for this bank, and we're optimistic as we move ahead in many ways. Thank you all.
Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
