Republic First Bancorp, Inc.

Thank you for holding. Your conference call will be beginning shortly. Thank you for your patience. Once again, thank you for holding. Your conference call will be beginning shortly. Welcome to the second quarter 2021 earnings conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. Please note this conference is being recorded. I'll turn the call over to Vernon Hill. Vernon Hill, you may begin.

Thank you. Good morning to each of you. With me is CFO Frank Cavallari, Andy Loeb, the President of Republic Bank. So I'll go through the press release and we'll open it to the floor. The 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. The revenue growth was strong. We've controlled costs, as we said, in the last quarter. The deposits on a 12-month basis grew, Frank, help me here, $916 million or 25%. And the growth per store in the core deposits was, counting our new stores only, it was $34 million a store. When you add all the stores, including the ones we haven't converted yet, the growth was $29 million per branch. PPP loans were important. in the first half of this year. Frank, go ahead on those.

Yeah, 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 paydowns and payoffs of the PPP loans, so we extracted that when we presented these numbers.

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 pointed out to you, if I have this right, Frank, only one borrowing customer is deferring? That's correct. Okay. I'm on to the second page. It just shows you the first part of it is growth in assets, loans, and deposits. For the quarter, well, of the year-to-year assets grew 21%, loans grew 1%, but loans excluding PP pre-grew 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 30% 38%, 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, you want to say about that?

Yeah, 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 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've 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.

Going down on page three, the second part of the bullets, the margin improved for the six months by 16 points to 2.80 points. It was primarily a decline in the cost of funds, right, Frank? That's the main driver for six months, yes. You know 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 opened one store this year, and we have one about to open. They are Deptford, New Jersey, and for you at the Shore, Ocean City. Frank, Oak Mortgage?

Yeah, Oak 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.

And our book value per common share grows each quarter. It ended this quarter at $4.00. and 62 cents as compared to 434. Go ahead, Frank. Anything on the next page you want to highlight?

The next page just gets into more detail of the income statement for the three-month period. As Vernon mentioned, we increased net income to $5.9 million for the three-month period end of June 30th. 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. And the same numbers for a six-month period? Yeah, for the six months, similar trends. We continue to improve revenue at a greater rate than non-interest expense. The overall net interest income after tax was $13 million, or 17 cents a share. That's a 578% increase if you compare it to the six-month period ended June 30th of last year. 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.

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 continue to see new count relationships open, and we continue to get business from the effects of the PPP loan program. And the loan breakdown is on page 7, Frank. 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 30th this year to June 30th 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 30th of last year, we had over $650 million. That's down to $380 million as of June 30th of 2021. Okay. Asset quality. Pardon me. I got a call. Go ahead. Yeah, asset quality remains strong. We continue to monitor it closely as we come out of the effects of the COVID environment. Non-performing assets, the total assets, has shrunk to 26 basis points, 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.

And the allowance for the non-performing loans, 134%. Yes. Okay. The capital ratios are on page eight. Anything you want to say about that?

The leverage remains at 728. We continue to keep an eye on that. Overall total capital, 1330. 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. Anything else? They're the highlights for the course. Andy, you want to say anything? All right, we'll open the floor. Fire away, guys.

Thank you. We'll now begin the question and answer session. If you have a question, please press star and one on your touch-tone phone. And our first question comes from Frank. Charlie from Piper Sadler, your line is open.

Thanks. Good morning. Morning, Frank. Just, you know, you mentioned, Vernon, you mentioned the growth rates for the new stores in terms of deposits. And, you know, growth is pretty strong in the existing branches as well. Yeah, you're right. You're right. You know, you've talked about the new branches as in part being advertisements, you know, 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 have needed 10 or 20 years ago. And if you could talk about, you know, that build out, particularly interested in kind of the New York City geography.

Yeah. Okay. That's a good question. We're going to build out in the markets we had at Commerce. At the end, Commerce had 440 offices of 480. Today, you probably need half as many as that because of the online, the digital, but you'd 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, I'm looking to put in roughly half of what we had at Commerce. But it is amazing. how these new stores are growing. And as you pointed out, they're bringing the older Republic branch growth with them as the brand gets stronger in the market.

And when do you think, in terms of getting back, you're opening a couple in Jersey this year, when do you think you get back to growing or putting up branches in New York City and what's sort of the kind of the annual rate you're foresee.

We have two in New York City, in 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 the 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'll 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.

Okay, great. Thanks for the color.

But, Frank, just let me put that in perspective. Commerce was building one store a week, and we would like to build more, but, you know, with the margin being compressed, we have to get the expenses off. But you pointed out our growth per store. This is a giant number. I never had growth per store even at the peak of commerce like this.

And then in terms of the loan growth, you've 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?

Yeah. What's the outstanding loans in New York? 160 or something like that? I think 160 in New York is probably great. Even though we have a smaller branch present, 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, 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 Bethel. We'll 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.

Got you. And just a couple of quick, if I could, modeling questions. You know, Frank, service fees on deposits were down link quarter. I guess it was a very strong first quarter, but – I wonder if you could just talk about what a good run rate might be. Obviously, as deposits grow, I'd expect that line item to grow as well. We got it.

This is grid 17B. We have it. We got it, Frank.

So what you're seeing in the second quarter, I think, is a more normalized run rate. In the first quarter, 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.

So the second quarter is your normal run rate? Correct. As New York grows, you get more bigger commercial 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.

Gotcha. Okay. And then just lastly, on the Triple P, 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?

About $4.7 million in the second quarter.

Really? Is that low?

Yeah.

Remember, the SBA was backed up. So it got really slow there for a while.

We're starting to see the wind down of the first round. And what we're waiting for are the forgiveness applications for the second round to start to come through. So then we'll see more acceleration in maybe the latter part of this year, early next year.

Great. Thanks for all the callers. Thank you.

And just as a reminder to enter the queue, please press star then 1 on your touchtone phone. And our next question comes to Michael Pareto from KBW. Your line is open.

Hey, guys. Good morning. Good morning, Michael. I wanted to ask a question just piggybacking on something you said earlier, Vernon, to one of Frank's questions. 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, you know, 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, really well received. I just wonder maybe if you can just, you know, kind of flush out or just think about that math behind that and how to kind of continue this growth engine while not, you know, making sure that the capital doesn't become a burden, you know, like it was 12 plus months ago.

Yeah, you have to balance all those things out, Mike, and you know it better than I do as well as I do. So first of all, you start with your deposit growth in the store 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 growth capital if we keep up these rates as we did at Commerce. And then you decide which markets go in. You need some new stores and Suburban markets, you need new suburban markets with stores, and New York is the real question. Obviously, the difference up there is rent. The break-even at the branch level is higher in Manhattan because the rents are so high, but just like we found at Converse, the break-even time is lower in Manhattan because the deposits grow so fast. So you have to balance all those things out and That's what they pay me the big bucks for, Mike.

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 need for the remainder of this year?

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. Yeah. And part of the problem is the flat curve, even though we're making more money, we're not making as 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?

Correct. The one store that we did open didn't open until very late in the quarter, so the growth is still being driven by the existing stores.

And Mike, when I looked at the old days of Congress and we did the models, obviously we were much more advanced. It's the growth in deposits per store that really drives it.

Yeah, and that was going to be my next question, right? I mean, the loan growth has been really solid. I mean, I think it's been, you know, if we adjust our 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 the 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-to-deposit ratio inflecting, or is there just too much deposit growth momentum for that to happen really anytime soon?

Yeah, I mean, it's difficult to say. You know, it depends on the shape of the yield curve. You know, 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. The margin in the second quarter went up, right? if you compare the second quarter of this year to the second quarter of last year, it did go up. Right.

New York is interesting, too.

Where do you know to handicap the... Oh, sorry. Go ahead, Vern.

What we found in New York at Commerce is the lending book overfunds 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't... When we talk about growth per store, you know, 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 overfund themselves.

Go ahead. Yeah, I was just going to clarify something with Frank. The NIMX PPP, 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.

I would say if you pull those numbers out, I'd say it's a little bit higher than that.

Okay. And so do you expect that number to remain relatively... Mike, take it out.

We'll tell you it should be around 2.5, 2.6 without PPP.

Got it. Okay. All right, guys. Well, I appreciate all the color. Thanks for taking my question.

Sure. And just as a reminder, if you'd like to enter the queue, please press star 1. And we're standing by for more questions. And we have no further questions. I'll turn the call back over for final remarks.

All right. Thank you all. Call me or Frank if you need something after the call. Thank you all. Cheers. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.