Republic First Bancorp, Inc.

Welcome to the third quarter's 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. During the question and answer session, if you have a question, please press star, then one on your touchtone phone. Please note that this conference is being recorded. I'll now turn the call over to Frank Caballero, Chief Financial Officer. Mr. Caballero, you may begin.

Good morning. Thank you for joining us on the earnings call for Republic First Bank Corp 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.

Welcome to our Q3 call. Thank you for being on. The third quarter and our nine months of this year has been especially strong as our power of red model continues to show increasing momentum in all the markets we serve. Frank, would you highlight the main points, please?

Yeah, we'll start with the earnings for the nine-month period ended September 30th. Our earnings grew to $19 million or 25 cents a share compared to just a million dollars or two cents a share a year ago. For the three-month period, we recorded income of $6.1 million and compared to a net loss of a million dollars 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 we refer to as the Jaws effect. Revenue increased by 30% for the nine-month period, and non-interest expense increased by just 9% in the same period. Deposits have grown more than a billion dollars over the last year. We've reached $5 billion in assets for the period ended September 30th. That's 27% growth year over year. Our new stores are currently growing deposits at an average rate of $42 million a year. And all stores 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 to 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 30th. And asset quality remains strong as we grow these loans. Our ratio of non-performing assets to total assets has dropped to just 25 basis points in September 30th. 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 30th.

Frank, let me add one other item that's not on the first page. We're pleased in 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 the volume from our growth, which produced 16 million of the 27 million growth. And the rate environment also helped us base the way we have our asset liability structure created, 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? 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, we're no longer utilizing that program because it has expired. The table below, that 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'll also note in this table that we broke out. You mean in non-interest expense? Non-interest 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 so you're able to see that and the change in expenses on an apples-to-apples basis. 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 assistance in rates as we continue to see a decline in the cost of funds.

What's up? This, again, reflects the power of the model we have. You've all seen this 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.

We're also reporting that we've got 32 store locations open as of today. We've got a store under construction in Ocean City, which we expect to complete during the fourth quarter, and then 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 loan originations over the last 12 months. We're assisting 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 30th. And our book value per share increased to $4.67 compared to $4.33 a year ago. The following pages... dive 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 non-interest 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 25 cents a share, compared to about just $1 million a year ago. So the power of REDD and the model that we're running continues to generate results across the board, not just from the balance sheet, but on the income statement as well.

And our earnings for the quarter were 25 cents a share versus 2 cents a share, and not third quarter of 2020, correct? That's correct. And I want to make a point here in case some of you missed it. We had no goodwill on our balance sheet at all. We had one small goodwill item that we were over at all. So this is a bank with, I believe, no goodwill. Is that right? That's correct.

The following page, we get into a breakout of our deposits. We talked about the strong growth in deposits, more than a billion dollars year over year. We like to highlight that one of the fastest growing categories within the deposit group is the non-interest-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 roll out the model and continue to win fans over throughout the market. The following page has a lending table. We break out the loans by type. We segregate the TPP loans at the bottom so you can see the declining balances there if 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 really seeing 15% growth in this environment. It's something we're proud of. And we continue to see pipelines build as we go into the future.

And our Metro New York, pushes already begin to contribute a substantial amount in loans and the deposits.

The following page has a table on asset quality. We mentioned the non-performing assets. The 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 compared to non-performing 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 for our regulatory minimums.

Thank you, Frank. Andy? Andy, you want to say? No, we're good. All right. Can we open the floor up for questions, please?

Thank you. We will now begin the question and answer session. If you have a question on the line, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There will be a delay before the first question is announced. And if you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for questions on the line that start, then one on your touchtone phone. First question on the line comes from Mr. Frank Giraldi from Piper Sandler.

Good morning. Just wanted to start with growth. Obviously, the last 18 months has been pretty unique from just an industry and a macro standpoint. Frank, you mentioned the 27%. uh, growth year over year. Just, just wondering your thoughts, given, you know, all that, you know, the new store openings, uh, coming, um, you know, down in 4Q and next year, uh, is that, you know, 20 to 30% growth? Is that still a reasonable expectation of, um, of future growth or is, or has, you know, the macro environment, the stimulus, um, just kind of been such a tailwind in the short term?

Uh, Frank, obviously it was a strange year, and 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 per store, just like I did at ComCommerce. And particularly as we expand into Metro New York, where our growth numbers were higher, ours being commerce, I think the numbers we're using is generally what we predict going forward, Frank. Am I right?

Yeah, you're correct. And, you know, I'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 footprints. The PPP loan program had a big effect, as Vernon said, on helping us drive new business and to improve our brand. But we're feeling, you know, 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.

So, Frank, some that are not familiar with this overestimate the expense of new stores and the impact of growth on new stores. We like new stores because it helps us go into new markets, but certainly you need less new stores than we had in years past. But if you look at our models and our numbers that you have, 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're 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 crowdfiling.

Okay. Great. Thank you. And then just in terms of, you know, the capital, obviously that comes up a lot in conversations. And, you know, how big a constraint is that on growth? You know, what are your thoughts on that? 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 know, you want to stay above as we get into 2022 here?

Frank, why don't you talk about the percentages, the ratios CapCut?

Yeah, sure. As we mentioned earlier, there's a table in the release that lists out all the ratios. The leverage ratio is one that we monitor closely because that's driven by the asset size, not just risk-weighted, but average assets. So we're below 7% on the leverage ratio, and we're clearly aware of 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 run models on a regular basis to assess what the needs are. But our goal is to continue to stay above that well-capitalized threshold.

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 this growth 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.

Okay. And any further color in terms of, you know, a 4Q raise in terms of, you said small, you guys have done on the convertible side, 50 million, I think a year ago or so ago. Is that sort of the size range you're thinking or, you know, what sort of level do you think you need in a 4Q raise?

I don't want to commit to a number, Frank. I don't want you to write that I'm giving you a number, but sort of that, let's say 30 to 60 or something, but generally around that raise is the additional growth capital. It's certainly not going to be larger than the preferred raise.

Okay. And then 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'll be generating internally, you know, for the next, A few years, until 2025.

Yeah, three, four years. Three, four years of models, and we run, like all the banks, to a million different ways. We don't see any need for any equity raised for the next three or four years. Like all these models, as everybody on the call knows, a model is a projection, but that's the way we see it right now.

Okay. Okay, great. Thank you for all the color. Thank you, Brian.

Thank you. Our next question on the line comes from Mr. Michael Perito from KBW.

Hey, guys. I wanted to stick on that capital topic for a second. So, I mean, if we – and appreciate the specifics, you know, it's helpful. But so, I mean, is it fair to assume that as we move forward here, I mean, you guys – I mean, you've driven about 32 points of efficiency improvement since year N-19. I mean – To not need additional equity, you know, it would kind of – you kind of 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?

Well, you asked about three things there, Mike. So let me – Frank's going to give you the answers to all of them, 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 new 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? Yeah. You know, Mike, as we mentioned earlier, we also talk about our focus on the improvement in revenue as a greater percentage compared to the increase in non-interest 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 Werner mentioned, this is just a model. Things can change. If we grow faster, way faster than we expect, then this could be a different answer. But as of right now, in the foreseeable future, in the models that we're running, we think that that is a fair statement.

To make it even clearer, Michael, everybody knows I'd 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 new markets. But think about just what I said to you. You're opening fewer stores, new stores, on a larger existing store base. Really helps the expense up.

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, you know, the comment here, you know, obviously is a little tough at the current multiple. I mean, is it the thought that the priority really is to boost the CET1 ratio and that's why you guys are electing on the comment or is there some other thought process behind that? electing to use the common equity potentially in the fourth year.

Yeah, 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, Brian?

Yeah, 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. Okay.

Got it. Thank you. And then just one last one for me on the NIM, Frank. I was curious if you could provide any kind of near-term thoughts you have. I mean, maybe a little color on what you're buying in the bond book and what yield and where you think that could, the overall NIM could trend over the next few quarters here, assuming the loan world, you know, continues to be robust.

Yeah. We're, you know, like the steepness of the yield curve is clearly the thing that helps us there. And I think that's something that we focus on every day on the, in the bond portfolio, you know, you're you're, 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've 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, you know, steepness of the curve is really the answer. If that helps us, things only get better. If it inverts on us again, then, you know, things are a different answer.

One way to look at it, Michael, you might remember back at 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-backed security number. And when you combine them at Republic, those two numbers are 70% loan-to-deposit. That's our loan portfolio plus our mortgage-backed.

Got it. Nope, that's it. Thank you, guys. Appreciate it. Thank you.

Thank you. Once again, for any questions, that's star then one in your touchtone phone. Our next one comes from Abbott Cooper from Driver Management. Please go ahead.

Thanks. Just to follow up on that last point, you know, I look back at Commerce Bancorp's results for the last year you were CEO, so that was the year ending 2006. You know, the yield on securities then was 5.36. Your leverage ratio was 6.18. What are your models? And I'll get to the capital raise in a minute. But, like, you say, you know, the models show that you won't need a capital raise for some time. What are your assumptions in there about yields on securities?

Right. We use conservative assumptions. We don't expect that the current – 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.

Okay. And how are you going to do that?

The way you always build loan books, particularly in the new market, you go out and recruit teams of lenders that have clients in the market.

Yeah, but that's not your model, right? I mean, you guys keep talking about it.

No, 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.

Okay, but, you know, 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 using the balance sheet anymore.

Because our deposit growth at Commerce in total raw numbers is higher than we're seeing at Republic. 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 it in Metro New York now. I wouldn't be surprised if in several years Metro New York was the largest market for this bank.

And then just under this capital raise, so, you know, I get, based on annualizing this quarter, a 6.4% return on equity. If I look at what your cost of equity is just on Bloomberg, it's 12%. If you do a capital raise this, you know, 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.

Because this is the cheapest way for us to raise capital as we grow this model. Everything you say about the math is true. This is the cheapest way.

I guess my biggest overall question is, you haven't mentioned profitability once. Do you care about profitability?

We've mentioned profitability multiple times. We've talked about the earnings.

You mentioned increases in earnings. You don't mention how much it costs to get those earnings.

We're not getting anywhere with that discussion. We've talked about our profits for the last nine months. Hold on. Allow me to answer. We've talked about our profits. We've talked about our rates. Our NIM grows 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 expenses.

Thank you. Thank you. Our next question online comes from a Mr. Will Wallen from M3 Incorporated. Please go ahead.

I'm a bit troubled as well about the capital raise at 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 delete themselves out? And then secondarily, has Vernon Hill considered purchasing the shares, all of the shares in the secondary at book value?

If we do an offering in the fourth quarter of And her and he'll buy the same price as everyone else.

Would it be a rights offering or a traditional offering?

We haven't really determined the exact form yet, but we will get back to you on that.

Yeah, it just doesn't seem to make much sense to me to raise capital at such a 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 strongly, you know, hope that you think about things before you do it.

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, commerce returned 20. Let me finish, please. Commerce returned 23% a year. So there was a somewhat better rate environment during 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 the small equity offering we're doing, the person that gets diluted the most is me.

Yeah, 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.

First of all, that's completely unfair. What happened to Metro has nothing to do with 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 than it was consumer clients at Commerce. We can always debate where we were living in the past, but we certainly do not agree with that. Thank you.

And I'm showing no further questions in queue.

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.

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