Republic First Bancorp, Inc.

Welcome to the fourth quarter 2021 earnings conference call. My name is James, 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 Q&A session, if you have a question, please press star 1 on your phone, and also note that this conference is being recorded. I'd now like to turn to caller Frank Cavallaro. Frank, you may begin.

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. 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 results, which brings to a close a very successful year. our Power Up Red 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 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 enhancements to our technology platforms in 2022. We remain committed as as ever, to delivering the best experience to our customers across every delivery channel, including in-store, online, mobile, and by phone. With that, I'll go on with some comments about quarter four. As I said earlier, fourth quarter of the year was an excellent quarter for us. If you have 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?

Earnings per share of the year, approximately 428 or something. Yeah, earnings per share grew 371% year over year.

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 and top-line growth While we continued our focus on cost control, revenue grew 26% year over year, and non-interest expenses grew only four. 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 $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 deposits. Highs of growth. There's a further breakdown of deposit growth further back, but the important number is on page six, 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 $2,400,000,000. Asset quality has always been very strong here and continues to be strong. Non-performing assets declined to 0.24% compared to 0.2, 0.8% in 2020. No loan customers are on loan payment deferral. All customers that were granted deferral during the PPP stage have resumed contractual loan payments. Right, Glenn? That's correct. Going on to page two, it just shows you another chart in growth in assets, loans, deposits, and so forth. It shows your growth fourth quarter compared to third quarter and the 12-month growth. On the top of page three, it just shows you another chart that shows you the top line for the last three 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 non-interest expenses only grew six. Net interest margin on page three grew 17 bps this year to 2.68 as our cost of funds declined. We presently have 33 stores open, including our brand new store in Ocean City, which just opened, and we expect to open in the area of two to four for the balance of this year. Our residential mortgage division has done 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 through the capital amount? At the end of the year, the total risk-based capital was $11.76, and the leverage ratio was at $6.06. Both numbers still above the well-capitalized threshold, and we continue to monitor those. The book value per common share increased to $4.67, $4.67, compared to $4.41 a year ago at this time.

Go ahead, Frank. I've got to call those. I'm having more trouble than normal. Yeah, on page four, you can see the financial results. Page four is for quarter four. Is there anything we haven't addressed yet, Brent?

You 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 non-recurring legal and professional fees that impact at the fourth quarter as well. So we continue to manage expenses as closely as possible, but sometimes there are one-time effects that impact us.

Thank you. On page five, these are the comparison income results for the 12 months.

Go ahead, Brian. Yeah, the 12-month year-over-year, as mentioned in the beginning slide, 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 non-interest expenses. That's a recurring theme and has been one since 2019.

On page six, as I said earlier, we break it down. Deposit-based baseline type. Demand deposits, again, was our highest-growing segment of 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 you the growth by type. This is excluding the PPP loan effect. Asset quality on page 8, we talked earlier. Asset quality remains excellent as it has been. The bottom of page 8, capital. Go ahead, Frank. Talk about capital.

Yeah, this is just more detail on our capital ratios. We mentioned the leverage and the total risk-based capital already. The tangible common equity ratio. It 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 575. 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 operable 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.

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?

Thank you. We can now begin the question and answer session. If you have a question, please press star 1 on your phone. If you wish to be removed from the question queue, you may press the pound sign or the hash key. And if you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. So once again, if you have a question, please press star 1. Our first question comes from Frank Shirati of Piper Sandler.

Good morning. On the expenses, you mentioned, Vern, the investment in technology. Just wondering if you guys can provide any color on either expense growth in 2022 or obviously you guys talk a lot about the JAWS effect. you know, perhaps frame it that way in terms of should that continue to accelerate the increase of revenues, you know, minus the increase in expense.

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 FISERV technology change that brings us a new core system that 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?

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 its benefits and we expect to see a decline or a leveling off of our technology cost.

We believe this will have a tremendous positive effect on the bank, not only in the way we deliver and the tech, but over time, we believe it's going to produce a tremendous cost savings.

Okay, so should the JAWS effect accelerate into 2022 from 4Q?

You know, we can control the expense side, Frank, and we expect to, you know, to continue to monitor that. We're hoping to see more like the year-to-date effect as we go forward. The top line or 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 You know, if we get help from the yield curve, yes, you know, it'll enhance. If it flattens or inverts, you know, we're not, we keep reading the same thing that you do about what the Fed is going to do this year. You know, that will unfold as we, you know, get into the latter part of this year.

But it is true, Frank, are you willing to say, as the yields and the long bonds move up, that is definitely a plus for us.

The steepness of the curve and that effect will definitely help us, yes.

Okay. Okay. And then I wonder maybe if you could frame how much flexibility you have in terms of the timing of any capital raise. And would you consider slowing balance sheet growth here in 2022 if the pricing isn't to your liking?

Well, that's something we have to consider. There's lots of things about raising capital, the growth rates, the price, what it does to the to the book value, we have to balance all those 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 account 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.

Okay. And in terms of branches this year, you said you've got the one open in January, and then you said two to four more. Is that right? I think it's in the two to four range, guys.

Two to four range. Two under construction and potentially others that are at different stages. Right. Gotcha.

Okay. And just finally, you know, you talked about alternative strategies. You talked about it in the release as well. Just wondering if that could include a capital raise other than common. I mean, are you still looking at potentially more preferred? Is that something of a possibility for 2022?

I don't think we're 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 to common. The convert price is $3 a share, and the stock price in the market is approaching $4. So that's another factor we have. Our common needs may be 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.

Okay. And then just lastly for me, you know, would an alternative be a consideration of partnering up with another bank or – You know, are the models just so different that that's less likely here?

Look, we have to look at all the paths we might take. We're focused on shareholder value over the long term, not just in one quarter or one 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. Okay. All right.

Fair enough. Thank you, guys. Thank you, Frank.

Our next question from Michael Perito of KBW.

Michael?

Good afternoon, guys. You know, Frank obviously touched on a couple of my questions, but I do have a couple more I wanted to hit on. First, just on, you know, 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 two years with deposits growing up towards $5 billion now. It's 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. You know, my guess is they're fairly low, but we'd love to just hear from you and how you guys dissect the portfolio.

Yeah. So, Mike, you're right. When we first, you know, started this transformation, it wasn't just public funds. It was brokered CDs and internet and, you know, wholesale sources of funding. And And we've removed all of that from our deposit base. What we have now is a great mix of consumer, commercial.

Actually, commercial is our largest class of deposits, Frank. Mike, I'm sorry, and that's unusual for our model. That's not what we had at Commerz. This bank has grown primarily on commercial deposits.

In the release, we state that commercial deposits are 44% of the total deposit base. the thing that we love, and Vernon mentioned it once or twice on the call, was that the fastest growing segment percentage-wise is non-interest demand deposits. So obviously, they're the ones that we like. But we do factor in low bandits. We do have some public funds in our base, but we see those public fund relationships as core relationships. It's not just hot money that comes and stays for rate. It's the full operating relationship of those entities.

And just let me make that point again, Mike. You've heard this before. It's not bid 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 for the local school board in town and you're de facto the bank for that town.

Got it. And are you guys, you know, 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, you know, Frank or Verna, 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?

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 they're 182 on a 10. That's very helpful to us. As you know, our loan-to-deposit rate is lower than we would like, and we invested in mortgage-backed primarily. And, Frank, we are seeing higher yields in the mortgage-backed market.

We definitely are. And to go back to Mike's original question, you know, one move of 25 basis points where? On the end, the short of the end. 25 basis points on the short end by the Fed to Fed funds. we don't think has a significant effect, you know, one or two or, you know, maybe even three limited. You could go back, Mike, and, you know, when you saw in 2018 and 19, when the Fed started adding 25 and 50 and the Fed funds rate got up over to two and a quarter, 250, you know, 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, you know, in the industry.

Okay, but so, I mean, sorry if I misinterpreted that, but so, you know, if we get a couple short-end hikes in the next six months, you don't think it will have a significantly positive impact on the margin?

Positive if the short-end goes up? Go ahead, Brian.

We don't believe that there would be a significant impact on the margins. But, again, it's all based on the steepness of the curve, the shape of the curve.

There's a long end. You can see the reaction when the long end gets higher. That's what we're seeing almost every day now.

If those bumps move to 10 and longer yields, then, yeah, 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.

Anything else, Michael?

Nope. That's it. Thank you, guys.

Thank you, Mike.

And once again, if you have a question, please press star 1. Question from Abbott. Oh, I'm sorry. And we have no more questions.

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.

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