Q3 2021 Republic First Bancorp Inc Earnings Call
Ladies and gentlemen, thank you for continuing to hold your third quarter 2021 earnings conference call will begin shortly thank you for your patience.
[music].
Yeah.
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 you touched on phone. Please note that this conference is being recorded I will now turn the call over to Frank Caballero, Chief Financial Officer, Scott Blair you may begin.
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 will turn the call over to earnings for some opening remarks welcomed.
Two our Q3 call. Thank you for being on.
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 with you.
Highlight the main points. Please yes, we will start with the earnings for the nine month period ended September 30th our earnings grew to $19 million or 25, a share compared to just $1 million or two cents a share a year ago.
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 is really been driven by the strong growth in revenue as.
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 months period and interest expense noninterest expense increased by just 9%.
The same period.
Deposits have grown more than $1 billion over the last year.
We've 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 all stores combined with the legacy stores included are growing at $33 million a year.
We're pleased to report that we are 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 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.
Also pleased to report that all of our loan customers that were deferring loan payments during the Covid pandemic have all returned to contractual obligations contractual payments as of September 30.
Frank will add one other item its not.
On the first page, we're pleased that in the nine months of 2021 versus the prior year, our net interest margin went up 27%.
1 million year to year of that we're getting positive.
Our results on the volume from our growth was produced $16 million or the $27 million in growth and the rate environment also helped us base the way we have our asset liability.
<unk> created in that produced almost $11 million and increased net interest margin. So we're pleased to say we are getting positive performance on both growth and the rate.
On the next page of the release, we put a table that shows you our asset loan and deposit balances, including and excluding the PPP effect.
As you are aware, we were a strong participant in the PPP loan program beginning last year. When it was first rolled out we continue to add 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.
We presented balances and growth with wisdom without those to make it clear that our balance sheet continues to grow <unk>.
Excluding that effect.
In addition to the PPP short term borrowings that we were utilizing.
Are also we're no longer due to link utilizing that program because it has expired.
The table below that is the is this a more.
More detailed summary of the income statement, we talked about net income.
For the nine months in the quarter earlier, but we're also reiterating here that the jaws effect of revenue we increase for both the three and the nine months period.
Our strong 18% for the third quarter and revenue growth versus 4% in net interest growth.
We will also note in this table that we broke out we made a noninterest expense noninterest expense yes.
In this table, we also drawl out a year ago, we had a charge of one time charge for goodwill impairment. So when we're doing this comparison, we separate that out youre able to see that in the change in expenses on an apples to apples basis.
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.
This again reflects the power of our model, we have with Allstate. This model before from US we get is tremendous.
Deposit core deposit growth.
A very low cost of funds people are switching to us for convenience and service not for rate the magic of our model and our past banks and this one is again very high core deposit growth with a low cost of funds right.
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 then additional sites that we're pursuing for next year.
Our residential mortgage division or mortgage.
Chewing 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 the purchase of new homes.
The total risk based capital ratio was 12, 53% in the leverage ratio was $6 50 as of September 30th.
And our book value per share increased to 4.4 dollars 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 months 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 differed PPP fees that will continue to be recognized over the life of the loans in future periods.
For the nine months period, we saw tremendous growth in net income net income for the nine months period was $19 million or 25, a share compared to about $1 billion a year ago to the power of Red and the model that we're running continues to generate.
<unk> across the board not just in the balance sheet, but on the income statement as well.
And our earnings for the quarter or <unk> 25, a share versus two cents a share.
Third quarter 2020, correct that's correct.
And I wanted to make a point here and patient visit that we had no goodwill on our balance sheet at all we had one small goodwill item that we worry about it.
So this is a bank with I believe.
That's correct.
The following page, we get into a breakout of our deposits we talked about the strong growth in deposits more than $1 billion year over year, we'd like to highlight that one of the fastest growing categories within the deposit group is the noninterest bearing deposits.
Those deposits over the last 12 months grew nearly $300 million or 28%.
We are seeing deposit inflows across the board as we roll out the model and continue to wind fans over throughout the market.
Yeah.
The following page has a lending table, we breakout the loans by type we segregate the PPP loans at the bottom. So you can see the declining balances there as the forgiveness process continues.
We've seen strong growth in not only our commercial loans, we've got residential mortgage growth commercial real estate, we're really seeing a 15% growth in this environment, it's something we're proud of and.
And we continue to see pipeline build as we go into the future.
Our Metro New York pushes already begin to contribute a substantial.
Amount in loans and the.
Positive.
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.
And the allowance compared to nonperforming loans with a coverage ratio has grown to 133%.
Finally, the last table as a capital table listing at our capital ratios at both the holding company at the bank level.
The leverage ratio at the holding company is at six 5%.
But all of our other ratios continued to remain strong and above the well capitalized levels.
We required for a regulatory minimums.
Thank you Frank Andy.
And as you watch that.
Alright can we open the floor up.
Okay.
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 husky there will be the labor for the first question is announced and if youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again for your questions on the line Thats Star then one on your phone.
First question on the line comes from Mr. Frank Gerardi from Piper Sandler.
Good morning.
Just wanted to start with growth.
Obviously, the last 18 months has been pretty unique from an industry and a macro standpoint.
Frank you mentioned the 27%.
Growth year over year, just just wondering your thoughts given all that you know the new store openings coming.
Down in <unk> and next year.
Is that 20% to 30% growth is that still a reasonable expectation.
Our future growth or has or has the macro environment the stimulus.
Kind of been such a tailwind in the short term.
Brian obviously it was a strange year on PPP was very important not just for the loans, we made but the new business relationships we've created.
Frank will give you the percentage number, but we project that growth.
Different way, we've projected if deposit growth per store, just like I did comp comp at.
At current commerce and particularly.
Particularly as we expand in the Metro New York market, where our gross numbers were higher.
Our E Commerce I think the numbers we are using.
It's what generally what we predict going forward frankly, I have that right, yes, youre correct in what I will say that the new store growth. Obviously helps 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.
Graham has had a big effect is Vernon said on helping us drive the 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 so Frank.
They're not familiar with us over estimate 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 surely you need less new stores than we had in years past, but if you look at our models and numbers that you have you will see the growth is coming in deposits from the existing.
<unk> per store growth and new stores, while they are important to us they were much smaller.
Percentage of our growth numbers in <unk>.
Our losses.
The new stores the first months of the road, but are a very small number in our total expense base because the banking.
Profiling.
Yeah.
Okay.
Great. Thank you and then just in terms of the capital obviously that comes up a lot.
Conversations and how big a constraint is that on growth.
What are your thoughts on on.
Capital in terms of a potential timing and size of.
Of a common raise to.
To boost those levels and is there a specific kind of ratio that youre looking at on the capital side that you have that you want to stay above.
As we get into 2022 here.
Brian why don't you talk about the percentages ratios cap cost yes.
As we mentioned earlier there is a table in the release that lift out all the ratios.
The leverage ratio was one that we monitor closely because that's driven by the asset side, not just risk weighted but average asset.
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.
And keep an eye on.
It's something that we're aware of where we are.
Sure.
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 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 your 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 additional equity raised through 2025.
Okay.
And any further color in terms of you know <unk> raised in terms of you said small you guys have done on the convertible side $50 million.
Year ago, so that was that sort of the size range youre thinking.
Or.
What sort of.
Level do you think you need in a <unk> rate I don't want to commit to a number of frankly I don't want you to write and I'm, giving you a number but sort of that let's.
Let's say <unk>.
30 to 60 or something but generally around that raises is the additional growth capital.
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.
For the next few years until 2023 or four years, three or four years of models and we run it like all the banks still have a million different ways.
We don't see any.
Need for any equity raised for the next three or four years.
Like all of these models as everybody on the call on those models as a model as a projection, but thats the way we see it right now.
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 K B W.
Morning, guys.
I wanted to stick on that that capital topic for a second so I mean, if we.
And I appreciate the specifics it is helpful.
I mean is it fair to assume that.
Move forward here I mean, you guys.
I mean, if you are at about 32 points of efficiency improvement since year around 19 I mean.
To not need additional equity.
It was kind of.
You've kind of you don't 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.
Ask about three things there Mike So let me give you the answers to all of them, but let me repeat what I said earlier the number of store openings.
A decreasing percentage of our store base.
And the initial opening of losses on new stores is a decreasing number of hours.
<unk> expenses and profit so new stores will have a much more minimal effect on our bottom line and you've seen in the first few years Frank 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 at the increase in noninterest expense. So that is a focus on that drive better efficiency.
Talked previously on earlier calls about our focus on technology. So we think theres. Some <unk> improvements there that are for us.
So it's really all the things that you mentioned together and.
As already 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 but as of right now in the foreseeable future and the models that were running we think that that is a fair statement to make it even clear Michael everybody knows I love.
To build new stores.
And this 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.
Youre going to see fewer new stores and fewer total stores and we use them primarily to expand into new bar.
Markets.
But think about this what I would say youre opening fewer stores new stores on a larger existing store base really helps the expense.
Got it and then just any way.
Insights youre willing to share I mean, I know you guys did the convertible preferred last time, but just you know what.
The common here obviously it is a little tougher at the current multiple I mean is it the thought that the priority really is to boosted the CET one ratio and that's why you guys are collecting on the comment or is there some other thought process behind.
I would like to use the common equity potentially in the fall and we have no debt we have almost no debt here. So obviously, we look at all the ways to deal with carbon and we did a preferred debt.
Minimal amount of Com and we plan to raise will solve our capital needs total capital is where I think it affects us the most right Brian as well as the leverage it helps all the ratios to comment is the best I mean to be clear.
Our models tell us that.
Equity raised is all we need to keep up that growth rate.
Okay got it.
Thank you and then just one last one for me.
On the 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 youre buying in the bond book and at what yield and where you think that the overall NIM could trend over the next few quarters here some of the loan growth continues to be robust.
Yes.
The steepness of the yield curve is clearly the thing that helps us there.
It's something that we focus on every day on the bond portfolio.
Sure.
It's no secret Youre seeing yields out there between 150, and maybe 2% on the high end today based on the type of <unk> securities that we buy.
Picked up a little bit excess cash over the last quarter, because we are selectively waiting for the right strategy the right timing in there and the right strategy to come to us.
But thats.
Steepness of the curve is really the answer if that helps us things only get better if it inverts on US again then.
Things are things are a different answer one way to look at it Michael you.
You might remember back at the days at 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 securities.
Sure.
R&D number and when you combine at Republic. Those two numbers are 70% loan to deposit that's our loan portfolio.
Plus our mortgage backed securities.
Yes.
Yeah.
Got it.
Nope that's it. Thank you guys appreciate it.
Thank you.
Thank you again.
Again for any questions. That's star then one on 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.
Look back at.
Commerce Bancorp's results for the last year your CEO says you're ending 2006.
The yield on securities than was 536.
The leverage ratio of $6 one eight.
What are your models and I'll get to the capital raise in a minute, but like you say the model show that you won't need a capital raise for some time what are your assumptions in there about yields on securities.
Alright.
We use conservative assumptions.
Don't expect that the curve that the interest rates are what kind of drive our revenue. The one thing that we can control and we will focus on is loan growth that that obviously, improving the loan to deposit ratio will enhance or help our margin.
So as we expanded in 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 markets you go out and recruit teams of lenders at at clients.
Yes.
That's not your model right I mean, you guys keep it to.
100%.
No. It's a 100% of our model with 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 do.
Did it at Commerce and Thats, what were doing right now.
Okay.
You still had you just pointed out that your loan to deposit ratio of commerce was much lower than what it is now so it's not like you are you able to balance our deposit growth that right because our deposit growth at Congress in total raw numbers was higher than we are seeing that.
So you asked me how we do when we go out and recruit teams.
Loan people and we build a loan book from.
From the market, we did it in Metro New York wants and we're doing it in Metro New York now I wouldn't be surprised if in several years Metro New Europe is the largest market for this time.
And then just terms of this capital raise so.
I get based on annualized in this quarter.
Six 4% return on equity.
If I look at what your cost of capital equity is just on Bloomberg, It's 12% if you do a capital raise.
Fourth quarter, you are 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 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, yes, so like what is it I guess.
Kind of biggest overall questions.
You haven't mentioned profitability once.
Do you care about profitability and do you care.
And profitability multiple times, we've talked about you mentioned you mentioned increases in earnings you don't mention how much it cost to get those earnings.
We're not getting anywhere where that discussion we talked about our profitable well. That's the last I think that's because we don't have I think a lot.
Yes.
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 are getting this.
Positive jaws effect, that's our model grow the top line quicker than we grow expenses.
Yeah.
Thank you thank.
Thank you. Our next question on line comes from Mr will wallet from and three incorporated please go ahead.
Alright.
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 put basically dilute themselves out.
And then secondarily cause Vernon Hill conclude or purchasing shares all of this year was in the secondary book.
Book value.
If we do an offering in the fourth quarter and Vernon Hill buys they'll buy at 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 great capital. It puts a such a discount to book value when you could potentially sell the company because somebody with one of our stronger capital position, but get them succeed with the growth plans that you have it just doesn't make any sense to us.
We strongly.
You know I hope that you think about things before you do it.
When you think about everything we've been down this road before our goal is to create higher value over a long period of time, just likely data commerce.
Remember our Amherst returned 20, let me finish please Congress returned 23% a year.
So.
There was a somewhat better rate environment or acquire those times, but our goal is to create.
Increasing value over a.
Parent in time, and when you say our shares are being dilutive with a small equity offering we do it.
Personally it gets diluted the most is made.
Yeah, it's a very different world today than it was when commerce was around.
Your 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 is completely unfair what happened to Metro has nothing to do at our model. It has to do with the banking system in Britain and the European banking system and 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 are.
Our business is much more commercial clients and it was consumer clients commerce.
We can always debate, where we were living in the past, but we certainly do not agree with that.
Sure.
Thank you.
And I'm showing no further questions in queue.
Okay.
Okay. Thank you very much for your time, we appreciate the questions and we look forward to our next call. Thank you all a great day.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.