Republic First Bancorp, Inc.
Q4 2019 Earnings Call Transcript

Published: 28 Jan 2020

[Operator:]

Welcome to the Fourth Quarter 2019 Earnings Conference Call. My name is John and I will 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. [Operator Instructions] Please note that this conference is being recorded.And I will now turn the call over to Vernon Hill.

[Vernon Hill:]

Good afternoon and good morning to everybody. We have with us today on the fourth quarter call for Republic Bank, Frank and address everybody please.

[Frank Cavallaro:]

Frank Cavallaro, Chief Financial Officer, we have Andy Logue, our President and Chief Operating officer; Harry Madonna, President and CEO; and finally Vernon Hill, Chairman of the Board.

[Vernon Hill:]

Okay, thank you all for dialing into the call, the press release is out, I will highlight the items in the release, and then we will talk about whatever you would like. We had another great quarter of growth, deposits year-over-year have gone up $600 million. Our new stores are growing at $30 million a year and all of our stores [indiscernible] at 22. We have two storage in New York open they are doing very well and third one about to start. Loans also grew very well where they grew 22% and they are growing in every markets.This was a third quarter I believe or the second quarter where we have a small loss. As I think I just mentioned at the last quarter, we had unusual set of facts where we had expenses particularly of New York, flat to inverted yield curve compressing our margin. We are going to talk about the things we are about to do or I started to do until the margin improves.Again, the margins the problem, you have a flat or inverted curve. One of the ways we are improving our margin is our loan-to-deposit ratio will be going up. On Page 2, everybody asked about tech, I'm pleased to announce that we have brought on board Jack Allison who worked for me at Commerce as a Chief Technical Officer from like 1991 to 2010, and he helped lead the tech transformation of Commerce was doing all of those years. And he has already improved not only our back office but the delivery express to our clients. Republic is about the integrated delivery experience of in-store, mobile, online and as you know our theories about building fans.You can see the growth in assets loans in deposits. Slightly deposit growth in the fourth quarter -- I missed the quarter here. $200 million or some.

[Frank Cavallaro:]

Yes approximately $200 million for the third quarter alone. Fourth quarter, I'm sorry fourth quarter.

[Vernon Hill:]

Non-performing assets went down, declined 0.42%. Our largest ORE asset was sold off in the fourth quarter. Our new residential mortgage business is doing fine for the year and SPAs have been in port. Capital is still fine, these growth rates low at these rates. We said we expect to raise capital in some form, later this year we will have a date.So we have also announced that in response to the margin, we have introduced which has begun already dramatic reduction in expenses and expense growth, Frank why don’t you go through this.

[Frank Cavallaro:]

Yes. So the first item on our list is to slow the store openings. We have announced previously that we expect to do four stores this year. Most of them were already under construction or far along in development where we found a need to continue with them. But that will certainly help us control the expense growth. We are looking at control the of new hires, as well as other variable costs, things like marketing, maintenance and professional fees.

[Vernon Hill:]

One of the things we have done in this new world of tech, we have actually reduced the hours of a stores which I have never done in my life, I don't think. It is still very long hours, the best in the market. But we have reduce some of the weekday night hours and some other hours. We have got some real cost saves there.

[Frank Cavallaro:]

We have taken a very close look at all high cost deposit relationships in an attempt to drive down the cost of funds. As Vernon mentioned, we hire Jack Allison, as our Chief Technology Officer. We will use Jack to optimize the use of all technology resources. We are assessing the size of future stores, we will try and optimize and limit any cost or expenditures there.In addition, we have taken a close look at management salaries, as well as Board fees and the bonus pool that we accrued for 2019. So all those initiatives together, most will take effect in the first quarter of 2020. But if you look at the earnings release, you can also already see the stabilization of non-interest expenses. Non-interest expense actually declined slightly during the fourth quarter of 2020.

[Vernon Hill:]

I think everything else is covered in the press release and the online release. We would be happy to open the floor now to what you would like to ask.

[Operator:]

Thank you and I will begin the question and answer session. [Operator Instructions].

[Vernon Hill:]

Anybody there?

[Operator:]

And our first question is from Frank Schiraldi from Piper Sandler.

[Frank Schiraldi:]

Good morning.

[Vernon Hill:]

Frank we are confused with your new name.

[Frank Schiraldi:]

It is confusing. I know. It's different. But not much else has changed besides the name. So that is good. But I wanted to start Vernon with - actually Frank, I think you might have just mentioned, I might have just missed it. I thought you guys have talked about the number of branches next year you were looking to open was four. And then I'm not sure, if you updated that on the call here this morning?

[Frank Cavallaro:]

No. We said at this time four is the target for this year. One already opened in January. There is another one under construction that will open late second quarter and two more that are far long enough in the development process that it doesn't make sense to slow them down at this time.

[Vernon Hill:]

But Frank that is slower than we had in our plan last year. We tend to build more new stores and buds more of it, we deliberately slowdown these store openings. Go ahead.

[Frank Schiraldi:]

Okay. Right, no, I understand. Okay. So, four for 2020. And then Vernon, you mentioned the loan-to-deposit ratio should be going up. Frank, you talked about taking a hard look at some higher cost deposits. So, is this something that we should expect just stronger loan growth throughout the year than deposit growth, or is there something in the first quarter where we could see some attrition in the deposit levels. Just right off the back to kind of reduce some of those higher, I guess, cost deposits?

[Vernon Hill:]

Our loan-to-deposit ratio is definitely going up. The New York expansion has really helped, as I found when we went to Congress to New York, as more commercial loan demand and the rates are higher in New York, surprising. So we had bit of fourth quarter. What was the loan growth in the fourth quarter, Frank?

[Frank Cavallaro:]

Loan growth in the fourth quarter was $175 million and a lot of that was in the backend of the quarter.

[Vernon Hill:]

And how is that compared to third quarter?

[Frank Cavallaro:]

For the first nine months altogether it was only 130 million.

[Vernon Hill:]

So we grew more than the fourth quarter in loans than we did in all three of the first quarters. It is coming from every market, but as I said, Frank. I was really surprised from Commerce went to New York, there is more loans in that segment and the price is higher. So, pretty confident in loan-to-deposit numbers going to keep going up, which the margin will get helps of course.

[Frank Schiraldi:]

Okay. So it sounds like it is more a case of just tremendous loan growth as opposed to trying to call part of the deposit franchise.

[Vernon Hill:]

I wouldn't say we are trying to call to deposit franchise. There is always outliers you can dial back and their deposit growth is so strong now but we can be less aggressive on certain types of products and rates. We have the deposit growth slowing this year Frank?

[Frank Cavallaro:]

No, but we have loan growth accelerating further than we had in investors.

[Frank Schiraldi:]

Okay, alright got you. And then just on the capital front. You mentioned Vernon, I think you would have to address some form of capital just given the way you are growing at some point later this year, I believe. So just if that is the case then it doesn't sound like you are looking to do something immediate. But just kind of curious, if you could give us a little bit of detail on your thinking on common levels. Because to me, it seems like you are going to just given this growth rate you will have to raise comment at some point. Just curious, if you could tell us what sort of levels on a TCE ratio you guys target. And how low do you think you can go on a TCE ratio at the at the hold co before, you need more common?

[Vernon Hill:]

Right. we are thinking about doing something in second and third quarter, we are not committed to that. We do need common in some form. You have heard me talk before Frank, I have done converts several times and it is a possibility to do some kind of convert, whether it is a preferred or debt.Generally in my experience on what we have had at Republic is we raised capital and we sort of work it downwards to growth, and then we raised some more. we are not ready to say what the amount is, but it is not a giant number that we need.

[Frank Schiraldi:]

Okay. I mean, do you think you would go back about - I mean, any sort of color or guidance you can give us on just where you think you guys need to get on a TCE ratio in order to once you raise some money that you don't need to raise again for another 18 months, 24 months, something like that. Where do you think you need to get to on a TCE ratio?

[Vernon Hill:]

It was certainly going to keep it above 7%. But we are not specific about how much we want to get above that number in the next race. So as we see how the first quarter does and we will get back to the market and talk about the range that we expect later this year.

[Frank Schiraldi:]

Okay. Alright, great thanks.

[Vernon Hill:]

Thank you Frank.

[Operator:]

Our next question is from Michael Perito from KBW.

[Vernon Hill:]

Hi Michael.

[Michael Perito:]

Hey, good morning Vernon, how are you.

[Vernon Hill:]

Good, thank you.

[Michael Perito:]

A couple follow-up questions. So as we think about just Frank's capital question, but as we think about the overall kind of asset growth for 2020 with the four stores, do you guys have any initial thoughts on kind of what your expectations are there, especially with kind of the revised up loan growth expectations that you discussed earlier on the call?

[Vernon Hill:]

Do we have any expectations about what?

[Michael Perito:]

Overall asset, well, we are trying to think about the size of the balance sheet, just as we are trying to think about capital and levering capital?

[Vernon Hill:]

Yes, well, you can look at our deposit growth for store for 2019, and we are pretty optimistic continuing that area. But remember, when you talk about new store openings, you have to count the months but not the year, so I just can’t add four of the stores and multiply that number. But generally, it will be in this area per store.

[Michael Perito:]

Okay. And then on the expense kind of actions that you guys are - how it sounds like you have already started to take. Frank, I was wondering if you could give us a little bit more details about how you kind of expect that to impact the near-term expense run rate? And I guess just more specifically, do you think by the second quarter of next year with the actions you are taking, that you guys should be able to kind of return to a positive earnings run right here? Or do you think it will take shorter or longer than that?

[Frank Cavallaro:]

That is our expectation. A lot of these initiatives were set up to start with the beginning of the New Year. You can already see the stabilization, so you have got some impacts that are taking effect in the fourth quarter. But that is clearly our - and it is a priority for us right now.

[Vernon Hill:]

Remember Mike that the new store openings or a decreasing percentage of the total store base. So, the new stores have a less negative impact because there were lower percentage. But we definitely expected to get back on course soon.

[Michael Perito:]

And so does the expense, does it actually step down or do you think it is more of a stabilization with the loan growth and the NII benefit on top of that?

[Frank Cavallaro:]

It is a combination of - so the initiatives are a combination of both. Some of them are reductions, and some of them are controlling with the future growth. Obviously, we continue to grow the balance sheet at the same rate, managing expenses to the limited is really a priority and should show the benefits in the -.

[Vernon Hill:]

Well we also get some top line improvement, the margin improves, and we are very optimistic about loan growth which is going to increase the margin in the top line. So that is sort of both working together we know.

[Michael Perito:]

Okay. And I don't know if you guys could answer this, but just as we think about the margin, it was 267 in the fourth quarter. Obviously the New York market is a small relative piece at this point, but growing rapidly, but it sounds like the margin in the New York business is stronger than the rest of the business at this point. I was wondering if you could maybe just disclose where kind of the margins arranging on the New York business just as we try to think about how the NIM could improve as that becomes a bigger piece of the overall company?

[Vernon Hill:]

Historically, that was my experience at Commerce, the margins were better in New York, because the loan yields were high and the cost of money was no higher. It is too soon to tell on that Mike, because stores open, they have opening deals and you are working with a small number. I think long run we think the margins are going to be about the same there.But as you have heard me talk for 100 years, it is all about deposits per store, and you are going to get much higher deposits per store than you would have, and a - fell out few market and any suburban market. So over time the earnings impact in New York is much better because the average deposits per store will be much higher.

[Michael Perito:]

Got it. And then just one last quick one if I could sneak it in, but just Vernon you mentioned that your current store hours, I was just curious, has that been communicated yet? And has there been any kind of client feedback on that as you sit here today? Thank you.

[Vernon Hill:]

Andy?

[Andrew Logue:]

Yes, it has been communicated out and no new feedback. It's been installed.

[Vernon Hill:]

It is been right, Mike, I like these long hours and we haven't cut the hours about seven days a week. It is more of the fringe hours. We couldn't cut out seven days a week. But it is obvious to everybody that people don't use the stores as much as they did because of online and FinTech. So we have made it, we have made a savings, I haven't heard a thing back, have you Andy?

[Andrew Logue:]

No, no response.

[Michael Perito:]

I think it makes sense. So that is good to hear that the feedback has been different.

[Vernon Hill:]

Our stores are - we spend very little on marketing. Our stores around marketing. And in the new world it is about the right balance between stores and online and FinTech. And these growth numbers for the stores that as long as that American bank branches grow $1 million to $2 million, our branches I knew which are going $30 million a year guys.

[Michael Perito:]

Got it. Well, thank you for taking my questions. I appreciate it as always.

[Vernon Hill:]

Thank you. Anybody else?

[Operator:]

Our next question is from [Brian] (Ph) [Indiscernible], a private investor.

[Unidentified Analyst:]

Hi yes. Thanks for taking my question. Just looking at the non-interest expense category, and specifically the other operating expenses. I was just wondering if you could maybe breakout, the growth related expenses in that category. Is that something that you guys could do. I'm trying to get down to kind of like the profitability of outside of the growth. I'm trying to get like a run rate basically.

[Frank Cavallaro:]

There will be more detail in the 10-K that we file in a few weeks. Other operating expenses is really a catch all, there is TV and marketing advertising. It is a large bucket that we summarize for purposes of the earnings release, but we will provide more detail in the annual report.

[Vernon Hill:]

When we are out on the road next time and when we do another calls we will break out the store profitability model and then the back office expense model, we will show you how it all works together. I don't know you, Brian, but the old days at Commerce, we did profitability models by store and back office and we are prepared to do that again soon.

[Unidentified Analyst:]

Okay. That would be great. Alright Thank you.

[Vernon Hill:]

Sure.

[Operator:]

And we have another question from Frank Schiraldi from Piper Sandler.

[Vernon Hill:]

Frank, you are back again.

[Frank Schiraldi:]

Just one follow-up if I could. First I just want to say yes, definitely if that would really be great if you guys would provide that again sometime soon that would be really helpful. So look forward to that.

[Vernon Hill:]

In next release we will put out and not soon we will come out some breakdowns of stores than we used to, we reported Commerce the right breakeven level generally and the flow through profit. So we will report some of that at the next report. Republic never had enough size and experience for the numbers to have a lot of meetings, but we are getting to that scale now.

[Frank Schiraldi:]

Okay, and then just wanted to try and zero in on expenses a little bit more. Just big picture for 2020. Frank you talked about the fact that that expenses stabilized in the fourth quarter, which they did. They were down linked quarter, with the growth you are looking for in 2020, with the four branch openings, I'm assuming you are still going to see some expense growth here. If you could just characterize for us, is that some sort of normalized growth more in line with what we saw in 2018, ten percentage sort of growth from these levels or any sort of color you can give on just sort of when you talk about cost control measures, how much is stabilization and how much is just controlling growth from here.

[Vernon Hill:]

You know Frank, maybe would be helpful to everyone if we gave you some numbers about expense growth, excluding the new stores and break the new stores out. See if that helps and we will come out that we will share with the market that will give you some more numbers to work with.

[Frank Schiraldi:]

Okay. Okay, so at this point you are not prepared to talk about, I guess growth and expenses for 2020 year-over-year.

[Andrew Logue:]

Good morning Frank. We can only disclose so much, Frank. But adding four new stores is obviously going to drive more costs. The other initiatives like managing raises and merit increases and advertising that will offset some of that growth. So, you saw the percentage in the growth year-over-year in 2019. We are clearly not going to reach those levels. Hopefully, we will be back closer to that to 2018 level that you referenced. But, somewhere in between is probably a reasonable assumption.

[Frank Schiraldi:]

Okay, great. That is helpful. Thank you.

[Vernon Hill:]

Anybody else?

[Operator:]

At this time, I have no further questions.

[Andrew Logue:]

Thank you all, Harry, Frank and Vernon. Good bye everybody.

[Operator:]

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