Republic First Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Jan 2021

[Operator:]

Welcome to the Fourth Quarter 2020 Earnings Conference Call. My name is Jenny. 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. Please note that this conference is being recorded. I will now turn the call over to Vernon Hill. Mr. Hill, you may begin.

[Vernon Hill:]

Thanks. Thank you, all. Good morning, and thank you all for joining the call. Welcome to the fourth quarter earnings for FRBK. This is a great quarter for us and a great year despite the PPP -- despite the COVID problem. We had a great year with growth in income, deposits and loans.

[Frank Cavallaro:]

Thanks, Vernon. So, in the room here in addition to Vernon, I'm joined by Harry Madonna, our CEO and President; and Andrew Logue, Chief Operating Officer. As Vernon said, we are very pleased with the quarter. We'd like to start the discussion by talking about our earnings. As a reminder, in the third quarter of this year, we booked a one-time goodwill impairment charge that was a non-recurring charge. So when we talk about earnings comparisons quarter-to-quarter, year-to-year through the discussion, we'll do the core earnings, excluding net impairment charge. For the fourth quarter, we recorded earnings before tax of $5.7 million. That compares to earnings before tax of $3.5 million in the third quarter of 2020 and a loss of $3.5 million in the fourth quarter of 2019. Year-to-date also showed tremendous improvement. The core earnings before tax for this year were $11.5 million compared to a loss of $4.9 million in the 12 months ended 2019. The significant improvement in earnings per share for the quarter, fourth quarter was $0.05 per share. For the third quarter of 2020, $0.04 a share and a net loss of $0.04 a share in the fourth quarter of 2019.

[Vernon Hill:]

And for the year.

[Frank Cavallaro:]

For the year, we earned $0.12 a share, excluding the goodwill charge compared to a loss of $0.06 a share for the 12 months of 2019.

[Vernon Hill:]

Pardon my cold. Frank, why don’t you talk about why this happened and talk about the effect of the jaws.

[Frank Cavallaro:]

So the improvement in earnings, both quarter-to-quarter and year-over-year was driven by what we focus on as the jaws effect. This is the improvement in revenue -- percentage revenue growth compared to the expense growth. So for the fourth quarter of 2020, we saw revenue grow by 48% compared to the fourth quarter of 2019, while expense grew -- expenses grew just 10%. For the 12 months, we saw a similar trend. Revenue grew 26% for the 12 months, while expenses grew just 8% in the year and compared year-over-year. So we call this the jaws effect and it's our -- it reflects our concentration and our focus on expense control throughout the year. At the end of last year, we announced several initiatives that we would focus on this year to control expenses, to improve earnings. And as of the end of the year, we're pleased to report these significant improvements.

[Vernon Hill:]

Okay, back to me. Frank, thank you. We had a great year in growth. Deposits grew over – year-over-year 34% - $1 billion, 34%. Demand deposits grew to 30% for the year. Part of that was the PPP effect. Loans also had a good year. Frank, why don’t you go ahead with the numbers going forth?

[Frank Cavallaro:]

Yes. So total loans grew by $897 million, or 51% to nearly $2.6 billion at the end of the year. Some of that growth or a significant portion of that growth was driven by the PPP loans that we still carry on the books. There's about $600 million in PPP loans. But excluding that, we still grew loans $273 billion, or 16% year-over-year in a year, which we consider challenged by the governmental restrictions and limited availability of customers as a result of the COVID pandemic.

[Vernon Hill:]

And our focus on growing our $700 million in PPP loans.

[Frank Cavallaro:]

In addition to the loan growth, we're pleased to report that asset quality remains strong. Our total non-performing assets to total assets declined to just 28 --0.28%…

[Vernon Hill:]

0.28%, Frank.

[Frank Cavallaro:]

0.28% as of December 31. And as for deferrals, we were -- customers were deferring. We only had 16 customers deferring loan payments at the end of the year, which represents $50 million, or less than 1%. This is well down from the peak of $444 million that we saw earlier in the year. So we're very pleased with the trend in asset quality. In addition to the earnings, we'd also like to mention that the improvement in earnings in each quarter throughout the year, in our release, we put a chart in there, that shows the trend in the first quarter all the way through the fourth quarter. So it was consistent improving – consistent improvement in core earnings, demonstrating the momentum that we feel as we head into 2021.

[Vernon Hill:]

That's on Page 3 of the printed press release for those of you haven't. Go ahead, Frank.

[Frank Cavallaro:]

Yes. We have a section here as well regarding the PPP loan program. We reiterate the statistics that we did earlier in the year, nearly $680 million in total PPP loans. That was for nearly 5,000 business customers. And the important thing that we like to stress here is more than 50% of the applications that we received approval on were from businesses that were not previously customers of Republic Bank. Many of these customers have since switched their business over to Republican, opened deposit accounts as well as bringing regular commercial loans.

[Vernon Hill:]

We are in the process of rolling out forgiveness on the round one, and we've begun making loans on the PPP round two, which the portal opened last week.

[Frank Cavallaro:]

We've also previously reported that we received gross fees of 20 -- nearly $22 million as a result of this program. And as we stated before, these fees are recognized over the life of the loans. So we have nearly $13 million that we carry into next year as deferred revenue that will continue to be recognized that these loans are paid off or paid down. Thank you.

[Vernon Hill:]

Why don't you keep going here, Frank? I'm going hoarse.

[Frank Cavallaro:]

Yes. We put a section here that talks about the total banking experience. Our goal is to deliver a unified customer experience not only through our store locations that we talk about so much, but we have tremendous online and mobile options as well. And as a result of this, we were named as America's number one bank for service during 2020…

[Vernon Hill:]

By Forbes.

[Frank Cavallaro:]

… by Forbes in a survey conducted according to their customers. We opened our 31st store this -- in the third quarter of this year. Bensalem opened in the third quarter. We're pleased to announce that we’ve broken ground on stores in Deptford as well as Ocean City that we expect to open in the – during 2021. The additional highlights include growth per store. The average growth rate per store, the new stores that we opened, the glass filling, I'm sorry, in deposits was $38 million. And if you look at all the stores combined, we're still growing stores at an average of $33 million a store, which is tremendous growth. We also saw…

[Vernon Hill:]

And our cost of money went down.

[Vernon Hill:]

We did see a decline in the cost of funds, which led to the next bullet point where we talk about the improvement in our margin during the fourth quarter. If you compare Q4 to Q3, we saw the margin improve to 2.43% compared to 2.35%. The improvement in the -- decrease in the cost of funds drove that as well as the fact that the compressed margin partially was driven by the PPP loans that we carry on the books -- for those that aren't familiar, those loans carry a rate of 1%. We also had a tremendous year in our residential mortgage division. Our mortgage team originated more than $700 million in loans during 2020. This is a record high for this group. They had a tremendous year. The low-rate environment has assisted in that. We've seen some refinancings, but we are also seeing really strong growth in our new home purchase originations. We are really pleased with the performance of both mortgage. We also originated -- we also raised capital during 2020. During the third quarter, we announced a $50 million capital raise. We issued convertible preferred stock. This gives us the capital that we need to continue with the growth plan and trajectory that we're on.

[Vernon Hill:]

Deposit type, Frank. It's on Page 10 for those that have our copy. I talked to gross and total deposits, but demand is by far the fastest growing.

[Frank Cavallaro:]

[Vernon Hill:]

This reflects my longtime experience in the business that commercial lending over funds itself. If you look over time to see, commercial deposits growth exceed commercial loan growth. I've always found that one. All right, go ahead, Frank.

[Frank Cavallaro:]

When we look at the lending categories, we had a chart in our release on Page 11, that shows our lending by site. We saw strong growth in in our commercial and our own occupied real estate, commercial real estate, as well as our residential mortgage loan book. In addition to PPP loans, we've got about $624 million still on the books. We continue to see forgiveness of those loans come through as we get into the first quarter. We're starting to see the SBA accelerate on their forgiveness with those applications …

[Vernon Hill:]

we expect those to one down, they were very low number as the year goes on.

[Frank Cavallaro:]

Yes, we're …

[Vernon Hill:]

That will help our NIM, right?

[Frank Cavallaro:]

It does help the NIM because the 1% loans come off the books. And we're hoping by the end of the second quarter, we've got most of those applications to the SBA and forgiven.

[Vernon Hill:]

And we can take fees we received in that?

[Frank Cavallaro:]

At that time, yes, the acceleration on the fees happens when the loan is paid off or forgiven. Lastly, there's a chart in here on asset quality.

[Vernon Hill:]

Well, on average .

[Frank Cavallaro:]

We have …

[Vernon Hill:]

I’m sorry.

[Frank Cavallaro:]

As we reiterated …

[Vernon Hill:]

I’m sorry, Page 11.

[Frank Cavallaro:]

Nonperforming assets to total assets .28%, our charge-offs .05%. Our allowance for loan losses compared to gross loans continues to grow. Excluding the PPP impact, the -- that amount is -- that level is reaching to 64 basis points, and our allowance for loan losses to nonperforming loans is now over 100%. At this point, I'll turn it back to Vernon.

[Vernon Hill:]

Capital, the numbers speak for themselves. That's all we have in the press release. We'd be happy to open the floor now. Any questions you'd like to ask, please do so.

[Operator:]

Thank you. And we have a question from Frank Schiraldi from Piper Sandler. Please go ahead.

[Vernon Hill:]

Good morning.

[Frank Cavallaro:]

Good morning, Frank.

[Frank Schiraldi:]

Hey, guys. Let me ask you about PPP. I mean, you guys did such an exceptional job in the first round. Just wondering how significant do you think the second round here could be for FRBK?

[Vernon Hill:]

I don't think we know the answer, Frank. So it's sort of a guess. There's not the wild demand for round two that we saw on round one. But there is definitely demand for round two. Round two has targeted provisions for hotel businesses and food businesses. So you're going to see more demand there. We're -- we don't know how to guess what the amount is going to be. But we're seeing demands now, we're seeing that, but I would be surprised if we saw the flood that we saw in the spring of 2020.

[Frank Schiraldi:]

Okay. And then mortgage banking, obviously, has been quite strong, and even the fourth quarter, which seasonally usually a little bit weaker in the industry, which was much stronger than the third quarter. So just wondering if you can talk about the pipeline and your thoughts for the beginning of 2021 at least on the -- in that revenue column?

[Vernon Hill:]

Andy Logue runs that group. Andy wants to brings up to date.

[AndrewLogue:]

Pipelines are still very strong right now. I mean …

[Vernon Hill:]

Suburban business primarily, right?

[AndrewLogue:]

Suburban business, yes. But, again, we haven't seen a slowdown other than two weeks around Christmas. Volumes are strong.

[Vernon Hill:]

I think what, Frank, is a little different than what we've seen. It's partially weight-driven, of course. But it may be more driven in our market. The people moving to the suburban markets, they're buying new homes or refinancing. You're seeing that in the New York market, too. We haven't seen it slowdown in the fourth quarter, right?

[Andrew Logue:]

No. No, that’s not slowing.

[Frank Schiraldi:]

Okay. And then just finally on deferrals, they're down quite a -- significantly, obviously, down under 1% of loans. Just wondering, in your experience, have all the loans that have come off deferral, have they just basically gone back to paying under the original terms? Are there any modifications that have been made to get those off deferral?

[Vernon Hill:]

I think the answer to that question is yes and yes, and there's probably some more twists and turns to it. None of them have gone off deferral and put on a troubled debt restructure, I don't think, Andy, right?

[Andrew Logue:]

No, we haven’t.

[Vernon Hill:]

But they all take slightly different forms. Some of the loans have been repaid. Some of them repaid by the SBA. Some of our deferred loans were SBA 7A loans. So they have a different twist, too, but there’s no real common trend, I don't think.

[Frank Schiraldi:]

Okay. I mean, is there any common trend on that stuff that has been modified? Is there any trend there in terms of what the modification has looked like? Is it just basically an extension of term -- of original terms, just broadly speaking?

[Andrew Logue:]

Broadly speaking, majority, there would be an extension of terms.

[Frank Schiraldi:]

Okay.

[Andrew Logue:]

They're paying, but they .

[Frank Schiraldi:]

Gotcha.

[Vernon Hill:]

Okay.

[Frank Schiraldi:]

Thank you.

[Vernon Hill:]

One thing I want to say to you, Frank, hold on a minute, but I forgot what it was. The momentum is what we talked about in this bank in Q3. And the momentum is building again in Q4. We can see it in all of our lines of business in every market. Thank you, all. Anybody else? Thank you.

[Operator:]

Our next question comes from Michael Schiavone from KBW. Please go ahead.

[Michael Schiavone:]

Hi. Good morning, everyone.

[Frank Cavallaro:]

Hi, Mike.

[Michael Schiavone:]

So 2020 was a strong year for loan growth. Can you just talk about your loan growth outlook and appetite for 2021 and the key drivers there?

[Vernon Hill:]

I'm not sure we know what the overall loan growth is going to be in the market because of the COVID-19 is still up in the air. But as I said in quarter three, our tremendous participation in the PPP 1 loan program from move the tremendous number of new accounts to us, deposits and loans, we see lots of new clients, particularly because of the work we did in the first round. So I'm optimistic about the growth, but it's hard to tell what America is going to look like in the next months.

[Michael Schiavone:]

Okay. Understood. And then, can you just talk about your expectations for the NIM as well, including in that conversation the impact from PPP this quarter, and then how much opportunity might be left from cost of funds to drive that down?

[Vernon Hill:]

Frank?

[Frank Cavallaro:]

So we read the minutes like you do of the Fed meetings and we're not projecting or expecting any change in rates during 2021. So we would expect the NIM to remain consistent as you've seen it over the last quarter or two. However, you do bring up the PPP, so you'll see PPP loans payoff in the first and second quarter, where we'll shed 1% loans. However, you'll see a pickup because we're going to accelerate the recognition of the revenue that we talked about, which was deferred. So that also runs through the margin. So you'll see an increase from the PPP revenue. But outside of that, if you strip the PPP away, we expect the rate environment to remain as...

[Vernon Hill:]

Cost of funds is going down or it's flat, Frank?

[Frank Cavallaro:]

It dropped down into the fourth quarter. We think it's leveled off. We've done our rate cut and we don't see much…

[Vernon Hill:]

But our mix is improving all the time.

[Frank Cavallaro:]

We continue to see growth in demand deposits, as you’ve pointed out. On that chart, that highlights the significant increase in non-interest-bearing demand will always help us. But there -- there's not much room for rate movements.

[Michael Schiavone:]

Okay, thanks. And can you just remind us of when you're adopting CECL and of the capital impact you expect on adoption?

[Frank Cavallaro:]

So we had stated earlier that we intended on adopting CECL in the fourth quarter of 2020. The Economic Aid Act that was adopted or passed by Congress in the fourth quarter pushed the adoption for another year. So we're not required to adopt it until January of 2022. We have the ability to electively adopted in January of 2021, but the requirement is January 2022. In the fourth quarter, we weren't allowed to adopt in the fourth quarter. So as of this time, it’s being deferred. We can say that we're running a parallel comparison. We run our CECL calculation each quarter and compare it to the incurred loss method that we're currently booking our loss on – our reserve loan. And at this point, we are -- our reserves under the CECL model would be lower than where it is that today. So we think we have a conservative number and a good number up for the loan loss -- allowance for loan losses.

[Vernon Hill:]

So I will make it clear. If you adopted it in the fourth quarter, you wouldn't have to make an additional contribution to your loan losses.

[Frank Cavallaro:]

It would have been .

[Vernon Hill:]

Okay.

[Michael Schiavone:]

Great. Thanks. Thanks for taking my question.

[Vernon Hill:]

Thank you.

[Operator:]

And our next question comes from Doug Stevens from Morgan Stanley. Please go ahead.

[Doug Stevens:]

Hi. I just …

[Vernon Hill:]

Hello, Doug.

[Doug Stevens:]

Hey. New York has changed since you opened a few branches up. I wondered if you could talk about New York. We haven't heard about that lately. And this was ?

[Vernon Hill:]

Yes, New York is a different world right now. We opened our two stores. We built a commercial loan team up there. There -- our commercial loans are growing, our deposits are growing, mainly commercial. So we expect strong growth in this coming year in New York. But we're probably not going to build another store in New York City till we determine what New York, particularly Manhattan looks like. But we're getting strong growth in deposits and loans from our lending teams.

[Doug Stevens:]

Okay. Thank you.

[Operator:]

And we have no further questions at this time.

[Vernon Hill:]

Thank you all.

[A - Frank Cavallaro:]

Excellent. Thank you.

[Operator:]

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