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Edited Transcript of FRBK earnings conference call or presentation 29-Jul-19 2:00pm GMT

Q2 2019 Republic First Bancorp Inc Earnings Call

PHILADELPHIA Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Republic First Bancorp Inc earnings conference call or presentation Monday, July 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew J. Logue

Republic First Bank (Philadelphia, PA) - President & COO

* Frank A. Cavallaro

Republic First Bancorp, Inc. - Executive VP & CFO

* Harry D. Madonna

Republic First Bancorp, Inc. - President, CEO & Director

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Conference Call Participants

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* Frank Joseph Schiraldi

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the second quarter 2019 earnings conference call. My name is Sylvia, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Harry Madonna, Chief Executive Officer. Mr. Madonna, you may begin.

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Harry D. Madonna, Republic First Bancorp, Inc. - President, CEO & Director [2]

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Good morning and thank you for joining us. I'm here with Andrew Logue, the Chief Operating Officer; and Frank Cavallaro, the Chief Financial Officer. Frank, I'd ask you to go ahead and go through our -- the highlights of our second quarter earnings, please.

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [3]

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Okay. Thanks, Harry. Thank you for taking the time to join us this morning. Pleased to report to you the results for the second quarter of Republic First Bancorp Bank.

We'll start off with total deposits, which grew $394 million year-over-year, that's 18%, to $2.5 billion. Our new stores that we've opened since the beginning of our Power of Red is Back expansion campaign are growing deposits at an average of $25 million a year. All our stores together are growing at an average of $14 million a year.

Our total loans year-over-year grew $191 million or 15% to $1.5 billion. And total assets are up to $2.9 billion, which represents growth of 15% year-over-year.

We're pleased to announce the opening of our first store recently. The shift occurred 2 weeks ago in New York City. We had a grand opening for our location at 14th and 5th, which got off to a tremendous start. That's our 28th store altogether. We expect to have 31 stores opened by the end of this year.

Net income for the second quarter was $381,000 or $0.01 a share. That compared to $426,000 in the first quarter of this year and $2.4 million in the second quarter of last year. We continue to feel a suppression of earnings due to margin compression and the costs associated with the build-out of our New York market.

The net interest margin in the second quarter shrunk to 2.94%, which compares to 3% in the first quarter of this year and 3.19% in the second quarter of last year. So during the second quarter, we'll not only experienced a flat margin, but at times, we're seeing -- I'm sorry, flat yield curve or inverted yield curve. This has created continued compression as we continue to feel the effects on our revenue line.

Nonperforming assets continued to decrease. Our nonperforming assets to total assets shrunk to 53 basis points. That compared to 81 basis points a year ago at this time.

We're pleased to report a strong quarter in our noninterest income line. Noninterest income was driven by SBA gains of over $1 million, and the mortgage division contributed $3 million to the noninterest income line.

Capital ratios continue to be strong. At June 30, our leverage ratio was 8.97%, and our total capital ratio was over 14%. We're pleased to report that we see consistent growth in noninterest-bearing, demand deposit balances and account openings.

There are the highlights for the quarter. At this point, I'd open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Michael Perito from KBW.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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I had a few questions I wanted to hit on. First, Frank, I wonder if you can give us maybe just a little bit more specifics. Got the first month in the books. I know it really has only been a little over 2 weeks, but just what are the early indications from the New York City expansion from an actual growth perspective?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [3]

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So as you pointed out, Mike, it's been just 2 weeks. We can tell you that the grand opening weekend that occurred the weekend of July 11 was a tremendous success. We had hundreds of customers coming in and opening accounts. We've had, in just 2 weeks, $5 million in deposits. So that's a really strong start for us, and we're really pleased to see how that store's gotten off the ground.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Helpful. And then I guess just kind of a broader question based off of that. So I mean obviously the -- kind of the underbelly of the brand here has a lot of momentum, right? And there are still a lot of customer interaction and brand awareness, and that is driving deposit growth, which I imagine will be stronger in the back half of the year with some of these new stores.

But I guess can you talk a little bit more about the profit model that you guys are using to analyze this growth at this point? I guess my question really is with the curve where it is and prospects now for maybe the Fed start cutting short-term rates, I mean is there any talk or discussion about altering that growth rate to a level that can be more supported by the profit that you can make in the current yield environment?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [5]

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So I start off by saying that the first half of this year, we've been incurring expenses to launch a new market, and that's been obviously a drag on our earnings. Now that we're opening New York, we're now generating deposits and loans, so the revenues will start to come with that. But in addition, we continue to evaluate what happens and what the margin environment will bring us.

There's talk of potential reductions by the Fed in rates, and we think that would provide some rate relief to us or margin expansion. As we've seen over the last year, 1.5 years, when the Fed has raised rates over 7 times, we're seeing that the increase on the short end of the curve, in fact, are cost -- are deposit cost of funds. So anything that the Fed does can help us there.

But at a high level, we continue to evaluate and [want to monitor it] to project what would happen in different scenarios. And if this were to continue, if margins were to continue to suppress, obviously we would make the right decision to accommodate and account for that to make sure that we can maintain a profitable bank.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [6]

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Okay. Frank, just lastly, just a quick one. Just the tax rate took a step-up in the quarter. Any thoughts, Frank, on just where that will trend for the rest of the year?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [7]

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The tax rate in the quarter, there's such a small pretax income. There's some deductible items. Obviously, the biggest impact on our run rate is going to be the federal tax rate, 21%. However, when we're down in the low profitability, the deductible items that we see have some impacts. So I would say that what you're seeing is consistent. As we go -- as we increase profitability in Q3, we'll see a more normalized tax rate and effective rate in the high teens to the low 20s.

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Operator [8]

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Our next question comes from Frank Schiraldi from Sandler O'Neill.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [9]

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Just wanted to start with the New York store opening again and just ask what is your -- if you could just remind us what you're targeting in terms of breakeven there and then just your thoughts on growth. I mean if I look at your new stores opened, generate $25 million in deposits. What is the anticipation for this flagships -- flagship branch in New York?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [10]

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So on the last call, we identified a breakeven target of $55 million to $60 million, and we believe that's the case, now that we're starting -- we're seeing the actual expenses come through. Obviously, that target shifts if the margin environment changes. But right now, that's what we see.

And then your question about the average $25 million in deposits per year per store, that's the growth prototype that we see down here. That's the growth that we see in our prototype building in the Metro Philadelphia market. We said earlier on the call that already in just 2 weeks, we've seen $5 million in deposits in this new store in New York. So we're expecting that -- [not only in] New York, we're expecting a higher growth and a higher deposit availability in that market.

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Andrew J. Logue, Republic First Bank (Philadelphia, PA) - President & COO [11]

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And Frank, this is Andy. Let me add this to the -- and we also -- we talk about store, but we also had a lending team in place now between -- and they really just got started in the late May, June period of hiring. So they're just on the ground now out there, so we start to see volume on the loan side, on the commercial loan side.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [12]

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Got you. Okay. And then I would imagine, as you look at the environment and think about growth and profitability, Frank, you mentioned it's something that you're always clearly looking at. But I would imagine in the near term, you have branches coming online that are in process and are basically going to be -- regardless of what the profitability picture looks like over the next 12 months, are already sort of far enough along that they're going to open.

So I just wondered, like, where are you in terms of as you look out over the next 12 months and you think about -- if you could just kind of remind us the expectations for store openings. And then when can you -- not pull the plug, but when can you sort of take a step back and think about maybe slowing branch growth down? Does that take -- is that an 18-month lead time? Or what is that?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [13]

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So that's about the lead time, Frank. I think we've talked about that before. We mentioned earlier on this call we've got 28 stores opened. We expect to get to 31 by the end of the year. So obviously, that means we have 3 under construction, and we're confident on their status.

As we think into next year, we have the ability -- as the development cycle moves forward, we can be aggressive or we can slow it down. The approvals that are necessary, the permits and the land acquisition, there's a tremendous amount that goes in. So if you're asking, can we slow this down sooner rather than later, I think the answer is yes because we're not committed to a deal until we get all the approvals. That means regulatory approvals. That means local zoning, the permits necessary to do construction. So we're not locked in to something until we actually reach that point.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Okay. And then on margin, just thinking about your interest rate risk profile that you guys offer up in your Qs, as we expect a rate cut here, you've talked about the deposit pricing, on the muni side, repricing [mainly], maybe getting some benefit to the NIM in the near term. Is that still sort of the thinking?

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [15]

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That's our expectation. And we've seen the opposite of that over the last 1.5 years as it's gone the other way. So in this environment, expecting no change in the long end of the curve. Yes, I think that's a fair assessment.

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Operator [16]

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We have no further questions at this time.

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Harry D. Madonna, Republic First Bancorp, Inc. - President, CEO & Director [17]

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Thank you very much.

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Frank A. Cavallaro, Republic First Bancorp, Inc. - Executive VP & CFO [18]

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Yes. Thank you for joining us. We appreciate your time.

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Operator [19]

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