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Republic First Bancorp Inc (NASDAQ:FRBK)
Q1 2020 Earnings Call
Apr 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the First Quarter 2020 Earnings Call.

My name is Brandon and I'll be your operator for today.

[Operator Instructions]

I will now turn it over to Vernon Hill. You may begin, sir.

Vernon W. Hill -- Chairman

Good morning to everyone on the call. Welcome to the Republic Bank Q1 call, which is different than all calls we've had in the past.

With me is the Chairman and Chief Executive of Republic Bank, Harry Madonna, our Chief Financial Officer, Frank Cavallaro, and Andy Logue, the COO. I hope you all have a copy of our Q1 release that was released this morning. And I'll run through the high points and then we'll answer whatever you would like.

If you look at this quarterly release in the first quarter for Republic, the first quarter sort of spills over into last month and I see it as a tale of two worlds. On the first page, we talked about how Republic Bank performed in the first quarter, where there were really no impact of PPP yet. And you can see on the first page, loans grew 27%, deposits grew 19%. I want to highlight that demand deposits alone grew 29%. Our store growth -- even during these times, our new stores grew at $24 million a year. And when you blend this in with all the stores, we're still growing at $16 million a store a year. The American median is $1 million to $2 million.

Income has improved. We had a small loss in quarter one, which is a big improvement from the fourth quarter of last year. As we said before, these losses were for a temporary amount of time and were caused by both opening our new stores in New York City and the flattening of the inversion of the yield curve.

More fun is if we go to Page 2, the post-world what we are calling the PPP world, we have some results on Page 2. The income -- these numbers will be reflected on the Q2 results. This is what we have in place and what we expect. Republic has taken a really leading role in this PPP Loan Program right from the beginning, we've been out front with it both to our current customers, but we're one of the few banks of this size that are offering PPP loans to new clients. And it's been a tremendous tool.

So if you look on the red Rs on Page 2, so far out of the 4,300 PPP apps received, 72% have been approved. The rest are in queue. And we expect approximately 100% of our apps to go through. Our average loan size is $213,000. We've booked already $600-million-plus in loan balances on PPP and we expect that in the next month to close out around $800 million assuming there is SBA funding left. The next bullet talks about 35% -- our PPP Loan production at the $661 million number is 35% of our loan book prior to the PPP. Based on a research report from KBW, we're number one in America. So our PPP loan production, we're number one compared to our post loan. We expect that -- we hope we expect that loan number to go up to 43% -- the PPP loans we produce will be 43% of our current loan portfolio.

As you've seen in the press, we expect the average fees to appear -- to be around 3% of the loans amount and those will be represented in the earnings in primarily in Q2 and Q3. For those that aren't experts on the PPP plan, as I become, the Federal Reserve has created non-recourse loan for the banks to pledge their PPP loans funded by the fed at 0.35%. These loans and the borrowings from our assets are both risk capital and leverage. So these are no-capital required loans.

So far, 20% of the loans we've approved are for new clients. This has been very important to this bank, not only for the loans it's produced, but the way it's improved our brand, it's brought new clients, and of course we're earning money. It's going to dramatically impact our income projections for the balance of the year, and with this we expect to double our loan loss reserve by adding approximately $9 million to the reserve over the rest of this year.

I think those are the major points I'd like to make. I would be happy -- Frank, do you want to say anything? Harry? Okay. We'll open the floor up. Fire away.

Questions and Answers:

Operator

[Operator Instructions]

And on the line, we have from Piper Sandler, Frank Schiraldi. Please go ahead.

Vernon W. Hill -- Chairman

Go ahead, Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning, everyone. Vernon, I wanted to just stay on the PPP loans for a second. Obviously, tremendous numbers there. If you could just talk a little bit more about the process. Was it really just the fact that you guys were going after new clients, do you think that enabled you to have such a strong showing there? And could you talk about some of the opportunities you see. Have you started to see deposit wins, other lending relationships as a part of this? Is it still too soon? If you could just talk a little bit more about that. Thanks.

Vernon W. Hill -- Chairman

Yeah, Frank. I got all those. Make sure I give you the answer for all of them. So we were out first with this, we were aware of this law. I got involved in it. We were really ahead. So we knew this was coming and we had a pretty good understanding of the rules. Republic has been an active SBA lender for years. So we knew what the SBA was. So we were out first. We were offering PPP to our current clients. But we also saw it as a tool to attract new clients. So part of it is because of us. We've been helped by the large banks, which have not been very good at it. And many of them have only done PPP loans for the current clients. We've opened it for both existing customers and new customers, and that's a big advantage.

Wells is a big player in our core market, and they've done the worst job. And I would say, talking to PPP clients myself, they got some mighty happy folks there. So I think all those things to work together, we were at the right place at the right time with the right team. And as I said, we expect our PPP production to be 43% of our existing loan book, which we believe is number one in America.

Frank Schiraldi -- Piper Sandler -- Analyst

Great. And then...

Vernon W. Hill -- Chairman

And I wanted to -- Frank, Frank, Frank, I'm sorry, I forgot the main point. The new clients are not only doing PPP loans, they're bringing their regular commercial business, they're opening accounts with us. The comments we get are, I'm sick of my bank, I'm tried of being abused. If you can help me on this loan, I'm going to bring my whole banking relationship with it, and that's what we're happy seeing happen, and that's where -- my personal view of the growth of this bank has gone up, because we're seeing that kind of reaction every day.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay, great. And then in terms of -- well, I think you answered my second question there too, because it sounds like in terms of growth trends from here, I would imagine that -- it seems like there is no change to your expectations and significant growth. Part of that is these PPP wins. But if you could talk about the branch side of things, just in terms of -- I'm sure construction having slowed/stopped for some time. What your plans are going forward over the next couple of years now for branch expansion?

Vernon W. Hill -- Chairman

Okay, Frank. Thank you. Our branch expansion has been slowed this year because of the stops [Phonetic] building. We have one that's been sitting there ready to go, or half done. So I think we're going to -- how many are we going to open this year, Frank?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

We expect our initial plans for it, but we'll get two definite with some under construction going into next year.

Vernon W. Hill -- Chairman

And so, next year, we will do somewhere in the two to four. New York is going to get new stores. We're happy with that. The New York expansion also has been slowed by the fact that nobody can leave their house. But you'll see us doing some new stores in both markets. What's been happening is the stores in the newer markets [Technical Issues] have performed better than I expected. So you're going to see us probably on that three to four path in those markets, total.

Frank Schiraldi -- Piper Sandler -- Analyst

And it sounds like you mentioned the fed facility, the PPP. Should we expect, just in terms of modeling the balance sheet. You mentioned it doesn't hit right capital at all, I guess, so why not. Do we expect to see the fed 35 basis points basically fund the entire program? Or should we see some mix shift away from securities into loans, just given the current...?

Vernon W. Hill -- Chairman

Frank, to have it excluded from your capital, it has to be funded by the fed. So we would be happy to keep these loans on our books. But if we do, they are included in your asset total for your capital. So yes, we're going to fund everything with the fed loan. Think about this -- Frank, think about -- they've set this up as an SPV, that's the way you should really think about it, because the fed loan is a non-recourse loan to the bank.

Frank Schiraldi -- Piper Sandler -- Analyst

Right. No, understood. And then just finally from me. Just given where the expected growth going forward and where capital stands, but we certainly thought that and then we've talked about in the past, certainly there could be some external capital raise in the near term. Certainly, the PPP Program is going to throw off a lot of fee income over the -- I guess it will run through NII, but it's going to throw off a lot of fee income over the next couple of quarters, which will help. But just could you update us on your thoughts, Vernon, on any sort of timing instrument in terms of any sort of external capital? Thanks.

Vernon W. Hill -- Chairman

Well, first of all, our plans for timing all went to hell with this coronavirus. So we're a little uncertain about the timing. But you're right, Frank. The income from the PPP Program satisfies half of the capital needs we see. But we still want to do some kind of cap raise in quarter two and quarter three, and we haven't decided whether it's going to be debt or equity, or some convert. I personally think our growth rate is going to go up, based on what I've seen as a result of this PPP. So I'm still hopeful that we can get some form of capital raise on top of the impact we get from the PPP.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay, appreciate it. Thank you.

Vernon W. Hill -- Chairman

Thank you, Frank.

Operator

And from KBW, we have Michael Perito. Please go ahead.

Vernon W. Hill -- Chairman

Michael?

Michael Perito -- KBW -- Analyst

Hey, good morning, guys. Glad to hear everyone is doing well. Thanks for taking the question.

Vernon W. Hill -- Chairman

Sure.

Michael Perito -- KBW -- Analyst

I wanted to ask on the expense side. Obviously, you guys had a second straight quarter here of some expense discipline that helped you kind of bridge the gap a little on profitability standpoint, but it does seem like maybe with the PPP Program, there is quite a few things going on. I was wondering if you had any near-term thoughts about kind of the expense initiatives that are updated that you guys laid out. And if you think the new customer secondarily on the PPP side? I would think that would be pretty scalable from a profit standpoint, right, because there's not really any new stores or anything you guys will need to put up to kind of bring those clients in. Is that a fair way to think about it?

Vernon W. Hill -- Chairman

It's a fair way to think about it. One of the things, with all these PPP loans, we incurred almost no direct expense. We're using our current team to handle all these apps and get the process through. So there isn't really any direct expense, although there are some fees you have to pay with the software use. We are focused on keeping our expenses under control. Frank will give you a little detail in a minute. I think the growth side is going to be on the middle market commercial loan side, and the commercial cash management. So the new branches don't have that much effect. But as you've heard me say many, many times, the branches are our brand and we need them to expand, but -- Frank, do we really think it's going to be much of an operating expense increase?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Some of the expense control initiatives we talked about in earlier releases were slowing store growth, managing hires, and looking at some of our maintenance and utility costs. And those will be impacted by the growth through the PPP.

Vernon W. Hill -- Chairman

And some of your cost cuts that you talked about at the last call are just going through now, getting floated back in now, right?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

In Jan -- the first quarter is when we really started to see the effects of those initiatives.

Michael Perito -- KBW -- Analyst

Helpful, guys. Thanks. And then I did also want to just ask on the traditional 7(a) side within the SBA program. Do you guys kind of expect that to be limited in the next quarter or two with all the focus on the PPP? Is that a fair assumption or should we be thinking about it differently?

Vernon W. Hill -- Chairman

So Michael, the answer is yes and no. There is a flaw in the PPP bill that denies the traditional 7(a) funding for the month of May and June. They didn't know they had this error in the bill, and they're trying to get it fixed. Let's take that out of the equation for a minute. But I think we think our general 7(a) production is going to be about the same. Don't you think [Indecipherable]. So I think other than this gap we might have in May and June, we don't see any really slowing down there.

Michael Perito -- KBW -- Analyst

Got it. And then just from a credit perspective, how are you -- I appreciate the remarks about the reserve build expectation, but can you maybe just cue us in a little bit about some of the qualitative economic assumptions you guys are making around maybe GDP and unemployment, just so we can kind of try to have some consistency relative to our own internal forecasts?

Vernon W. Hill -- Chairman

Yeah, we haven't gone to -- what it's called, Frank?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

CECL. We have not...

Vernon W. Hill -- Chairman

We haven't gone to CECL. We're not required. So we're not really required to make these economic assumptions. So we can look at our actual loan portfolio and make our decisions based on that.

Michael Perito -- KBW -- Analyst

So we're looking primarily credit, credit metric driven? As charge-offs or more loans are deferred or migrate, you would expect the reserve to increase as a result?

Vernon W. Hill -- Chairman

Well, first of all, we want to increase the reserve because we want to get up 1% from where it is now. I thought you're going to ask me about the loans we deferred. We look at all the loans we've deferred, which is not very many. It's only 5% of our commercial loan portfolio. I like to watch the loans, as most of you know. I really haven't seen anything that bad there. One of the things you might have asked us, restaurant and hotels are only 7% of our loan balances. And it's funny, other than real estate stuff, healthcare is number two. So we don't have any big exposure in the hotel and the food service business.

Michael Perito -- KBW -- Analyst

Okay. That was actually going to be my next question. So, thanks for that. And I appreciate all the extra color, and stay well, guys.

Vernon W. Hill -- Chairman

Thank you, Michael.

Operator

[Operator Instructions]

Vernon W. Hill -- Chairman

We are here.

Operator

All right. It looks like no further questions at the moment.

Vernon W. Hill -- Chairman

We got them all answered. Thank you all. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 19 minutes

Call participants:

Vernon W. Hill -- Chairman

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Frank Schiraldi -- Piper Sandler -- Analyst

Michael Perito -- KBW -- Analyst

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