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Republic First Bancorp Inc (NASDAQ:FRBK)
Q2 2020 Earnings Call
Jul 27, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Second Quarter 2020 Earnings Conference Call. My name is Samara and I'll be the operator for today's call. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Mr. Vernon Hill. Mr. Hill, you may begin.

Vernon W. Hill II -- Chairman

Good morning, and welcome to the call. We're pleased to report on a strong second quarter. With me is Harry Madonna, CEO; Frank Cavallaro, CFO; and Andy Logue, the President. I'll go through the high points and then we'll be happy to open up for calls. We're coming out of the second quarter with very strong momentum. Some of the things that happened in the second quarter, I hope you also this national survey by Forbes that named Republic America's Number One Bank for Service. That is what our model is meant to be. We believe that reflects what we've been doing. Just by chance some of you may remember our [Indecipherable] was America's Most Convenient Bank. Also in the quarter, we were very active in the PPP Program. KBW mentioned of all the banks, we produce the highest number of PPP loans as a percentage of our current loan book.

It's not only been very strong in raising fees and we have about $18 million or $19 million left in PPP fees are overall move into the income statement in third, fourth and first quarter but it's brought a tremendous number of new accounts to us and the clients more than I've ever seen in my life. 50% of the PPP loans were for customers that did not bank with us and we see a good percentage of them moving over. While I'm on PPP, which is in the bottom of page 2, we originated $682 million in loans, 4,800 loans, 50% were customers that were new to us. Many of the banks in this market did not accept new clients and we were very happy to. Our gross PPP fees are $22 million of which approximately $19 million or less. The new rules are that we recognize those fees as the loans are repaid or forgiven -- the income statement in quarters three, four and one.

KBW is using these PTPP numbers; Frank, make sure I get it right, pre-tax profit, pre-tax pre-provision earnings. So that number for us was $4.2 million. If we used that number in the last quarter we had a small loss, is that right, Frank, breakeven in the last quarter and losses in the two prior. Talking about creating jobs where the top line grows in a higher percentage than the expense line. That's the way we see to increase our earnings. In the second quarter, quarter-to-quarter, top line grew 13%, expenses went down 2% and the same numbers pretty year-over-year top line went up 17%, expenses only went up 3% and that chart is on page 3. Asset quality continues to be very strong for us. Our non-performing loans went down to 0.31%.

On bottom of page 3 it shows our deferred loans, which was a high for [Phonetic] 22% of our outstanding loans now reduced to 2% of our loan accounts and 7% of our loan balances. Our NIM was down 21 bps. Frank, explain why that was a one-timer?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

In the second quarter, we had a high level of PPP loans on our balance sheet. And we only have just begun to recognize the fees associated with that so at a 1% yield on those loans plus a limited recognition on the origination fees it drove the margin down for the quarter.

Vernon W. Hill II -- Chairman

And that's because the accounting rules changed for this in the middle. So everything else. We currently are amortizing the revenue or recognizing the revenue on the origination fees into income on a 24-month basis, which is the controller or as the loans are forgiven or repaid so it certainly won't last that long on most loans. Residential mortgage has been a good business for us. We had good products here. The momentum here is very strong. And they tell me most of the residential mortgages are for homes being bought that would keep -- even in this market we're seeing a lot of housing sales. You can see growth in loans. One thing that's different in this quarter is on page 5, we have shown is the balance sheet and the growth with PPP and without the PPP and on the far right it shows our growth in loans the last 12 months without the PPP that was 25% and our deposits without the PPP effect was 28%.

I believe those were the points we wanted to make. We'd be happy to -- let's have the questions please.

Questions and Answers:

Operator

Absolutely. Thank you. [Operator Instructions] And the first question comes from Michael Schiavone. Please go ahead. Your line is open.

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hi, good morning. Thanks for taking my questions.

Vernon W. Hill II -- Chairman

Michael, you're from?

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

So sort of a high level question here, but.

Vernon W. Hill II -- Chairman

Michael, you're from what firm? Michael, you're from what firm?

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Oh, I'm sorry. I'm from Keefe, Bruyette & Woods, KBW.

Vernon W. Hill II -- Chairman

Right. Greg. That's what I thought. Go ahead.

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. So, yeah, sort of a high-level question here. Q2 had a lot of good fundamental momentum for your business. So can you just discuss what levers you have to keep this going moving forward?

Vernon W. Hill II -- Chairman

Yeah. Thank you, Michael. We see three things in the future that look very clear to us. We expect our loan deposit ratio to go from -- the current number is 65% and we see a reasonable way to get it to Frank, 85%.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Over the next couple of years, yes.

Vernon W. Hill II -- Chairman

And that raises our margin by how many bps, Frank, 30 bps, right?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Looking at it right now would increase it to 30 basis points.

Vernon W. Hill II -- Chairman

Which today, actually in the PPP would get it up 3%. So that's one lever. It's been about jaws where we're growing our top line at a higher percentage than our expenses. It's something we've been trying to get done for a long time. That should have a tremendously positive impact on our bottom line. As I said earlier, top line grew -- on a year-over-year top line grew 17% and expenses grew 3%. For the quarter it grew 13% and expect to make it down 2%. And our third lever is loans excluding PPP are growing 25% and deposits are growing at 28%. I might have also say that this PPP has had a tremendous impact not only on the growth of this company but our brand. The big banks in this market have done a really poor job with Wells leading the pack and it's been a tremendous opportunity to us handle our current clients but attract new clients. We see very strong momentum from this. Thank you, Mike. Anything else?

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. And then you guys have had pretty positive deferral trends compared to peers. How comfortable are you with the current reserve and how much do you expect to build it in this environment going forward?

Vernon W. Hill II -- Chairman

Yeah. We're comfortable with the reserve -- if you see our non-performing numbers, very low. We have $19 million left of PPP loans available in the next -- fees available in the next three quarters, so we might use that as an opportunity where we can to boost the loan loss reserves.

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, thanks. And just one last quick one, are you expecting any type of bounce back in SBA gain on sale now that the PPP program has slowed down?

Vernon W. Hill II -- Chairman

Am I -- are we expecting what?

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

A bounce back in SBA gain on sale since the PPP program has kind of slowed down now?

Vernon W. Hill II -- Chairman

Yeah, I'm not sure I understand your question. The production of SBA loans has kind of slowed during the PPP thing. Try and say that -- ask me a different way.

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Well, I guess, you mentioned in the release that your SBA gain on sale was down, so I was wondering if that would pick back up in the remainder?

Vernon W. Hill II -- Chairman

Oh, I see what you mean. Yeah, it's just down from the historic number we've been doing. Yes, we would expect that to move back to what we've seen normally. I think that's less affected by the PPP, that's it's just a whole COVID-19 thing.

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, that's helpful. All right, thank you. That's all I have. Thanks for taking my question.

Vernon W. Hill II -- Chairman

Thank you.

Operator

Thank you. Our next question comes from Frank Schiraldi from Piper Sandler. Please go ahead. Your line is open.

Frank Schiraldi -- Piper Sandler -- Analyst

Hi, good morning. Vernon, in terms of -- can you guys share with us -- the PPP program, can you share with us what that provided for income in the quarter? And then bigger picture just deposit growth was tremendous even excluding PPP but I assume some of that reflects good growth in operating accounts of some of these guys who were not customers become customers of the bank. So can you talk a little bit about what sort of deposit growth that generated as well as the income provided in the quarter? Thanks.

Vernon W. Hill II -- Chairman

Yeah, before I turn it over to Frank and he'll give you some numbers, but it's a little bit of a guess here, because you're not sure what's what? But what's happened in the market, the big banks did an awful job serving their PPP clients and Wells was the worst. So we and a lot of banks would only do PPP for their current clients. So it's been a tremendous plus for us in lots of ways, and I would say in the lower-middle market and even up to the middle market when they couldn't get their PPP loans done with their current bank and it gave us a chance to ask them to switch. And 50% of them, we think have. Go ahead Frank. Let's talk about fees.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

On the fee side, we recognized about $1.5 million of the origination fees.

Vernon W. Hill II -- Chairman

Of $22 million.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Of $22 million growth. In addition there was another $500,000 to $1 million earned on the 1% rate or yield on those loans.

Vernon W. Hill II -- Chairman

These things should yield about 3% over the lifetime. But it's hard to predict because you don't know how fast they're going to be repaid or forgiven by SBA. For instance, the SBA is not yet accepting forgiveness apps. Is that right, Andy?

Andrew J. Logue -- President and Chief Operating Officer

Correct.

Vernon W. Hill II -- Chairman

So it's a little hard to guess but we think the fees should primarily hit in quarter three, four and one.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. And then on the momentum, the operating leverage, the jaws as you know, obviously, it's going to be tough to say on a quarter-to-quarter basis. Revenues up 13% this quarter versus expenses actually fell but if we think about it longer term, any sort of guide you can give on modeling your expectations for how fast revenue should grow here versus expenses on the sort of longer timetable? Is it two to one? Any help there would be great.

Vernon W. Hill II -- Chairman

We're not really confident to give you a numerical projection in the middle of all this PPP stuff but, Frank, we'll try to -- we'll make that clear at least with the third quarter. But you can look on a year-to-year basis, which has very little PPP fees back. And you can see them on the 17 and three.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay, right. Okay and if you could just maybe talk about growth from here. A number of stores you expect to open. I'm assuming that's slowed a bit, just given the environment but if you could just remind us of those expectations?

Vernon W. Hill II -- Chairman

Right. We'll talk about stores because I love stores. But this company has become much more of a click-and-bricks business where we deliver in-store, online, mobile, and one of the things that we -- what was important about this Forbes America's Number One for Service. We were Number One in the FinTech stuff and the digital -- the customer wants a unified experience delivered through every channel. So we're continuing to win in every channel. We have one more opening this year. This is our third business this year. New York, we stopped for the time being on the grant side, but we're growing in the cash management and the loan side. But nobody is too sure what Manhattan is going to look like six months from now. But you'll see us building stores but you can see us focusing on every delivery channel mobile, online, and stores and our deposit growth for stores even when you take -- which includes all the FinTechs debt -- takes all the PPP debt. The number for the quarter -- what's the number for the quarter, Frank?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Number per store it's still -- excluding PPP is approximately $25 million per store.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. Okay and then just finally, I just wanted to ask about, as you go -- obviously delayed CECL, as you go to that model are you still comfortable that you're looking for profitability in the back half of the year or do you think there will be some reserve builds that could fully offset that?

Vernon W. Hill II -- Chairman

Well, let's put it this way, we are free to take either one of those routes or some combined route.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Okay. I'm not sure I understand. So you're saying you might not have to switch to CECL this year.

Vernon W. Hill II -- Chairman

You asked about CECL. Go ahead Frank.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

So the requirement to adopt CECL will occur when the national state of emergency is lifted. So it could be Q3, Q4, it could go into next year, but that's when the requirement will come into play.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. And you'll be able to capture some of that through outside of the P&L, right, through the day one mark?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

As of December 31st of the prior year so as of 12/31/19 any adjustment there goes through -- just through equity not the P&L, anything that would result in an increase this year -- in the current year will run through the P&L, so we're running a parallel model so that we can track it quarter-to-quarter and understand where the changes are.

Vernon W. Hill II -- Chairman

And the parallel model is less in line with our current?

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

The parallel model as of the end of the year was in line. The new CECL model with the significant effect of future economic forecast right now would have a higher margin, but we will continue to evaluate that as the economy stabilizes as well.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. All right, so you don't have a number you can share in terms of your expectation of reserve to loan post CECL. It's just with all the uncertainty you're still working through that I guess.

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Yeah, exactly.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. All right, great. Thank you.

Vernon W. Hill II -- Chairman

But, Frank, remember looking at the numbers, our non-performance keep going down -- quarter-to-quarter going down.

Frank Schiraldi -- Piper Sandler -- Analyst

No, that's fair. I mean, the deferral rates at some point and deferrals are really strong, but at some point, I would imagine some of those deferrals will migrate to lower risk weightings. I know it's probably not for the next couple of quarters. Yeah, OK. Okay, thank you.

Operator

Thank you. We have no further questions at this time.

Vernon W. Hill II -- Chairman

Thank you all. Thank you for your support. Cheers.

Operator

[Operator Closing Remarks]

Duration: 19 minutes

Call participants:

Vernon W. Hill II -- Chairman

Frank Cavallaro -- Executive Vice President and Chief Financial Officer

Andrew J. Logue -- President and Chief Operating Officer

Michael Schiavone -- Keefe, Bruyette & Woods, Inc. -- Analyst

Frank Schiraldi -- Piper Sandler -- Analyst

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