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Republic First Bancorp Inc (NASDAQ:FRBK)
Q3 2020 Earnings Call
Oct 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the third quarter 2020 earnings conference call. My name is Vanessa, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Frank Cavallaro, Chief Financial Officer. Frank, you may begin.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Hello, and welcome to the Republic First Bancorp Third Quarter Earnings Call. Here with me in this room, I have Vernon Hill, Chairman of the company; Harry Madonna, President and CEO of the company; and Andy Logue, Chief Operating Officer. At this time, I'll turn the call over to Mr. Hill.

Vernon W. Hill -- Chairman and President of Commerce Bank

Thank you all for the call. We are pleased to report on our third quarter results. As the press release describes the momentum of Republic Bank gets stronger and stronger. There was a onetime charge in the third quarter, a goodwill write-off charge of $5 million that had no impact on the capital of the bank and are good -- there's no further goodwill left on the books of the bank. So excluding the effect of that, we're pleased to report we had a strong third quarter and a strong nine months of the year. During the quarter -- Frank, why don't you go to the second bullet from the bottom of it. Go ahead.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes, during the second quarter, excluding the goodwill charge, we reported core earnings of $4.7 million for the nine months as compared to a net loss last year of $1 million. We continue to see improvement in the revenue, revenue percentage compared to expense growth. During the third quarter, revenues grew 27% compared to just 3% of expense growth for the quarter.

From a balance sheet perspective, deposits grew by $1.2 billion year-over-year to $3.9 billion. A lot of that was driven by the growth in customer accounts. We had some significant enhancements from the PPP program. Total loans grew $1.1 billion or 68% to $2.6 billion as of September 30, again, the growth driven by the enhanced PPP branding as well as continued momentum of our bank's expansion.

Vernon W. Hill -- Chairman and President of Commerce Bank

Second bullet from the bottom, for those you have press release, we had great improvement not only in the top line, but cost control was great for the first nine months of the year. Correct me, Frank. The top line grew 19% where cost growth was contained to 7%, and it was even better than that for the third quarter. Asset quality remains very strong here. Nonperforming assets declined to 0.27%. Only 2% of our loans -- customers are experiencing deferred loan payment -- not only represents 6% of our outstanding loan balance. Back to Frank on the Paycheck Protection Program.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes, we originated -- as we reported previously, $684 million in loans under the Paycheck Protection Program. We provided crucial funding for small businesses during a time of need. Most of those loans are stored in our books today. Approximately $16 million in fees will be recognized in the future as those loans are repaid or forgiven.

Vernon W. Hill -- Chairman and President of Commerce Bank

Frank might mention, I think, how important this whole PPP flow was to or is to in the numbers of the new clients we've gotten and how it's permitting the growth ahead?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes, that's correct. During a time when our stores were closed, had periods during the year as well as limited interaction with customers, we experienced significant growth throughout the third quarter, mainly driven by the new relationships that we were able to obtain through the PPP loan program. So this has been a big bonus for us, and we continue to enhance our brand and drive new customer relationships through this program. As Vernon mentioned earlier, we continue to evaluate the loan portfolio. We've seen deferrals decline from 24% in the second quarter as of June 30, down to 6% of loan balances.

So we continue to see positive trends as far as the sales go, and the interaction with customers continues. In addition to that, in the third quarter, we completed a $50 million capital raise to support our growth and expansion. We issued $50 million worth of convertible preferred stock during the quarter, which will boost our capital ratios and provide us the capital required to continue with the expansion plan. Assets grew by almost $2 billion to $5 billion as of September 30, some of that is artificially inflated as a result of the PPP program.

We had about $600 million in borrowings through the PPP liquidity facility, which was just a short-term borrowing, but overall continued growth in assets supported by the loan and deposit growth mentioned earlier.

Vernon W. Hill -- Chairman and President of Commerce Bank

Frank, why don't you just talk about the artificial drop in our net interest margin for the quarter because of the PPP?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes, the margin declined. If look at the quarter, 9/30 compared to the quarter of last year 9/30, the margin dropped 47 basis points to 2.35%. As you're aware, we put these PPP loans on the books. The interest rate on those loans are 1% and the acceleration of the fees that go with that, that will run through interest income is really being deferred until the latter part of the fourth and more likely the first and second quarters of next year. So there is some compression in the margin driven by the PPP program as well as the overall environment as a result of the fed reserve dropping the fed funds rate earlier this year.

Vernon W. Hill -- Chairman and President of Commerce Bank

Okay. Good, keep going.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes. As mentioned previously, we signed an agreement with Visa to convert our debit and ATM cards over to Visa cards. So we have initiated a branding agreement as well as a processing agreement. The conversion to Visa is in process, but this program will provide us with a number of opportunities to not only generate additional revenue but to reduce expenses related to the debit card and ATM program in the future.

Vernon W. Hill -- Chairman and President of Commerce Bank

Oak Mortgage is our residential mortgage group, Frank?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes, the Oak Mortgage is -- has originated more than $600 million in loans over the last 12 months. That's a record originations for that team, primarily driven by their fanatical experience with customers. There is a significant level of refinancing that they've done, but also many new home purchases have gone through the production line for the Oak Mortgage team.

Vernon W. Hill -- Chairman and President of Commerce Bank

Some of the other things we want to bring up, the deposits year-over-year grew 43%, demand deposits year-over-year grew 76%. Why don't you describe that a little bit, Frank?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Yes. So the deposit growth, as we mentioned earlier, not only driven by our growth in expansion program, but the PPP program has brought many new business customers to Republic. Commercial deposits now represent 47% of our total deposits, which is tremendous growth in a year, again, where there's been limited activity and interaction with customers.

Vernon W. Hill -- Chairman and President of Commerce Bank

Commercial deposits in total are 47% of our total.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

That's correct, as of September 30.

Vernon W. Hill -- Chairman and President of Commerce Bank

What else did we miss to it, Frank?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Lending remains strong across all categories. If you remove the PPP program, we still grew loans 25% year-over-year. And again, hampered by limited activity in the second quarter, but loan growth remains strong. Our pipelines remain strong. So we're excited about the future of loan growth.

Vernon W. Hill -- Chairman and President of Commerce Bank

But before we open up the floor, I want to give you my thoughts about it. I'm very proud of this quarter and this year. We -- the bank has really progressed and grown and created many new fans during this period. Optimistic about the next quarter and the next year and Republic Bank is positioned in a great spot. With that, we will open it up.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Michael from KBW.

Michael -- KBW -- Analyst

Yes. Thank you. Good afternoon, guys. I have a couple of questions. I first wanted to ask, I mean, obviously, the underlying growth momentum in the quarter was strong and really has been strong for quite some time. And obviously, there were some environmental things that could have impacted the numbers this way or that way. But I guess, you talked about kind of the operating leverage.

And I know we've talked about it on prior calls. But as we kind of -- with the capital raise behind you and as we approach 2021 here, I was just curious if maybe you were willing to kind of put some more parameters around what type of profitability improvement we could kind of look for next year as you guys prioritize that alongside your continued growth efforts?

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

So Mike, what we've talked about previously, the one thing that we can control is the rate environment, but we have had a laser focus on expenses this year. And as you can...

Vernon W. Hill -- Chairman and President of Commerce Bank

And fee income growth.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

As well as fee income growth. But expense growth is something we can control. And I think the numbers on both the 3-month and 9-month basis demonstrates that we've done our best to control expenses. We've talked about previously slowing down the branch openings, but we've also looked at our expenses across the board. And I think they're starting to show a consistent trend how significant and serious we are about managing it.

Vernon W. Hill -- Chairman and President of Commerce Bank

Mike, I want to reiterate this commercial deposit basis, 47% of our total deposits, you know that's a very high number for a bank this size. There's lots of growth left in there. That's also very good on building fees.

Michael -- KBW -- Analyst

And as we think about -- I mean, it seems like the PPP participation really kind of at the center of this all, right? Because, I mean, I think we've said in the past that it would provide you guys with an opportunity to really grow the customer base materially without opening new branches at all. And I guess, as we try to think about that, I guess, one, any update on how the process -- I know you guys mentioned it briefly, I think, in your prepared remarks, but any additional color you can provide on how the process is going of getting these customers over to the bank? And do you still think it holds true today that these customers and their potential growth longer-term should be theoretically achieved -- higher profit margin than the customers that you were growing historically through branch openings or store openings rather?

Vernon W. Hill -- Chairman and President of Commerce Bank

Well, it's not one versus the other. It's a mix of them, but the PPP changed the brand of this company. We built a niche. We service new clients, and we've created a whole new branding and a whole new group of clients. We see it every day. And I think the commercial mix will increase because we fill the niche that the big banks couldn't fill or wouldn't fill, or wouldn;t know.

Michael -- KBW -- Analyst

Okay. Just lastly for me and then I'll step back. Just on the provision and reserve, the metrics look good here, but obviously, still a few things unknown out there. Just -- I think you had said on the past call, Vernon, 1% reserve by the end of the year or early part of next year, I guess, depending on a few things. Is that still kind of largely how you guys are thinking about it?

Vernon W. Hill -- Chairman and President of Commerce Bank

We believe we will head in that direction. As you're aware, the CARES Act allowed us to defer the adoption of CECL until the end of the year or until the national state of emergency was lifted. So at this point, it looks like the end of the year is going to occur first, and we will adopt CECL. That will drive an increase in our provision. But as we go forward, we see that level probably being achieved in the future quarters.

Michael -- KBW -- Analyst

Okay. Thank you, guys for taking my questions. I appreciate it.

Vernon W. Hill -- Chairman and President of Commerce Bank

Thank you, Mike.

Operator

Our next question comes from Frank from Piper Sandler. Your line is open.

Frank -- Piper Sandler -- Analyst

Good morning. Just wanted to follow up on the really significant deposit growth, obviously, and the strong transaction account growth. As PPP has been part of the story, I just wondered if you could talk a little bit about your thoughts on the environment and the different delivery channels that these deposits can come in through. And the fact that the -- maybe the digital delivery channel has delivered a greater level of deposit gathering in the near term. Has that at all changed your thoughts on level or speed or amount of branches you look to grow per year?

Vernon W. Hill -- Chairman and President of Commerce Bank

Yes. We like stores, but the world is different than it was in the days when we're building one new store each week. Well, we've slowed down our store growth, but we know to go in the new market and expand that brand. We have to build stores. So you're going to see this kind of growth with the less stores, commercial -- as we've spoken commercial more than consumers driving the growth. So we're certainly going to slow the store growth down, but they're building the new markets. Stores are an important part of building a brand, but commercial clients care as much or more about the stores than the current consumers. So it's a mix.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

We have seen upgrade in the digital banking though. It's also has been helping us.

Vernon W. Hill -- Chairman and President of Commerce Bank

It's a mix of the model, Frank.

Frank -- Piper Sandler -- Analyst

And then just on the PPP again. Obviously, it's been quite a boon for you guys. I'm just wondering where do you think that narrative is in terms of bringing in significant new deposit relationships? Is that story still strong? Or is it -- have we seen a lot of it already take place in the third quarter?

Vernon W. Hill -- Chairman and President of Commerce Bank

It's not only bringing new deposits, but it's a great source of new credit. People that we supported that already bank with us are staying with us and growing, but lots of new clients that came to us when we met their needs are in the process always moving their basic core business to us, and I see a growth in that almost every day.

Frank -- Piper Sandler -- Analyst

So it doesn't seem like the story then or the narrative has played out. You're still seeing that.

Vernon W. Hill -- Chairman and President of Commerce Bank

Yes, because it's about building a brand, Frank. It's about building a new brand for this bank that can handle these types of credit, let's call them, middle market.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

So we review our loans out today that we're looking at. And a good percentage of those loan requests are from PPP customers. So they're helping increase our lending capacity.

Vernon W. Hill -- Chairman and President of Commerce Bank

As you probably know, people on the call, we were one of the few banks of any size that opened the PPP lending program, not only the current clients, but the new clients, and that's been an important part of the bank's growth.

Frank -- Piper Sandler -- Analyst

Right. Okay. And then just finally, just a follow-up on the CECL adjustment that, I guess, will take place early next year. Frank, is it fair to assume that most of the growth in the reserve, if there is growth in the reserve to loan ratio that will just be taken on that day one mark? And has there been any estimate that you can share in terms of what that day one mark would look like?

Analyst

Yes. Frank, we don't -- we can't. We're prohibited from really giving you forward-looking guidance, but if you look at other banks in the industry as a whole, the CECL adoption and the adjustments have been significant, even peer banks of our size. So there will be -- what we assume is a onetime adjustment when we adopt. And then as we go forward, most of CECL is driven by future economic factors, what does the future look like? And that will have an impact. So in this environment with the uncertainty, I think you would expect that to continue to build in the coming quarters.

Vernon W. Hill -- Chairman and President of Commerce Bank

Is it fair to say you don't expect a big charge? That's what he's asking.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

There will be an adjustment. We're just not ready or at liberty to report that. But we have been building the reserve every quarter. The current reserves is built based on factors that we see change in economy, the incurred loss methodology drive is also to look at that. CECL just takes a much more forward-looking approach when you do that and brings in much more economic factors and data than we've historically looked at.

Frank -- Piper Sandler -- Analyst

Okay. All right. Great. Thank you.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Thank you, Frank.

Operator

There are no further questions at this time.

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Thank you all. See you next time.

Operator

[Operator Closing Remarks]

Duration: 79 minutes

Call participants:

Frank A. Cavallaro -- Executive Vice President and Chief Financial Officer

Vernon W. Hill -- Chairman and President of Commerce Bank

Michael -- KBW -- Analyst

Frank -- Piper Sandler -- Analyst

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