Republic First Bancorp, Inc. (NASDAQ:FRBK) Q2 2019 Earnings Conference Call July 29, 2019 10:00 AM ET
Harry Madonna - CEO
Frank Cavallaro - CFO
Andrew Logue - COO
Conference Call Participants
Michael Perito - KBW
Frank Schiraldi - Sandler O'Neill
Welcome to the Second Quarter 2019 Earnings Conference Call. My name is Sylvia and I will 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. [Operator Instructions] Please note that this conference call is being recorded.
I would now turn the call over to Harry Madonna, Chief Executive Officer. Mr. Madonna, you may begin.
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 highlights of our second quarter earnings release.
Okay. Thanks, Harry. Thank you for taking the time to join us this morning. I’m pleased to report to you the results for the second quarter of Republic First Bancorp, Inc. 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 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, which just occurred two 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's 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 the suppression of earnings due to margin compression and the cost 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 not only experienced the flat margin, but at times, we're seeing, I'm sorry, flat yield curve, yield curve. This has created continued compression, as we feel -- continue to feel the effects on our revenue line.
Non-performing assets continue to decrease. Our nonperforming assets to total assets shrunk to 53 basis points. That's compared to 81 basis points a year ago at this time. We're pleased to report a strong quarter in our non-interest income line. Non-interest income was driven by SBA gains of over $1 million and the mortgage division contributed $3 million to the non-interest 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 non-interest bearing, demand deposit balances and account opening.
They’re the highlights for the quarter. At this point, I open it up for any questions.
[Operator Instructions] And our first question comes from Michael Perito from KBW.
I had a few questions I want to hit on. First, Frank, I was wondering if you could give us maybe just a little bit more specifics, I’ve got the first month in the books. I know it really has only been a little over two weeks. But just what are the early indications from the New York City expansion from an actual growth perspective?
So as you pointed out, Mike, it's been just two 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 two weeks, $5 million in deposits. So, that's a really strong start for us. And we're really pleased to see how that store has gotten off the ground.
And then I guess just kind of a broader question based off that. So I mean, obviously, the kind of the underbelly of the brand here has a lot of momentum, right. And there's 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 to start cutting short term raises, 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.
So I’d 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 open in New York, we're now generating deposit as well. So, the revenue will start to come -- 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 a potential reduction by the Fed in rates and we think that would provide some rate relief to us or margin expansion.
If you’ve seen over the last year, year and a half, when the Fed has raised rates over 7 times, we're seeing that the increase on the short end of the curve affects our deposit cost of funds. So anything that the Fed does can help us there. But, at a high level, we continue to evaluate [indiscernible] to project what would happen in different scenarios. And if this were to continue, if margins were continue to compress, obviously, we would make the right decision to accommodate and account for that to make sure that we can maintain a profitable bank.
And then just lastly, just a quick one, just the tax rate had a step up in the quarter. Any thoughts, Frank, on just where that will trend for the rest of the year?
The tax rate in the quarter with such a small pre-tax income, there's some deductible items. Obviously, the biggest impact on our run rate is going to be the federal tax rate of 21%. However, when we're down in the low profitability, the deductible items that we see has some impact. So, I would say that what we're seeing is consistent -- as we increase profitability in the future, you'll see a more normalized tax rate, an effective rate in the high teens to low 20s.
Our next question comes from Frank Schiraldi from Sandler O'Neill.
Just wanted to start with the New York store opening again and just to 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 open, generating 25 million in deposits, what is the anticipation for this flagship branch in New York.
So on the last call, I believe we identified a breakeven target of 55 million to 60 million. And we believe that's the case now that we're still 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 glass 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 two weeks, we've seen $5 million in deposits in this new store in New York. So we're expecting that, why we moved to New York, we're expecting a higher growth and a higher deposit availability in that market.
And Frank, this is Andy. Let me add just to the – I mean, we also – we talk about the store, but we also have 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 and so we’re starting to see volume on the loan side, on the commercial loan side.
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 or 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? Thanks.
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 three under construction. And we're confident on their status. As we look 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 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 approval, that means local zoning, the permits necessary to do construction. So, we're not locked into something until we actually reach that point.
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 immediately and maybe getting some benefit to the NIM in the near term. Is that still sort of the thinking?
That's our expectation and we've seen the opposite of that over the last year and a half as that’s just 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.
We have no further questions at this time.
Thank you very much.
Yeah. Thank you for joining us. We appreciate your time.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.