Description

• Price: $6.13
• TSO: 59.8
• Market Cap: $360M
• P/BV: 1.5x
• P/TBV: 1.6x
• P/Deposit: 0.15x

• Assets: $2,657 (up 24% y/y)
• Loans: $1,378 (up 26% y/y)
• Deposits: $2,400 (up 27% y/y)
• BV/share: $4

Situation Overview:

Republic First Bancorp, Inc. (FRBK) is Philadelphia-based commercial and retail bank with 23 stores primarily in PA and NJ. In 2016, the company appointed a long-time shareholder, Vernon Hill as Chairman FRBK.  Hill’s strategy has been to run banks like a retail store – focus on building a brand around customer satisfaction, experience and convenience (vs paying the highest saving rate) that would turn customers into Fans. As such, FRBK stores are open 7 days a week, 361 days a year and with extended hours. The bank also offers free checking, free coin counting, ATM/Debit cards issued on the spot and access to +55K surcharge-free ATMs worldwide.  These are ideal conveniences for most bank customers (vs an incremental $50 or $100 annual interest income in your savings account). Even the coin counting machines apparently – which converted $15M coins into bills in 2017.

Hill’s view has been that the value of a bank is in its deposit. His primary focus is to build a low-cost deposit base which he has successfully executed on at Commerce and Metro Bank. FRBK is essentially operating with Hill’s leadership and proven playbook from Commerce.  FRBK has also reunited the old band – several of the executive team are former Commerce managers. With only 23 stores today, we think this team has a long runway to compound shareholder value over the next decade.

Why do we like it?

1. Great Management Team: Vernon Hill was the founder and chairman of Commerce Bancorp, a $50B retail bank in Philadelphia.  Hill grew Commerce from 1 store with $1.5M capital to 450 locations and sold it to TD Bank for $8.5B in 2007. Over his time running Commerce, Hill had delivered impressive shareholder returns of 23% CAGR over 34 years. Hill is also the founder of Metro Bank (MTRO), a challenger bank in the UK, which he has grown from 1 to 60 locations and £15B in deposit since 2007.  We also like the alignment of interest with this management team. Hill purchased 923K shares of FRBK for ~$6.50.  Insiders collectively own ~25% of shares.
2. Strong Deposit Growth: Deposit has grown from $870M in 2013 to $2.4B in 3q18 for ~23% CAGR.  We expect deposit to CAGR in the high-teens to low-20s over the next 5 years. In addition to opening 4 more locations in PA/NJ, FRBK has announced plans to open 2-4 stores in NYC starting in 2019.  Newer stores are growing at the average rate of $29M in low-cost deposit growth per year. We think entering the NYC market will accelerate deposit growth and expand their territory outside of PA/NJ.
3. Long Runway For Growth: As management opens new locations and grow deposits, FRBK is incurring high upfront investments and operating costs. This depresses short term GAAP earnings and profitability metrics. However, as stores mature, shareholders should be rewarded with high ROE and value creation. We are already seeing the leverage in this model as YTD 2018 top-line for grew 24% vs costs which only grew 15%. Loan growth has lagged deposit growth but we believe the loan-to-deposit ratio (~57% vs +95% for peers) will increase as locations mature.  Same with NIM, ROAA, ROAE, and other profitability metrics – most of which has ample room for improvement (i.e., an efficiency ratio of 85% vs 61% for peers). 
4. Store Economics: New stores are growing deposits at an average rate of $29M per year, while the average deposit growth for all stores ~$22M per store. It takes $30-$40M per branch to breakeven – which translates to less than 2 years to breakeven. Management's mid-target is to increase store count to 50 (vs 23 today) with an annual deposit growth of $18M per store and NIM plus fees at ~4%.
5. Valuation: FRBK is currently trading ~1.5x TBV. We view this as a reasonable but on the lower end of valuation range for a small Pennsylvania bank. Hill sold his Commerce (~$50B in deposit) for 3.3x BV or ~20% of deposit in 2007. The last capital raise for his UK bank (£15B in deposit) was ~3x BV as well. We expect multiple to rerate to ~2-2.5BV as FRBK execute on its growth strategy.  Current valuation is ~15% total 3q18 deposits (at a discount vs 20% of deposit for Commerce). We expect deposit to CAGR in the high-teens to low-20s over the next 5-years. Excluding multiple expansion, this should translate into similar IRR for shareholders.

Risks to Consider:

1. Deposit growth slows down.
2. Flattish yield curve sustains. We think this is part of the reason we are able to buy FRBK at 1.5x BV today.
3. Key man risk. While the Commerce team is good and has reunited at FRBK, we think Vernon Hill is still integral to the culture and strategy.

Catalyst

1. New NYC store openings to accelerate location/deposit growth starting in 2019
2. Updated 5-year growth target from management.  Hill’s initial (2016) 5-year target was:
   • Increasing our store count to +50
   • Annual Deposit growth of $18M per store
   • NIM plus fees at ~4%
3. Yield curve normalizes (vs flattish recently)