The Bancorp, Inc. (TBBK) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Third Quarter 2019 The Bancorp Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Andres Viroslav. Please go ahead, sir.

Thank you, Sania. Good morning, and thank you for joining us today for The Bancorp's third quarter 2019 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call beginning at approximately 12 p.m. Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 4468437. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, which could cause actual results, performance, or achievements to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties please see The Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andres. Good morning everyone. This quarter our positive business momentum accelerated with across the board increases in both spread and fee income driven significantly by extremely higher total loan balances from our lending lines and continued acceleration in the year-over-year gross dollar volume of payment transactions. In addition, our CRE floating rate securitization produced a substantial gain. Excluding a $1.4 million charge to settle SEC litigation concerning a bank restatement in 2014, the Bancorp earned $0.38 a share on revenue of $71 million expenses of $41 million. Reported per share earnings of $0.36 grew 53% over 2018 third quarter excluding a one-time gain on the sale of our Safe Harbor IRA business in 2018. Total revenue declined by over 25% excluding the sale, while expenses were up approximately 9% year-over-year excluding the SEC settlement. Net interesting income after the provision improved to $37 million from $30 million year-over-year, an increase of 25%. Tier 1 leverage ratio amounted to 9.36% at quarter-end. ROE year-to-date stands just under 15%. We see continued significant strength in our payments business with 38% GDP growth in our prepaid and debit card transactions, and 22% related to fee growth year-over-year. Our ACH and indirect push-to-card revenues also continue to build with 14% fee growth year-over-year. We continue to expect GDP growth in our payments business during the balance of this year. Trends do indicate that there will be an extended period of GDP momentum and growth in 2020 should exceed historic levels of fee growth. Net interest income grew at 23% with contributions from each business line. Quarter-over-quarter loan balances grew across to board with annualized rates of 5%, 33% and 40% respectively for leasing, SBA, and SBLOC. We expect growth to continue at an accelerated rate for the balance of 2019, which should continue into 2020. We currently have a broad-based initiative to continue building our loan portfolios, and the current growth is a direct result of new products, enhanced technology, and large investments in sales and marketing resources. Our securitization business continues to build on the momentum from the first and second quarters. As previously announced, we had targeted doubling the size of our securitizations in 2019 from the $300 million range in 2018. This strategy has significantly increased our spread revenue, while eliminating related long-term real estate credit exposure. The third quarter securitization results in an approximate $14 million gain on a securitized floating rate CRE portfolio of $778 million. This gain was driven by the sale of the interest-only portion of loan pool to an investor. We have previously held this portion of the pool and other securitizations and its valuation goes into the gain computation. This sale also will mitigate any loan prepayment risk associated with holding the security on our balance sheet. We also believe that we are developing broad capabilities and expertise to address the future growth of the FinTech, Digital, and Gig Economy financial market and expect to be well positioned for sustained growth. This growth has been evident in 2019, and we believe long-term growth is supported by the many innovations in the banking sector. A new Investor Presentation will appear on our site in the next few weeks that will detail the opportunities that should sustain and improve the Bancorp’s long-term performance. Lastly, management has developed a new four-year Phase 2 business plan focused on innovation is in the process of developing a detailed 2020 budget. In that budget, we are now targeting a minimum of $1.25 a share of earnings for 2020. We believe that this performance is consistent with the productivity and operating improvements made in last three years and the Bancorp’s current business momentum. I now turn the call over to Paul Frenkiel, our CFO, who will detail more about the third quarter.

Thank you, Damian. Net income increased $8.4 million or 63%, excluding the $1.4 million SEC settlement in 2019, and $48 million net of tax gain on IRA sale in 2018. The increase reflected $7 million of higher net interest income, reflecting continuing growth in Bancorp’s lending lines, including CRE loans originated for securitization. Average CRE loans increased approximately $459 million or 147% to $771 million. Growth in other lending lines reflected respective 18% and 22% increases over prior balances for combined SBLOC and IBLOC and for SBA loans. The $7 million or 23% in net interest income of $38 million reflected an increase in interest income on CRE loans for securitization of $6.4 million to $11.1 million. Interest on SBLOC’s and IBLOC’s increased $1.7 million to $9.4 million, and interest on SBA loans increased $1.8 million to $7.8 million. As a result of the September 2019 securitization, a gain of approximately $14 million was recognized compared to a gain of $9 million in Q3 2018. While market spreads declined, the higher 2019 gain resulted from the largest securitization totaling $778 million compared to $341 million in Q3 2018. We anticipate that fourth quarter 2019 will show a decrease in CRE interest income as balances peak in the quarter they are securitized. In each of the past three years, there have been two securitizations per year and any gain or loss is subject to market conditions. In addition to loan growth, the increase in net interest income reflected the positive impact of the Federal Reserve rate increases in 2018, partially offset by the July 2019 FRB decrease, which impacted the majority of the quarter. Approximate yields on the loan portfolios were 4.1% for SBLOC, 5.7% for SBA, and 6.5% for leasing. While the yields on CRE loans originated for securitization has recently approximated 6% that yield varies with market spreads and timing of securitizations. These lines of business have historically had low charge-offs. Overall cost of funds was comparable to Q2 and increased 13 basis points over Q3 2018 to 96 basis points. The 13 basis point increase reflected the net impact of the Federal Reserve’s rate changes, which also contributed to the 28 basis point increase in asset yields. It also reflected the Q3 2019 use of more costly short-term time deposits and borrowings to fund increased originations of the higher yield in commercial loans which were securitized at the end of the quarter. The 13 basis point year-over-year improvement in NIM to 3.35% resulted primarily from those higher asset yields compared to the lesser increase in the cost of funds. The lesser increase in cost of funds primarily reflected prepaid card deposits, which contractually adjust only a portion of increases in market interest rates. The 3.35% NIM for the third quarter was down slightly from the 3.41% for second quarter 2019, reflecting the aforementioned higher rate short-term time deposits and overnight borrowings. It also reflected the impact of deposit rates, which decreased less than loan rates due to the aforementioned Fed rate decreases during the quarter. Those factors were partially offset by larger securitization originations with relatively higher rates. Prepaid accounts our largest funding source are also the primary driver of non-interest income. Fees and related income on prepaid cards were $16.1 million in Q3 2019 compared to $13.2 million in Q3 2018, a 22% increase. Card payment and ACH processing fees include rapid funds revenue and increased 14% to $2.5 million. Non-interest expense for third quarter 2019 excluding the non-deductible $1.4 million SEC settlement was $40.7 million, that’s slightly above the $40 million quarterly target discussed in prior calls. Salary expense was $5.3 million higher during the quarter and reflected higher commercial loan securitization incentive, SBLOC, Information Technology, and other incentive compensation expense compared to Q3 2018. That increase was partially offset by $1.1 million, one-time credit in FDIC insurance and reductions in software, legal, and data processing expenses. Book value per share increased to $8.52 compared to $8.07 at June 30, 2019, primarily reflecting the $0.36 of earnings per share and the increased value of Investment Securities resulting from lower long-term market interest rates. The Q3 2019 consolidated leverage ratio which is based upon average quarterly assets was approximately 9.3% compared to approximately 10% at the prior quarter end. The reduction reflected higher average assets resulting from loans originated for securitization. Our more than well capitalized position provides a solid base to conduct our operations and take advantage of opportunities in our lending and payment space. On October 22, 2019, certain ACH transactions were returned from another financial institution, resulting in a receivable in the amount of $11.2 million on the books of the Bancorp which amount is net of $5.5 million in funds on deposit which the bank believes it can offset against the receivables. The returns resulted from the failure by an ACH customer to properly fund its disbursements. The bank is working with the relevant parties to resolve the issue as soon as possible. Any amounts not recovered from those responsible parties were reimbursed by the banks insurance carriers will result in a loss to the bank. That concludes my comments and I will return the call back to Damian for questions.

Thank you, Paul. Operator, would you please open the line for questions, please?

[Operator Instructions]. And our first question comes from William Wallace of Raymond James. Your line is now open.

Maybe let’s just with where you guys ended on that -- on this ACH issue that you disclosed. Can you just -- I thought an ACH transfer was a direct wire transfer out of cash out of someone's accounts. So I’m just curious how that could be transferred funds when there was no cash and if there's -- if you guys feel assured that this isn't something that could happen again, with other clients.

I can say that the type of payments involved represent a minor part of our revenues and are unrelated to the card business which comprises the vast majority of our business. We hope the situation will be resolved but wanted to communicate it as an abundance of caution. That's all we can really say for the moment.

So I mean, you can't walk through kind of the mechanics of how a transfer to the card without cash to support the transfer. But this is an area of growth focus for your bank right I mean; I thought that you guys were spending lot of time --?

Not this particular payment --

Not this line?

As I said, it is a very minor part of revenue.

This is a very minor part of our -- of this part of our business. This is a situation we can't go into detail about. As we've already said, generally ACH transactions are pre-funded and they're matched. So there was an issue at another financial institution and we can't go into it. This is obviously this earnings release was produced prior to this occurrence on October 26. And we just can't speak to it for various reasons, which we can't disclose.

Okay. Okay, all right. Well, I'll move on then. So the guidance you guys put out an EPS target at the first time, I can recall that ever occurring for the Bancorp. I think it's great that you're putting a target out there. I'm wondering if you could help us kind of walk through some of the mechanics of how you anticipate that you will achieve that target? Is this going to be driven by continued growth on the fee income businesses, are you seeing more momentum in the loan businesses just kind of maybe talk through some of the mechanics of how you think you achieve that target?

Yes, so the first remember we have talked a lot about our Phase 1 business plan, which was about getting the bank operating at the level that we wanted to be efficient and generate about a 15% return on equity. We believe we’re there and also focused on remediation of a regulatory issues which we think we're very close to being out of. So we have sat down this year and spent six months working on the next phase in our business plan. And where -- we were a little delayed on the ROE number because we had the sales a Safe Harbor where we lost fees but also deposits. So we're about at that now in the third quarter of 2019. So after a lot of both bottoms up and tops down, looking at what the business should perform over the next four years, we're very comfortable with our current business momentum that the revenue will continue to be driven by growth and balances. So SBA, SBLOC, and leasing balances, and also with above trend, especially for 2020 fee growth. So I think we'll be able to give some guidance on where we expect to be on balances as we finalize our 2020 budget. But it becomes clear to us that looking at a -- at that business plan, that four-year business plan that we’ll be able to get to a minimum of $1.25, we said it as a minimum, we'd really like to get the 15% plus ROE. And so that was where we really like to be next year. So if you simply time 15% times our capital base, it looks more like in the 130s. So that's where we'd really like to be in 2020. And I think the momentum of the business and what we've been looking at through our modeling and understanding of new products and services, the enhancement of technology, and both SBA display a platform in SBLOC but also we’re reengineering leasing that will have the scale in order to support balanced growth. But then also with the investment in our technology and operations platform for the primary payments business, the card business, and the expansion of FinTech debit cards throughout the industry, where we have a very large portfolio of transactions. We think it will support that type of revenue with a minimization of expense growth.

Okay, a lot there. So there's two, maybe two ways I wanted a third question. You said in your prepared remarks and you just hinted at it again about momentum on the prepaid business giving you confidence that the growth in GDV and revenue should be I think you said above trend or above industry in 2020. Can you go little deeper there about what's giving you confidence in this shift?

Yes, well the shift is happening throughout the industry. So there's clearly a shift to alternative banking providers. And we're a sponsor of those. So you're seeing a change in buying behavior with new FinTech companies, where people are selecting them as their primary banking relationship of which we're enabling. So that growth that you're seeing in GDV growth. And this is something that's been talked about the industry for years. But it seems to be that there's a market inflection point between consumer buying behavior that is supporting that GDV growth at least we're seeing it in our portfolio. So that's what we think supports the continued above trend GDV growth in our cards business.

Okay. So if I look at first three quarters of 2019, year-over-year, the GDV growth is averaging 30%. And the revenue growth is averaging 16%. I mean, are we talking about a continuation of those levels or an acceleration of those levels?

We think it'll be a continuation of those levels somewhere in that range. So we're seeing slight -- believe it or not, we're seeing slight acceleration in GDV in the fourth quarter. So that doesn't always translate 1212 fee growth. So I have to caution you there, but generally, it's a good track. So we're seeing that continued market trend that's been -- obviously started in the end of last year, but carried very strongly throughout this entire year and the growth has been accelerating quarter-to-quarter. So that -- that is what's basing our understanding. So even over, if you look year-over-year as the fees have grown, you're going to get some just from the year-over-year impact and then from the continued acceleration that we're saying.

Okay. And then with some continued expectation that we will see some pressure on the margins just due to competitive pressures you see that evading?

Well, not really, I wouldn't say competitive pressure in the short-term. Some of the programs that we have are layered, so depending on the volumes that you process that you have lower fees as volumes go up. So competitive pressures don't really -- they're a longer-term impact because in the short-term we have long-term contracts. So we really if market pricing goes down tomorrow, we wouldn't feel it for one to four years in some cases. So we don't have -- we don't have competitive pressures that directly affects our long-term. And 20 of our programs represent about 95% of our volume and all of those are predominantly in one or to four year contracts.

Okay. Okay, all right, great. Well, that's great to see, I guess. And then just a question on the asset side, I did notice the pretty big jump in the SBLOC line this quarter. Have you been onboarding new clients with the delay of product or is this growth from the existing base?

No, it's coming from both. We're in the process of finally switching over to all of layer. So we have to integrate with the platforms that deliver the SBLOC and IBLOC product. So that's ongoing. But there's definitely a significant increase due to the technology enablement. IBLOC also has been growing. So we want to increase the products and services over time but ultimately, we want to make it easier for people to get their money. So that's really what the push is. We set $1 billion as our target for the end of this year we're feeling will be very close or over that. And we think we can get significant amount of growth for 2020 in that envelope of activities, and we will hopefully be able to give more clarity as we approach 2020, we finalize our budget.

Okay, thanks. And I'm sorry, I have two more questions, I know I've asked a lot but there's only a couple of us left following. So if you'll bear with me, I have two last questions, you put on $475 million in time deposits this quarter?

Yes.

Can you expand on that, was that so --?

Because of the higher securitization, the securities -- the loans that we generate for securitization averaged over $771 million. So, we short-term funded those with those overnight borrowings in short-term CDs.

Okay. So those gone already?

They will be gone. But from time-to-time, we may use them again, we use borrowings and short-term CDs to manage our liquidity.

Okay. Got you. Fair enough. Good. And the last question I had is, if you could give us an update on the consent order Dam, you said you feel like you're getting close. Can you just let us know what is left? I assume you put together your business plan presented it. What’s your expectation?

Yes. So we're going to go into a full review in the beginning of 2020. We've made, I think tremendous progress from where we were in 2017. We really set out to build a real Center of Excellence for this capability. We've been closely working with our regulators to meet the expectation to get out of the consent order to really build a new model. The problem is that we're in this neck of this industry where it's unusual. It's not fully understood across the industry of our role as a sponsor bank. And so we've really worked and because more banks are wanting to become sponsor banks so we've really tried to build a new paradigm and how you do this type of business. We're very close, we identified a short list of items that we wanted -- the -- our regulars wanted to get clarity on. And I think we're pretty much there for the next review. So hopefully, we can always guarantee what our regulator, our partners will do. But we feel confident that we have a capability that is safe and sound and meets the requirements.

Okay. So that the next full review is early 2020s, is that what you said?

Yes, early 2020.

Great. Thanks guys.

And we’re holding at the time that we were -- we have a meeting of the minds.

Okay, all right, fingers crossed. I will step out, asked a lot of questions. Thanks.

Thank you, Wallace.

Thank you. And our next question comes from Frank Schiraldi of Sandler O'Neill. Your line is now open.

I think there is only couple left. I wanted to ask about the growth next year the preliminary guide of getting to at least 125. I know you guys have talked in the past about your direct push-to-card initiative; I don't know how much growth you anticipate how much you anticipate that to be -- to impact growth year-over-year is that part of 125?

Well the way to say it is in minimum, we wouldn't need any of those revenues. So we're not considering those revenues when the minimum when we're discussing the minimum. We think we could do that and a 15% ROE with the balance growth and the payment side grow. We're hoping that to be in a nice to have and push for the growth but we think we can get to the minimum without a significant growth in that area.

Okay. So I mean, I know it's a big initiative for you guys. So in terms of you talked about 125 maybe getting into the -- trying to get into the 130s, is the push-to-card, is that initiative really just going to bear a lot more fruit in your minds in 2020, 2021 it's just a longer lag time.

Yes, once again, we're -- this is -- it could be a potentially a very large initiative. And there is a lot of interest in this area. We're prepared; we're working down the avenue of doing it the right way and taking advantage of the opportunity. But it’s we don't know yet. We still don't know whether or not that'll be a substantial revenue to make a difference in our overall enterprise earnings. So we can do really good next year and generate $3 million, $4 million, $5 not saying we will million. But it really won't make a lot of difference to our bottom-line. So we're going to build it out the right way. We just don't know yet what that is. But generally, when we've done our own planning around the Phase 2 business plan, once again, we haven't finalized our 2020 budget, we became very careful that -- very confident, let's put it that way that that 125 was attainable, under current -- our current momentum of our business and our product sets that we have.

Okay. And then back to the really strong GDV growth that’s -- that's anticipated to continue here. Is that mostly current programs that continue to ramp-up or are there big partnerships or new programs coming on board?

Yes, both. So we're getting, we have an amazing pipeline of around 70 programs that would like to join our platform. And there are significant new partners that will be joining us over the next three months. So it's a combination, we're seeing very good growth. I think the last time I looked at it three months, excuse me --

Three months.

Three days ago was we're seeing growth in almost every program of our top 20 programs quarter-over-quarter and year-over-year. So it's a very broad-based. It's focused mostly the higher growth rates are on debit programs because that's why we're making that market statement about the conversion between traditional and non-traditional banks. And we have significant programs that are joining us over the next three months. So that's why we become very confident that we have sustained GDV growth. And we believe it or not, in the fourth quarter, we've seen preliminary numbers and I'll stress that, preliminary numbers have increased once again, the GDV is increasing. So we have that, we have all those three areas to support our continued payments growth into 2020.

Okay. And then I think you use the term alternative banking I mean -- I just challenger banking or whatever the challenger banks. I mean, what sort of percentage, if you can give of your GDV either growth or current GDV is these challenger banks, and where do you think that moves to over the next 12 months?

They're higher. The only thing we have really and we've thought about that because people are very interested in that obviously. So they're higher growing. But they're not alone. So there is a clear move towards the challenger side that you see. But there's an adoption across a broad spectrum of program types of this enabled technology that we provide. So it's -- you're getting higher growth, I can't give you a percentage. We haven't decided whether or not we would publish that. There's some reasons that we have been asked not to by our clients, they want people backing out things. So that's where we are in that. So you're getting higher growth. We can't disclose at this time. How much is X, Y, and Z? But you're getting higher growth definitely from those programs than you're getting from their usual card programs.

Right. I mean can you say at this point, roughly in a broad range, what percentage that makes up, forget about the growth, just what percentage those challenger banks make up in terms of GDV versus the entire pie?

We'll put that under advisement for future disclosure. That's not we would love to put a page and have all the programs and their growth and all that stuff. But our clients have confidentiality and sometimes they don't want certain things distributed and it's not necessarily helpful because they can be volatile, so we will put that under advisement.

Okay. And then I guess just finally I'll ask about the discontinued book obviously whittling down one major or larger sized loan, you continue to have in there seems to be that that mall in Florida and there's been some price out there that that seems to be moving along. Just wondering if you anticipate any movement in that off the books over the next few months?

We would like it to move. So what you're probably referring to is the ground lease we purchased. That was one of the major reasons why our previous deal fell through. We’re hopeful that there are two parties very interested in now converting or purchasing the mall. So we're hoping that it will. Luckily the mall is income producing. So we have taken income over the last two years when we obviously, when the operating results suggest we should. So we have -- we're not losing money at the mall right now, we would like to dispose of it at par. And both parties that are looking at doing a transaction are looking at that range. So that's all, I can say. We don't have a signed deal on the table, right this second but we're hoping -- we're working constructively to dispose the mall.

Okay, great. And then last when you said par I mean you’re talking about where -- where it’s been marked to, right?

Yes, the marked -- just marked -- marked -- yes not par from but where it's been marked down to appraisal.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Damian Kozlowski for any closing remarks.

Yes, thank you, operator. I appreciate your attendance. And we'll talk again in the fourth quarter.

Well ladies and gentlemen; this concludes today's conference call. Thank you for participating. You may now disconnect.