The Bancorp, Inc. (TBBK) Q1 2021 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the Q1 2021 The Bancorp Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Mr. Andres Viroslav.

Thank you operator, good morning, and thank you for joining us today for The Bancorp's first quarter 2021 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 12:00 p.m. Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 5792244. 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 our 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 Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andres. Good morning everyone. The Bancorp earned $0.44 a share and revenue of 78 million and expenses of $42 million. We continue to have momentum across our business lines and the combination of opening of the economy, stimulus and virtualization should give us continued tailwinds in 2021. Excluding gains and losses on commercial loans, revenue climbed 17% driven by 25% increase in net interest income and prepaid fee growth of 4%. Cost of funds was down 63% year-over-year illustrating the benefits of our payments funding model. Expenses rose 9% year-over-year, cost control and efficiency continues to be a focus of management. Net income from continuing operations grew 98% versus first quarter 2020 adjusting for tax effective negative fair value adjustment in 2000 due to COVID net income grew 53% year-over-year. In the first quarter, we saw continued business momentum led by gross dollar volume in our cards business, which increased 23%. Prepaid fees grew 4% due to the mix of program growth and the impact of stimulus payments. In our payments business, we saw continued strong growth across most verticals with only COVID impacted products such as commuter cards showing a year-over-year decrease. These verticals should also show year-over-year increases as the economy opens. Balances across our lending businesses continue to grow quarter-over-quarter with SBA leasing in our institutional product set that includes SBLOC, IBLOC and RIA financing all growing approximately 5% quarter-over-quarter. Pipelines in all areas continue to remain strong and suggest continued year-over-year and quarter-over-quarter growth. Our business plan for 2021 is in full implementation. The focus continues to be product and platform expansion with a rigorous focus on building the best payments ecosystem in the financial services industry. Our plan includes a comprehensive and integrated analysis of the market and competitors and the needed investments to build towards the future and create scalable core competencies that our partners can use to innovate and grow. We also continue to invest heavily in anti-money laundering and compliance to have best-in-class capabilities to meet regulatory guidance and expectations. We are currently on track to meet or exceed our financial targets for 2021. We continue to closely watch the impact of the full reopening of the U.S. economy, the fed policy, government stimulus, interest rates and the virtualization of consumer spending to understand the likely impacts on The Bancorp. Currently, those impacts are mostly positive for our business model and should drive continued growth in business volumes and profitability into 2022. Lastly, our guidance target for 2021 continues to be $1.70 a share or approximately $100 million in net income. The earnings per share estimates do not include share repurchases that have been previously announced. I now turn the call over to Paul Frenkiel, our CFO, to give more on the first quarter.

Thank you, Damian. Return on assets and equity for the quarter were respectively 1.6% and 18% compared to fourth quarter returns of 1.6% and 17% and Q1 2020 returns of 0.9% and 10%. The higher returns were driven primarily by $11 million year-over-year and $2 million quarter-over-quarter increases in net interest income. The increases in net interest income reflected a lower cost of funds, growth in higher yielding SBA and leasing loans and the retention of the commercial real estate portfolio we had been securitizing prior to 2020. It also reflected $1.4 million of fees related to a line of credit to another institution to fund PPP loan originations, which are not expected to recur. The vast majority of the retained CRE portfolio is comprised of multifamily loans with cumulative COVID losses estimated by a nationally recognized analytics firm at 1.2%. The $1.5 billion CRE portfolio is recorded at a $99 price or lower and has a weighted average rate floor of 4.8%. SBLOC and IBLOC loans totalled $1.6 billion and while their yield is estimated at 2% and 2.5%. Those portfolios have not experienced credit losses due to the nature of the collateral. Our next largest portfolio is our $882 million small business loans, which includes $190 million of PPP loans. $95 million of which were made in first quarter of 2021. The 2021 PPP loans generated fees of approximately $3.4 million, which are being recognized through full year 2021, the estimated period of repayment by the U.S. Government. While SBA commercial mortgage loans have origination date loan-to-values of 50% to 60%, SBA 7a loans are generally 75% guaranteed by the U.S. Government. In addition to the six months of government payments on 7a loans authorized by the CARES Act, which mostly ended in the fourth quarter quarter, additional payments are being made in 2021. U.S. government passed legislation in December 2020, which authorized at least two payments and up to five months of additional payments for businesses more impacted by COVID including hotels and restaurants. These payments began in February 2021. Unlike the six months of CARES Act payments, these additional payments are capped at $9,000 per month. The small business portfolio has an estimated yield in the 5% range. In addition to 16% year-over-year SBA loan growth, we increased leasing balances to $484 million from $462 million at the prior quarter end. Leases have an estimated yield in the 6% range. We emphasized diversification in our small business and leasing portfolios, which is detailed in the press release tables, which segment loan portfolios by loan type, collateral and geography. Deferrals at quarter end decreased to approximately 1% of loans after excluding government guaranteed balances. Decreases compared to prior periods reflected the newly authorized government payments on 7a loans in the December legislation, and other reductions. The $11 million increase in net interest income over Q1 2020 reflected increases in average quarterly CRE loans to $1.5 billion, while related interest income increased $3.9 million. Interest on small business loans primarily SBA increased $3.8 million, including the approximate $1.4 million of fees related to the line of credit to fund PPP loan generation mentioned earlier, which is not expected to recur and $2.4 million of PPP loan fees and interest. While combined SBLOC and IBLOC loan balances increased 40% over these periods, related interest income was approximately equal reflecting the impact of historic Federal Reserve rate reductions of 1.5% in March 2020. SBLOC loans are secured by marketable securities and IBLOC loans are secured by the cash value of life insurance and credit losses have not been incurred. Interest expense was $5.4 million lower compared to first quarter of 2020. And the cost of funds was 21 basis points reflecting the impact of the Federal Reserve interest rate reductions. Most of our deposit interest expense is contractually tied to market interest rates. The net interest margin in Q1 was 3.34% for both the current and prior year first quarter and down from 3.58% in Q4. Current quarter earning assets reflected $550 million of increased balances at the Federal Reserve compared to Q4 resulting primarily from stimulus payments made in March 2021. Since Federal Reserve balances earn nominal rates of interest, they reduce the net interest margin. The net interest margin benefited from the $1.4 million of fees earned on the short-term line of credit to another institution to fund PPP loans, which has not significantly increased average earning assets. The provision for credit losses was approximately $820,000 and reflected growth in small business lending balances, while net charge offs for the quarter were nominal. Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance and have not incurred credit losses, management excludes those loans from the ratio of the allowance to total loans in its internal analysis. The adjusted ratio is approximately 1.3%. Prepaid accounts, our largest funding source are also the primary driver of non-interest income. These unrelated income on prepaid cards were up 4% to $19.2 million in Q1 2021 compared to $18.5 million in Q1 2020. Non-interest expense for Q1 2021 was $41.9 million or an increase of 9%. The increase reflected higher salary and legal expense. Increased salary expense reflected higher incentive compensation especially equity compensation expense. Increased legal expense reflected the matters noted in the legal note in the financial statements in our form 10-K for 2020. We continue to focus on expense management especially in relation to revenue growth. In December 2020, the FDIC issued regulations, which should result in the reclassification of a portion of the bank's deposits as non-brokered. Such reclassifications could result in a future reduction of FDIC expense, but various analysis must be performed and/or applications filed with the FDIC where applications are required, they will not be acted on until the fourth quarter of 2021. Accordingly the timing and extent of savings, if any is uncertain. Book value per share increased 20% to $10.42 compared to $8.69 a year earlier reflecting earnings per share, the increased value of the investment portfolio in the current rate environment and the impact of stock repurchases. The Q1 2021 bank leverage ratio, which is based upon average quarterly assets, approximated 8.7% and risk-based ratios, approximated 14%, a reduction in the leverage ratio from year-end reflected significant deposit inflows in March 2021, which resulted primarily from stimulus payments from the December 2020 legislation mentioned previously. In closing, there are certain characteristics of our loan portfolios, which I would like to highlight. The vast majority of our $1.5 billion of our CRE loans at fair value or apartment buildings, for which a nationally recognized analytics firm has estimated acumen of loss of 1.2% in their COVID projections. These loans are already on our books at levels reflecting that discount. The combined SBLOC and IBLOC portfolios approximate $1.6 billion and have not incurred credit losses, not withstanding historic equity market declines in 2020. The majority of the $882 million small business loan portfolio including PPP loans is U.S. government guaranteed. Majority of the other small business loans consistent of commercial mortgages with 50% to 60% origination date loan-to-value for leases, which experienced credit issues. We have recoursed to the leased vehicles. While there is uncertainty related to the future, we believe these are positive characteristics of our portfolio, which demonstrate lower risk than other forms of lending. I will now turn the call back to Damian.

Thanks, Paul. Operator, could you open up the lines for questions?

Yes, sir. [Operator Instructions] And your first question comes from Frank Schiraldi with Piper Sandler.

Good morning.

Good morning, Frank. How are you?

Good. Hope you guys are well.

Yes.

I just wanted to start with the prepaid card fee line. And in the past the way I kind of tried to model it is looking at your growth in GDV and take some sort of margin off of that gross dollar volume number, but it seems like year-over-year the margin continues to shrink. So maybe that's not the best way to approach it. I am just wondering your thoughts on that line item moving forward if you can continue to get sort of similar GDV growth, what sort of growth rate we could see on a year-over-year basis or linked quarter basis whatever on the prepaid card fee line?

Yes, see the last two quarters have been – well, the whole last year has been an anomaly, but the last two quarters had very similar characteristics and disproportionate growth due to what's happening with COVID and stimulus. So in the fourth quarter, we had this weird November where spending drops across the economy. The same thing happened in February in the first quarter. And then we were impacted in March greatly by substantial increases due to opening of the economy, but then the stimulus. So it kind of throws everything off. Some of the stimulus came against programs that are more mature. And so you didn't get the same fees associated with, because as we've discussed before they're laddered and we don't put on a lot of incremental costs as the program grows and it's -- to its maturity, so it drops. As you can see, our expense growth wasn't high and attributed mostly the salary and legal expense. So the answer is we have to see over the next couple of quarters. What we're seeing in April is kind of a more return to historic trend. We still have a fairly robust growth, but we're getting the growth more evenly. So, we should know more after the end of the second quarter, but I still think you'll see with – if you see double-digit fee growth, 20%, 25%, we should be able to retain even if we have these breaks of programs, because we do have new programs coming on. We should have at least half that fee growth. So I don't think it's – right now I don't think it's a new trend. I just think it's an anomaly based on the last two quarters of how the different programs have participated in the COVID economy.

Okay. Is it still reasonable to look year-over-year and think, okay, GDV grows 20% year-over-year in a given quarter than – that just you would assume the prepaid card fee line grows 10%. That's what you're implying I guess – or just not even implying, that's what you're saying?

Well, it the bumps – remember it bumps around. What I'm saying is that we should retain at least that much. So it could be one month, it could be 15 and another month it could be eight, it really depends. I think when we get the full opening of the economy, I mean, New York just announced not going to fully open until July. So, I think, you're going to have this quarter and next quarter, you're still going to be normalizing. And then we're going to have outsized. People are predicting 10% growth in the second and third quarter. So it's really hard to predict right now, but as you can see that, I think, there is enough drivers and tailwinds within our broad participation as a bank in the financial services and our low credit risks that we should be – the top-line revenue should be continue to be supported. And as I've said last quarter, all the tailwinds point to potential over performance on our guidance. We'll have to see and, of course, that's looking at the whole macro situation, I could be wrong, but it does seem like we're pointed in the right direction.

Okay. And then I'm just wondering as you had that obviously tremendous balance sheet growth and tremendous loan growth driven by the deposit growth in part, I guess. I'm just wondering as the leverage ratio has moved lower, your thoughts on continuing to implement the buyback program as you guys set it up. I mean, obviously in the first quarter you did basically exactly what you said you're going to do in terms of the $10 million.

Yes. No, we're going to continue to do that. We should expend another $30 million. If you look at the corporate level, that's where we're paying the buyback from. Remember we raised $100 million of debt up there, so we don't really have any issues and our balance sheet should normalize as payments. That's why maybe there is some support in the second quarter from continued stimulus payments, so I don't know that, but we should on the offset of course as the opening of the economy. So when those do run out, we should have more throughputs for the GDP growth. So I don't – there's no – we have no issues whatsoever buying back.

Okay. And then just finally for me, Paul, I wondered if you could – I think I'm going to miss some of the numbers in terms of just the – what flow through NII this quarter versus last quarter from a PPP standpoint?

So this quarter we had to combine $2.4 million of the old PP and new PP that includes the fees and interest. Last quarter, it would only have been the old PP. So that would be like 1 – $1.4 million or so.

Okay. So that's $1 million pickup in terms of a fee income through NII. And then you also mentioned the $1.4 million in fees related to the line, which is also related to PPP. So that, I think, you noted also would be not – something that you should consider non-recurring.

Yes, except for the 2021 PPP where we collected the $3.4 million, we took most of that – most of one quarter in this quarter and we'll have the rest of that over the rest of the year.

Okay. And should it be kind of fair in terms of how you amortize this should be fairly steady through the rest of the year until those fees run off…

It depends on the repayment. Like it took the government much longer than anticipated and we kind of anticipated that would take longer. We didn't think it would take over a year, but it actually took slightly over a year. So we're being conservative and we're assuming that that we won't get repaid until fully until year-end. But the way the accounting works, if the government repays earlier, then you take the income earlier.

Right. But you're still assuming, I guess, I'm just – I should've looked, but I think you assume the fees over a shorter amortization period than, than the five years of the loan. So you assume it's going to get forgiven earlier than that then you try and take those fees over those times – that time period, that's shortened time period?

Yes. It was basically 11 months for the first PPP and its 11 months for this one.

Gotcha. Perfect. Thanks

[Operator Instructions] And your next question comes from William Wallace with Raymond James.

Yes. Thanks. Good morning guys.

Good morning, Wallace.

Certainly back to the buyback, just real quick. Are you if at current levels in this 22 range? I mean, would you anticipate that you would continue to buy at that $10 million per quarter rate?

Yes. So we've raised that our internal target, we should have plenty of room to continue our buyback. We took another look at where we think we're going to be over the next couple of years. We still think the stock is accretive to purchase for shareholders, and we're going to continue to do that this year. So we expect to buy back $30 million more of stock 10 million a quarter.

Great. Looking at the balance sheet, you obviously had $1 billion or so deposits that came on. I believe you're saying those are related to stimulus checks. Is the expectation that those will be spent relatively quickly, and if not, that's at – we're – at close to $8 billion in assets. Do you need to start thinking about ways to manage balance sheet side?

No. Not at all. I mean we're doing, we've said before we're doing this project called credit roadmap where we're thematically looking at different ways the balance sheet could grow and get a very good idea. But we have plenty of room and plenty of liquidity to make sure for the next three to five years we have no issues. That $500 million we don't know if it's going to be spent or not, but we have mechanisms now to – if we don't need to deposits, we can offload those deposits.

Okay. Okay. Alright. And so those were already in place?

Yes. That we've been developing tools for last couple of years, so we don't anticipate. I can say definitively, we don't at this current time anticipate any issues with balance sheet size for the foreseeable future.

Okay. And then on the income statement you've got that gain on sale of loans line, it's been a couple of million bucks for the last two quarters. Is that related to the to the commercial loans that you've kept from balance sheet and they pay-off, then do you just accelerate the mark back through that line?

Correct. And so that – so we're going to on the real estate side, we liked the asset class, this new money in. We've talked about the red purple stay mostly, or if not all multifamily. So we're going to keep our exposure at the current level. But if we do any additional loans, first of all we're not going to do securitization, but if we do additional loans, we'll put them through the reserve. They won't be held for sale. And every time one of these rolls off, they have at least been marked at 99. So you get 1% and many are – have prepayment, 50 basis point prepayment, but that will roll off at the end of the year. So you have embedded this $1.5 billion, you've got $15 million embedded in it either to put in their reserves, if you do new loans or will roll off into revenue.

Okay. Alright. That's helpful. And then just for my last question, Damien during your prepared remarks, you made a comment about investing in the franchise for the future. And I just would love to know your updated thoughts on whether or not you're looking at new business lines or you're needing to continue to invest in the back office to make sure that you can keep up with and the rise in demand on the payment side. Just maybe some thoughts, bigger picture as to where you're thinking for the future?

Okay. So we – that's of course. The answer to that is yes to everything. So in each product area and that's part of the credit roadmap, but also we have the implementation of what we call payments ecosystem 2.0, we're investing across that whole – every, almost every part of the business. If you look at what we did over the last three to five years since we started kind of repositioning the business, we got out of a lot of things that we didn't think were core. And we're really now in core platforms that we're trying to build enhance capabilities, products and services. So each one of these areas has through what we call our strategic agenda, which is the highest priority. Strategic items that we're focused on including with an integrated business plan, we've identified for example, putting a new technology and operations infrastructure, enhancing BSA and compliance through using machine learning and AI, or our institutional business, which we've expanded from just SBLOC to IBLOC and RIA financing. So each one of these areas has a map and what we need to do over the next three to five years to get to where we want to be both on financial targets and profitability, infrastructure, product sets, but also the culture of our firm and things like ERG and diversity inclusion. So it's a very comprehensive, very rigorous approach to allocating resources and getting investor returns and creating a better company.

Thank you, Damien. I appreciate it.

Thank you, Wallace.

At this time there are no further questions. I will now hand the call back to Damien Kozlowski for closing remarks.

Thank you everyone for attending today's earnings call, and we will talk soon. Operator you may disconnect.

That concludes today's conference. Thank you for your participation. You may now disconnect.