The Bancorp, Inc. (TBBK) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2021 The Bancorp, Inc. Earnings Conference Call. [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. Thank you. Please go ahead, sir.

Thank you, Lisa. Good morning, and thank you for joining us today for The Bancorp's Third 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 9257937. 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. The Bancorp earned $28.3 million in net income or $0.48 per share from 4% year-over-year revenue growth with a 6% expense decrease. Interest income increased 2%, while net interest income increased 9% year-over-year. Loan balances grew 26% year-over-year and 8% quarter-over-quarter. Balance growth year-over-year was led by institutional banking, which includes SBLOC, IBLOC and RIA financing, with a 32% increase in balances. All businesses continue to grow quarter-over-quarter, with institutional growing 6%, SBA 3% and leasing 2%. Gross dollar volume from our cards business grew 2% year-over-year, while payments related fee income decreased slightly. Both GDP and fee income were impacted by the loss of RO volume. This quarter also had a year-over-year impact of 2020 stimulus that contributed to slower growth. Our relaunched commercial real estate business exceeded our expectations and has already closed approximately $200 million of our new floating rate loans with at least another $300 million set to close in the fourth quarter. Our current estimate is approximately $550 million for the full year 2021 in new CRE loans. These loans, like our previous securitization business credits which were mark-to-market, are reserved against and will not be securitized, but may be sold to institutions. Our current target is approximately 300% of capital for CRE floating rate exposure in aggregate. Due to changes in FDIC guidance regarding the definition of broker deposits, FDIC insurance costs have been meaningfully reduced from 16 to 10 basis points. This may reduce total expense by approximately $4 million a year or $1 million a quarter. The majority of our deposits are no longer classified as brokered, and our insurance costs for the quarter were very close to the minimum cost of 9 basis points per $1 of deposits. We also announced the departure of our Chairman, Daniel Cohen, who has been a member of the TBB community since its founding. The Board would like to thank Daniel for all his contributions and wish him great success on its many ventures. I would additionally like to thank Daniel personally for his significant support during our company's transformation into a leader in the fintech industry and across our thriving specialty lending businesses. The Board has selected Board Member Jay McEntee III to succeed Daniel as Chairman effective November 1. In addition, Cheryl Creuzot has been appointed as a new director, and John Chrystal has notified the Board of his plans to resign effective February 28, 2022. Lastly, based on our year-to-date performance of $1.42 a share, in our 2021 outlook we now believe that exceeding our 2021 guidance of $1.78 is likely. However, we are not issuing new guidance, but note that the bias is toward overperformance. We continue to see tailwinds that should drive continued growth in 2021 earnings and beyond. We are also issuing preliminary guidance for 2022 of $2.15 a share. This 2022 guidance does not include stock buybacks. This is approximately 21% income growth over 2021. I now turn our call over to CFO, Paul Frenkiel, to give more details about the second quarter. Paul?

Thank you, Damian. Return on assets and equity for the third quarter were, respectively, 1.8% and 18% compared to 1.5% and 17% in Q3 2020. The increased returns reflected a $2.2 million increase in noninterest income, a $2.6 million decrease in noninterest expense, and a lower tax rate. A $900,000 increase in net interest income reflected loan growth but was significantly offset by the $1.9 million impact of prepayments on commercial real estate loans. However, net realized and unrealized gains on commercial loans increased $3.6 million, which resulted primarily from fees related to those prepayments. In the third quarter of 2021, we recommenced the origination of such loans, which are intended to offset the impact of such prepayments and payoffs. Interest income reflected a reduction of $1 million in security interest, reflecting lower securities balances, prepayments of higher-yielding securities and lower reinvestment rates. Our average loans for the quarter of $4.6 billion grew 9% over Q3 2020. We believe our loan portfolios generally are lower risk than other forms of lending as a result of their charge-off history which reflects the nature of related collateral. Our non-SBA $1.5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings, while our SBLOC and IBLOC portfolios are respectively collateralized by marketable securities or the cash value of life insurance. Our small business loan portfolios comprised primarily of SBA loans, which are either 75% government-guaranteed or have 50% to 60% origination date loan to values. For our leasing portfolio, we have recourse to underlying vehicles in a prolonged history of pricing leases to minimize losses. Tables contained in the earnings press release detail the diversification of our loan portfolios. Substantially, all loans with COVID payment deferrals have recommenced payments and only $1.3 million of non-U.S. government-guaranteed principal remained in deferral at September 30. Interest expense was comparable to Q3 2020, while the Q3 2021 cost of funds was 18 basis points. Most of our deposit interest expense is contractually tied to a percentage of changes in market interest rates. The net interest margin was 3.35% compared to 3.37% in Q3 2020. While yields on loans were lower at 4.05% compared to 4.22%, they comprised a greater proportion of interest-earning assets in 2021, which contributed positively to the 2021 margin. The Q2 2023 NIM of 3.19% reflected the impact of 2021 stimulus payments, which temporarily increased balances at the Federal Reserve earning nominal rates. As recipients spent their stimulus, average interest-earning assets were reduced from $6.8 billion last quarter to $6.1 billion this quarter. The provision for credit losses increased to $1.6 million, which reflected the impact of the charge-off of the nonguaranteed portion of an SBA loan on the CECL methodology as well as loan growth. Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance, and have incurred only nominal credit losses, management excludes those loans from the ratio of the allowance to total loans in its internal analysis. The adjusted ratio was approximately 1.2%. Prepaid debit and other payment related accounts are our largest funding source and the primary driver of noninterest income. Total fees and related payments income decreased 5% to $20.1 million in Q3 2021 compared to the prior year, reflecting the exit of the single relationship Damian mentioned previously. Noninterest expense for Q3 2021 was $39.4 million, reflecting a decrease of $2.6 million or 6% from the prior year. The decrease reflected a $1.9 million decrease in FDIC insurance, which reflected the lower insurance rate noted earlier in the call. While the future impact may be $1 million per quarter, the current quarter impact was higher due to the cumulative effect of the change. Multiple factors are considered in the FDIC insurance assessments, which also may be modified by the FDIC in the future. We continue to focus on expense management, especially in relation to revenue growth. Third quarter results also reflected the impact of an approximate 23% tax rate versus higher tax rates in recent years. The reduction resulted from excess tax deductions related to stock-based compensation. The large deductions and tax benefit resulted from the increase in the company's stock price as compared to the original grant date of the stock compensation. Book value per share increased 15% to $11.13, compared to $9.71 a year earlier, reflecting earnings per share and the impact of stock repurchases. I will now turn the call back to Damian.

Thank you very much, Paul. Operator, could you please open the line for questions.

[Operator Instructions] Your first question comes from the line of Frank Schiraldi with Piper Sandler.

Just on the $2.15 next year, the guidance, just wondered if you could share any drivers of that 20% EPS growth, such as expectations on GDV or any ramp-up in those loan gain, gain on sale loans. Just curious if you could drill down into any color there.

So the GDV is going to return to trend. So we had -- the stimulus made it very difficult to predict because of the lumpiness. Plus, we had the loss of the one program that we mentioned, which did impact the GDV growth in this quarter. So if you back those 2 out in total, you would have a double-digit GDV growth. So that's how big the impact was. That's our best estimate. So that's going to return to trend. You should see better growth in the fourth quarter, and you should see a much better growth in 2022. We know what our pipeline is. We've added some major programs. So GDV growth should return more to the trend level. In addition, we have a lot of initiatives going on in the credit area that's linked to payments. And so you'll probably see increased realization of fee growth in addition to that. So how we've had a lower realization due to the tiers in our pricing to large programs, they've pretty much maxed out now. And so you're getting new programs, and then you're going to get fees through the credit area. So that should be very strong for '22 and then really build into '23. So we're very confident that's going to support the earnings per share. Credit is -- our programs across the board will continue to grow double digits. We've been in the mid for SBA. Leasing has a little bit of a headwind based on the availability of cars, but luckily, we have a very good presence in the marketplace and be able to secure vehicles. As that works out, you'll see increased growth in leasing also. So you'll be in that mid, maybe even before, above trend for a little while as cars become available. And then the big question is the whole CRE program where we're realizing fees in the near-term on the securitization portfolio, while replacing it with slightly lower spread loans that are these floating-rate multi-use, excuse me, multifamily properties. And so that timing of that through 2022 is a real question. I think we'll be able to generate the income necessary because there's that offset for fees as they're paid back. But additionally, the new portfolio of CRE has been very, very successful in the marketplace. So as I mentioned, we're already at about 550, we think, at the end of the year. And so we'll be able to build-out of that very quickly. In addition, if we need to, we can over originate the loans and distribute those, not through securitization, but through loan sales and realize those fees immediately. So across the board, we see strength in certain areas. We're seeing pipelines that we've never seen before, especially in our institutional business. But also, obviously, in CRE and SBA. So we're very comfortable with the $2.15 a share. The one thing I will note, very long-winded answer, is that there's probably a little bit more variability. We could really overproduce on the $2.15, but that would have to dovetail with the payoffs of the loans and where we start the year based on how many loans pay off in the fourth quarter. So we're watching that very closely and adjust, but we think $2.15 a share is a good estimate right now.

Okay. Thanks for all the color. And then in terms of GDV going back to run rate, in the past I guess a good rule of thumb as you have these volume discounts, is that card fees will grow maybe half of GDV growth. Is that kind of leveling out now that you're adding these new programs? And could we see more sort of similar to GDV growth in terms of card fee growth going forward?

Yes. I don't know -- and it's also a mix during this time of volatility, where some of the some of the cards weren't really used, like commuter cards, and there's a lot that goes into the calculation, but it's 2 sources. One is new programs. And the second is credit initiatives that are linked to our major programs where we've started developing, with our major partners, our ability to use our balance sheet in a very low risk way. So that doesn't -- those aren't GDV dependent initiatives. So from those 2 areas, new programs and fees from the sponsorship of credit instead of payments, bank sponsorship should drive that proportion higher over the next 18 months. Not sure exactly when and where, but definitely as we work through the year 2022, we should see a higher realization rate.

And when you say credit sponsorship, are you talking mostly originate and sell? Or could you hold some of this on balance sheet?

No, it's a combination of those things. In the early -- we're not going to securitize. So it will be utilizing our balance sheet with major partners by providing, in many cases, the loans may actually be booked on our -- we'll be the true lender. So these are very advantageous to us. We've got a lot of liquidity, and I think they'll add a lot to the fee base that we're generating in that area.

Okay. And then you mentioned the $2.15 doesn't include stock buybacks. You guys have been pretty religious about completing your quarterly authorization here in 2021. Given where the stock is now, do you see the same sort of game plan for 2022?

Yes, so this is all based on rigorous understanding of PE market to book multiples. When you hit the exemplar range, which we are on ROE, we're at 18%, and we're going to above 20%, you get about 5% of banks really do create fantastic shareholder return. So we think we should be at -- right now, we're about 18% trailing PE. We think we should, at the end of the day, be at 20% in a forward look, that's where we think our stock price should be. So if we're at 20x whatever our guidance is, if our stock is not there, we'll be buying back.

Got you. Okay. Great. And then just one last one. Just people are starting -- obviously, you guys have given guide for 2022, but people are even starting to look beyond that. And if you think longer term, you have that goal out there of greater than I think $500 million in revenues by 2025. So that would assume double-digit revenue growth over a multiyear period. And then the question is, does the scale story continue through that point in your estimation so that revenue growth will or could, should continue to outpace expense growth, and therefore, you could see this 20% EPS growth could be reasonable to extrapolate forward?

Well, we haven't given guidance, but in our investor presentation where we reissued, we've been very rigorous about those 3 tenets of our strategy. One is the whole payments, the Fintech Solutions Group, where we're trying to really look forward and turn ourselves not into a bank with a technology company, but a technology company with a bank. And so there's a whole envelope of middle office activities that we're investing in, not only for our partners, but hopefully to monetize out in the marketplace as we approach the end of that 4-year period. We're very optimistic of where we are right now. We had this bumpy ride on GDV with stimulus. We also are in an extremely low interest rate environment and have been able to adapt to it. In a more normalized environment and having just those supporting tailwinds, the virtualization of banking, all those things, plus our focus on not the use of the balance sheet, but the use of our capabilities to produce fee income, should really have long-term impact on our ability to generate above-market returns and also return significant amounts of capital to shareholders.

[Operator Instructions] Your next question comes from the line of William Wallace with Raymond James.

I wanted to just dig into some balance sheet questions here. Why take on the $300 million of short-term borrowings in the quarter?

I can respond to that. It was periodically to manage our Federal Reserve requirements and test our liquidity. We test that line from between like $100 million to $300 million. And we average, on average, we were a lot lower. It was a small fraction of that $300 million. It just happened on the last day that we had done that, we weren't really planning to keep that $300 million. So on a daily basis, you might see a fraction of that $300 million that as I said, we used to manage reserve requirements.

Okay. So it should -- mostly, we would anticipate most of it to be gone by the end of the year?

We have a lot of flexibility. We are one of the few banks that over time, that over time has actually exited deposit relationships. So we have a lot of flexibility. So we can actually determine the size of our balance sheet, the size of our deposits. So that's really going to be what we determine it should be. And as I said before, there may be some borrowings. It's really just to manage our daily cash. We do have, being a payments company and having a lot of inflows and outflows that have different timing elements to them, you might see deposits, and therefore cash, fluctuate on a daily basis. So the lines are helpful in managing cash on a daily basis.

And can't help but notice that you had -- you're down, deposits are down another $550 million plus this quarter. They're down about $1.8 billion from the first quarter. Does that have anything to do with this one program that you lost?

A fraction. I'll let Paul take it, but a fraction of it does. But that's mostly driven by our own actions to lower the size of the balance sheet and the stimulus. But Paul, why don't you take that?

Yes, it is basically those 2 factors. The biggest single factor was the stimulus that resulted in taking us from like a low $6 billion bank to a high, to almost a $7 billion bank. As the stimulus got spent throughout the year, as I said in my comments, in the third quarter things normalized and we're closer to a $6 billion bank. But yes, obviously, that one relationship did have an impact. And in addition to that, we exited some other deposits. The way we basically determine which ones to exit are based on cost. So we've been calling actually for years the higher cost deposits and that's left us with the cost of funds of 18 bps.

Yes, we just have a lot of flexibility on deposits, so we had no problem adjusting. Even through getting a lot of excess deposits, it did obviously hurt some of our ratios, but we managed through it very quickly and rightsized the bank. But with our partner base, it's very easy to get additional deposits if we need them. But sometimes, you don't want to pay up for them. We want to have the lowest cost possible, and that's why we use the lines and that's why on a long-term basis, we want to make sure that we have the right partners and the right agreements in place. But we're very comfortable with the funding of the bank.

Okay. Can you quantify how much of the deposits were related to the one program? And then was the one program, was this a customer that had higher cost deposits that you were less -- that were less profitable with the relationship that was profitable or…

The program we mentioned before, it's borrow. Remember, they got a bank license and so they're not the majority of those deposits. They're less than 30% of that excess deposit base.

Okay. And the nature of these programs is such that they can't just cancel the contract or wait till the end of the contract and then walk away and take deposits with them, is that correct? Or…

No, they're longer. We always knew the intentions of that program. So that was a multiyear transition plan. We were very aware of what was going to happen. But it's depending on when a -- when something like that happens, it depends when they re-card. They have to act -- they basically have to redo everything that we've done. So they wanted to do that in a more aggressive way, and that's fine. And so it did have an impact on 2021, but it will be, that impact will be over, obviously, in the beginning of next year. So that's why we're very comfortable with returning to trend growth with new programs, etc. It wasn't that big of a deposit, we're not going to say exactly what that was, but it wasn't -- you can make an estimate by simply getting the call report which is publicly available, and you can make that estimate alone by backing out some perceived growth that maybe came through their own communications to the marketplace.

Yes. Okay. Thanks, Damian. And then on the GDV side, so if I look at GDV on a year-over-year basis, in the third quarter it was -- GDV growth was about 2%. So if we think about returning to trend for the next 3 quarters or so, I should see, theoretically or hopefully, some year-over-year growth, but then returning to your prior guide of roughly 20% I believe is what you guys felt like you had visibility to in prior calls?

Yes. It really depends on the virtualization of the -- there's a lot of factors that grow in there. But that's our best estimate. You'll see growth for various reasons in the fourth quarter. We're already seeing good growth. We had a really bad November. Remember with the election, you had -- you didn't have a great quarter last year in the fourth quarter. So you're going to see obviously, much higher growth than you did in the third quarter. At least that's our estimate right now. We obviously don't know what's going to happen with consumer spend, there's a lot of ambiguity in the marketplace, but you should see much better growth in the fourth quarter. Then you still, in the first quarter of next year, you still have this other stimulus that came in, in March. So though our balances at the -- our biggest programs and some of the newer programs are really starting to come online, that's going to be -- we think we're going to see significant growth, but that's going to be the end of this year-over-year impact from government intervention. That will really be the last time that we see a big bulk stimulus payment where you have to kind of guesstimate what your program growth is because you really don't know how much was stimulus, how much was spent, etc., etc.

And then back to one of Frank's questions talking about the GDV margin, you started talking about other types of programs that are maybe more along the lines of credit sponsorship, etc. That sounds like it would be a new line-item business, not necessarily a GDV margin type. Like it wouldn't go in the prepayments business, would it? I mean, maybe help me understand what you were…

It depends on how we -- at the end of the day, it might, it might not, to your point. The reality is that it will add significantly to profitability. We haven't decided the final structure of that program and how it's going to be booked, but when we do, we will announce it, and it may not appear on that line, that's correct.

Okay. So is it fair to then maybe classify what we are hearing today at suggesting that we'll return to trend growth on GDV, which I believe you have stated think about maybe 20% is type volume growth with about a 10% type revenue growth that now perhaps there could be some tailwinds to that 10% level due to some new partnership opportunities and structures.

Well, yes. But I would -- regardless of how we book the business, if it's a purely credit line, a different line item, they should be aggregated. I would suggest they should be aggregated together because it's really part of the same relationships based off that whole ecosystem. So I think you can look at it any way you want, but even if we don't book it in that line, you should probably put it together and analyze it that way because it's very synergistic.

Yes. Okay. Great. And then last question, on the FDIC line, it said that it should -- the new classification of the deposits should save about $1 million a quarter. So that would suggest that the run rate expense is closer to like $1.5 million, $1 million to $1.5 million, not where you were in the third quarter, correct?

Yes. The easiest way to do that in your model is to look at the rates. The rate for us will be approximately 10 bps. So just take that 10 bps times your average liabilities for the quarter. And that comes out, as Damian mentioned, to about $1 million a year -- I'm sorry, $1 million a quarter.

At this time, there are no further questions. I would now like to turn the call back over to Damian Kozlowski for closing remarks.

Thank you, Operator. Thank you, everyone. We're making a lot of progress. We're very optimistic on our progress in 2021. It looks like a lot of tailwinds for 2022 and beyond, and we're going to just keep on working very hard to realize those opportunities in the marketplace. Thank you, everyone. Operator, you can disconnect the call.

This concludes today's conference. You may now disconnect.