Bancorp Inc
NASDAQ:TBBK
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Bancorp Inc
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Good morning, ladies and gentlemen, and welcome to the Second Quarter The Bancorp, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Andres Viroslav. Please go ahead.
Thank you, Jorel. Good morning, and thank you for joining us today for The Bancorp's Second 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 2868852.
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 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 $29 million in net income, or $0.50 a share from 13% year-over-year revenue growth and 3% expense growth. Interest income increased 10% year-over-year. Total loan balances grew 12% year-over-year. Loan balance growth was led by institutional banking, which includes SBLOC, IBLOC and RIA financing with a38% increase in balances.
Quarter-over-quarter, institutional grew 7%; SBA, excluding PPP and a related nonrecurring line of credit, 2.5%; and leasing 5%. Gross dollar volume from our cards business grew 15% year-over-year with fee growth of 5%. Total noninterest income grew 27% year-over-year.
Our Fintech Solutions Group, previously named Payment Solutions and Payments Acceptance, continues to have a robust business development implementation pipeline. We announced the addition of Current in the quarter as another major partner in our ecosystem. The newly named Fintech Solutions Group was created to enhance solutions integration to our expanding partner base. This group not only enables the challenger bank market, but also now includes all our verticals in corporate, gift, healthcare and government with an expanding set of card, virtual card, debit, prepaid and other payment capabilities, such as push-to-card rapid funds.
In addition, we also announced creation of our new fintech hub in downtown Sioux Falls. The named Bancorp Building will create an integrated innovation environment for our team members and partners. We expect to fully occupy the new facility in 2023.
We launched a new expanded website this quarter to reflect our progress as a company. On the site, you can find useful information about the company, including our new investor presentation, and educational and industry insights from our team, who are always focused on helping to build success for our partners.
In the new investor presentation, we are introducing Vision 500, a 4-year plan to achieve $500 million in revenue with a sustainable 22% ROE or better by 2025. Also in the second quarter, we were honored to be selected to be included in the S&P 600 Small-Cap Index. This index is a set of representative public small-cap companies and key industries that power our economy. This index is also part of the broad S&P 1500 index, and it also includes large- and mid-cap companies.
Lastly, based on our year-to-date performance of $0.94 a share and our 2021 outlook, we are increasing our 2021 guidance to $1.78 from $1.70. We continue to see tailwinds that should drive continued growth in 2021 earnings and beyond. We will give preliminary per-share guidance for 2022 with the third quarter earnings release. Current trends would suggest income growth for 2022 of 20% or more over our revised 2021 guidance.
I now turn over the call to our CFO, Paul Frenkiel, to give more details about the second quarter.
Thank you, Damian. Return on assets and equity for the second quarter were, respectively, 1.7% and 19% compared to 1.3% and 16% in Q2 2020. The increased returns reflected a $4 million year-over-year increase in net interest income, a negative provision for credit losses, increases in noninterest income and a lower tax rate.
The increase in net interest income reflected loan growth and $3 million of fees related to a line of credit to another institution to fund PPP loan originations, which are not expected to recur. SBLOC, IBLOC and adviser financing interest increased $3.4 million, while leasing and SBA each increased approximately $1 million. The SBA increase excludes PPP and the $3 million of nonrecurring fees.
While interest on CRE loans at fair value decreased slightly, noninterest income reflected $2.6 million in net realized gains on commercial loans, primarily resulting from exit and prepayment fees on loan payoffs. We have begun generating new CRE loans, with the first closings occurring in July. Total interest income reflected a reduction of $3 million in securities interest, reflecting lower securities balances, prepayments of higher-yielding securities and lower reinvestment rates.
Our average loans for the quarter of $4.6 billion represents growth of 16% over Q2 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 securities are respectively collateralized by marketable securities or the cash value of life insurance. Our small business loan portfolio is 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 and a prolonged history of pricing leases to minimize losses. Tables contained in the earnings press release detailed diversification of our loan portfolios. Loan deferrals, which have been encouraged by COVID legislation, substantially all expired as of July 5, which was the due date for the vast majority of small business loan payments. Of the $48 million of deferrals at March 31, 2021, small business loans with an unguaranteed principal balance of only $2.6 million had not made their July payment, and only $968,000 of all loans remained in deferral.
The $1.3 million increase in interest expense compared to Q2 2020 resulted primarily from the senior debt issuance in Q3 2020, while Q2 2021 cost of funds was 18 basis points. Most of our deposit interest expense is contractually tied to market interest rates.
The net interest margin was 3.19% compared to 3.53% in Q2 2020. The reduction reflected the impact of 2021 stimulus payments, which temporarily increased average balances at the Federal Reserve, earning nominal rates. As funds were spent, these balances were reduced; and by June 30, 2021, total assets decreased to $6.5 billion compared to an average of $7 billion for the quarter. The net interest margin benefited from the aforementioned $3 million of nonrecurring credit line fees, which served to offset the impact of reductions in loan and securities yields.
The provision for credit losses was a negative $951,000, which reflected the reversal of certain pandemic-related economic risk factors in the CECL model and the recovery of an allowance on a loan payoff. 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 is 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 was up 5% to $21.4 million in Q2 2021 compared to $20.4 million in Q2 2020. Leasing income increased $1.3 million, reflecting the impact of the reopening of vehicle auctions after pandemic shutdowns and higher vehicle market prices due to vehicle shortages.
Noninterest expense for Q2 2021 was $43.9 million, or an increase of 3%. The increase reflected higher salary expense, including incentive compensation and equity compensation expense. We continue to focus on expense management, especially in relation to revenue growth.
Second quarter results also reflected the impact of an approximate 21% tax rate versus higher 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.
Book value per share increased 16% to 10.77% compared to $9.28 a year earlier, reflecting earnings per share and the impact of stock repurchases. Capital ratios continue at satisfactory levels primarily as a result of retained earnings, notwithstanding the second quarter impact of stimulus payments, which temporarily increased average assets.
I will now turn the call back to Damian.
Thank you, Paul. Operator, could you open it up for questions?
[Operator Instructions] Your first question comes from Frank Schiraldi with Piper Sandler.
I know you're going to give preliminary guidance on 2022 next quarter, which I'm sure you'll have more detail to offer. But is there any more color you can give in terms of the drivers to get to the 20% plus? And I guess more so, I'm just kind of curious about the growth rates you anticipate getting in the payments fee income.
We still think, with our pipeline on the payment side, is that we'll get the GDV. It's been very bumpy the last couple of years, obviously. It's real extremes over particular months because of stimulus, but also because of consumer buying behavior. But with the pipeline we have, we still think we can sustain that 20% GDV growth over the next couple years as there's a transition in the economy. So that's from the payment side.
From the lending side, it's still between 10% and 15% on the commercial side and the SBLOC side. IRA and IBLOCS, we've been growing disproportionately, so 20% to 30% growth there, as we have been demonstrating.
And on the real estate side, we restarted that business in the multifamily. We already closed, or are about to close, $25 million in deals, and we have another $125 million in the pipeline to close. So we're experiencing not a lot of weakness across the board. We've got a lot of strength and tailwinds. And I think we'll give a lot more color when we give per-share guidance.
And you can look at our new investor presentation, which we issued yesterday, which has a lot of additional facts about where we are today and where we think we can go as a company.
And then on the GDV side, if I just look at my model, we've been seeing margins come down. I know a lot of that is related to volume discounts with big partners. At least in this quarter, it looked like the margin has stabilized. So when you think about 20% GDV growth, are you still thinking half of that in terms of fee income growth? Or if margins stabilize, do you kind of get one-for-one?
I still think half, because we have a lot of new partners, Current being a real high-profile one that just joined our ecosystem. But we have partners like SoFi, which just started last year, which is still ramping up. So we have, obviously, the dominant players in the industry, too, like PayPal and Chime.
So I still think it's half, maybe a little bit more than that. But it'll be chunky again for the rest of this year. For the third quarter, we have a year-over-year with the stimulus comparison. And then, in the fourth quarter, we had a really bad November last year, which we should excel this year.
So there'll be bumpiness this year. We'll still maintain GDV and fee growth. And I think you're going to see more stability next year in what you see from the growth in GDV and the fee growth.
And then you mentioned a couple of partners there. So on the current front, usually, TBBK is it seems like the first bank partner and the primary bank partner. And I know Current has had in the past couple of other banking partners. So I apologize if there was more detail out there I missed, but anything you can say about your relationship with Current? Is it new business? Is it taking over some of the old business? How does that work versus some of their other partnerships that were in place?
So part of the appeal of TBBK has been our investment in both our technology and product capabilities, but also our compliance in BSA envelope of processes and procedures. So we're attracting a lot of more mature programs that have been with other partners, but view those 2 things as a real benefit to being with our company.
So it's a good thing, not necessarily a bad thing, for a fintech company to have 1 or more partners in order to ensure that they have a processing base or a banking relationship that's diversified. However, there tends to be, like in many other parts of banking, a lead bank relationship. And more and more, we're establishing. Sometimes we establish it first. But with our partnerships, we tend to, even if it's not upfront, to become the dominant player within the ecosystem for the partner, and we build that relationship over time.
And many of our partners, Current has their own strategy and plans. I don't want to speak for them, but that's how we run our business, is to be a valuable partner across the spectrum of activities for each one of our partners within the ecosystem, and we build that advantage over time.
You also mentioned SoFi, that that business is still ramping up. Obviously, they've gone after their own bank charter. And I know you can have relationships with partners even after that, certainly, like Borrow. I just wondered if you could talk a little bit more about that. So when you said ramping up, I guess you're saying that business is still ramping up and revenues are still ramping up for TBBK.
And then, I just wondered if you could touch on Galileo and how that fits into all of this. Do they become in some ways, or can they become somewhat (indiscernible) competitor, or how to think about that?
No. Galileo, as you know, was acquired by SoFi. Galileo's capability is processing. We're not a processor. There are occasions where a processor can also be a program manager.
So if you think of the 3 parties involved, there's the bank, there is the processor, and then there's the program manager. Those are the 3 main partners. And they're not a competitor to the bank. They can be a competitor depending on if they're captive with other program managers, if you have a processor and program manager together, but they're not a competitor of ours, generally.
I just wondered if they were expanding at all.
Well, I think we're going to have a long-term relationship with SoFi. That's always up to them, of course. But I think the envelope activities we can provide SoFi over long periods of time will be able to be of value of companies like that, regardless if they get a charter or not.
And we're not competing with a Galileo. We're not competing with the program manager. If you think about it in that sometimes you get the competition between the different parties. You can be a bank, but you also could be a program manager, too. And we don't do that. So of the 3 roles, we say we do this one role. We're not a program manager. We're not a processor so that we can work with anybody within the ecosystem and not worry about being a competitive threat.
I was just thinking, with Galileo being owned by SoFi, SoFi getting a bank charter, now they are a bank, as well. But it doesn't sound like you believe that they're looking to push into that side of the business.
Well, I'm not going to speak for SoFi, but I think that we have the scale and sophistication and the understanding of the whole envelope of activities, including the scope across so many different large partners, that there's real value to partners in our ecosystem to using our platform. And they're going to decide long-term whether they do that or not, but I think we can make that case, too. Just as we've added Current to our platform just recently, we see a lot of the opportunities out there. And more and more, we're seeing those partners that are at other institutions contacting us, or at least having a discussion about what the differences are and whether or not they would be better using our capabilities.
[Operator Instructions] Your next question comes from William Wallace with Raymond James.
So Damian, you mentioned restarting the multifamily lending business with I think you said $125 million just closed, another $125 million in the pipeline. Is this 20 -- no, we've closed or soon to close $25 million.
No. we've closed, or soon to close, $25 million, and then we have another $25 million that we should close within the next 60 to 90 days.
Is this meant to be a securitization business or a balance sheet business?
These are all the new deals. This is replacing the securitization business. So if you think on the spectrum between community banking all the way to the securitization activity, which was more conduit business, which was investment banking. This is really mainline commercial banking in one asset class, which is this floating rate, multifamily properties, which have very low loss rates. That's where most of our securitization loans were created, but it takes away the securitization element, but it's not really a community banking, local business, either. It's a national business.
Are the deals that you closed and the deals in the pipeline, are these coming out of that portfolio that's already on the balance sheet from the broken securitization, or are these all new?
These are all new loans, but it's with a part of that team that was retained after we shut that business down. So these are people that are experienced with this type of asset class with our broker and other direct contacts within the national framework of doing these loans.
So we were able to restart the business very quickly. We really initiated this in the beginning of May. And we rapidly got a very good pipeline going. So if you think about 18 months, that old portfolio is going to roll off. Remember, we have a 1% fee that will be realized at that time, maybe some exit fees, too. And then, we will put on this new portfolio of these floating rate loans at about 300% of capital. So as the company's capital base grows, we will hold that portfolio.
It's an extremely good asset class to have, but also very flexible. They're fast amortizing loans. And there are also other distribution channels and sale opportunities, so we can sell it to insurance companies or other types of people who may want to put these loans into conduits. So this is very flexible. So if we need to reduce because of the growth of other businesses, reduce that portfolio, it's very easy to do it.
And so you mentioned in your prepared remarks, I can't remember what you call it, the 5-year plan to get to 20% ROE.
It's a 4-year plan. It's called Vision 500, and it appears in our investor presentation that's just been released.
So this now-$1.7 billion portfolio of multifamily loans is yielding well above market rates, correct, due to the timing of when these loans were underwritten with floors?
Correct. Yes. They're approximately at 4.8%, but the portfolio is a little smaller than $1.7 billion, but you're in the ballpark. But they're 4.8% loans and they have floors, so they're very accretive. But we are originating in the low 4% now. There's not a big difference, about 60 basis points difference between where we're originating loans as replacements and where they were before. But we'll make up for that by holding the portfolio. I think we're at about 265% of capital, but we'll max out at 300% of capital. And we'll continue to originate loans.
So if we have excess origination, we'll sell those loans for a 1% fee, right, so we can originate more. So we'll be able to cover the interest income that's coming off those loans with both the transitional fees and then also excess loans if we need to originate excess loans in order to make up any difference between the roll-off.
So you will need this line of business then to hit that return on equity target then, presumably, just given you need yield, right? I mean you've kind of managed your business to a much lower risk asset generators, excluding now this product. Is that correct?
When we did the credit roadmap, which is part of Vision 500, so there's 3 elements you'll see in Vision 500. There's the ecosystem of payments, there's the credit roadmap, and then there's the strategy around return of capital and buybacks, right? So all those things are embedded in the main tenets of Vision 500. And through the credit roadmap process, which is an ongoing process, we looked at the balance sheet over the next 4 years and said what are the asset classes we're going to hold, and it's scenario planning exercise that looked at a payments-heavy business and then a commercial-heavy business to really understand how the balance sheet should grow.
And the good news was, whether it's commercial-heavy or payments-heavy, or somewhere in between, we're still able to maintain this very high returns on equity over a long period of time. I mean the real key to this, at the end of the day, is growing revenue faster than growing expenses, and we've been able to maintain this positive Jaws, or the difference between revenue expense, now sustainably for the last 4 years and believe that we can continue that into the future, and that will drive, obviously, income per share but also return on equity.
You did mention the buybacks, and it was good to see another over 400,000 bought back in the quarter. Is it safe to assume that, one, that those buybacks will continue, that you'll exhaust the existing buyback? But 2, I noticed that, even with those buybacks, the period-end share count went up. I believe that usually the first half of the year is when a lot of the stock grants, et cetera, are booked. So would we see more favorable impact to the share count in the back half of the year should the buyback continue at roughly that $10 million per quarter range that you had mentioned before?
I'm going to give that to Paul.
You're absolutely right, Wally, that the first half of the year represents more grants, divesting of more grants. There are typically fewer, but there will be some in the last half of the year. But over time, we're planning. We've announced the buyback. It's going to continue at $10 million a year. There's no reason to think that we wouldn't continue that or something similar in 2022. And so yes, over time, you should see a reduction.
Now, we're rigorous with the Board around buybacks, and we're at 40%. That was the target, or $40 million this year. The industry is between 40% and 50% of returning capital through dividends and buybacks, and we'll continue on a quarterly and yearly basis making sure that we're consistent with the market, but also choosing the right mix between buybacks and dividends, depending on where our stock price is.
And I mistakenly asked this question on the wrong call earlier this week, so I'm going to ask it on the right call this time. Earlier this week, there was some noise around the Senate Banking Chair sending a letter to the CFPB to investigate the Chime account closures. There's been a large amount of complaints, supposedly.
And I'm just curious to what extent you can comment on how account closure decisions are made. I think you mentioned it in one of your answers to one of Frank's questions about the policies and procedures that you guys have around rules and regulations and making sure that everybody is compliant. So any comment that you could make, and it doesn't have to be specific to Chime, but maybe just generically around how you might help a partner make decisions on account closures, et cetera.
So first of all, we take our regulatory responsibilities extremely seriously. And has been covered in the press, the U.S. government was defrauded on both the state and federal level, literally billions of dollars, and we were able to recover almost $1 billion for state and federal governments. And we're very proud of that. We follow the rules. I can't really comment on any specific case, but we are part of that decision-making process.
And obviously, because we have a platform that not overlooks at one program but across all our programs, we see things that maybe other institutions don't. And we are required to do certain activities in a certain way, report things when they are reportable. And we try to file the letter of the law, but also to do it in a practical way. It's not knee-jerk or anything. We go through a process to identify fraudulent accounts, and they can have effect across clients. So you can have activity in one partner, and you can have an account in another program, and we will see that that individual may be doing multiple activities across our ecosystem.
So I can't comment on that other than we're part of the process. We take it really, really seriously. We're required to do it by law, and we do it when it's necessary.
I'm showing no further question at this time. I would now like to turn the conference back to Damian Kozlowski.
Thank you, operator. Thank you, everyone, for joining us. I think we continue to see a lot of growth and profitability over the next few years, and we're going to continue working hard for everyone in our community. Thank you for joining us today.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect