Bancorp Inc
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Bancorp Inc
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[00:00:01] Good afternoon, ladies and gentlemen, and welcome to the quarter three 2020, the Bancorp Inc. earnings conference call. At this time, all participants are innocent, only mode later. Well, we'll come back a question and answer session and instructions. Will a follow up decline, if anyone should require assistance during the conference be spread by zero? As a reminder, this conference call is being recorded on a to turn the conference over to your host, Mr. Andres. First up, you may begin.
[00:00:31] Thank you, operator. Good morning and thank you for joining us today for the Bankcorp. Third quarter 2020 Financial Results Conference call. On the call with me today are Damien Kozlowski, chief executive officer, and Paul Frankel, our chief financial officer. This morning's call is being webcast on our website at EBITDA Bancorp dot com. There will be a replay of the call beginning at approximately 12:00 p.m. Eastern Time today. The Dylon for the replay is eight five eight five nine two zero five six with a confirmation code five six eight to nine three eight. Before I turn the call over to Damian, I would like to remind everyone that when using this conference call, the words beliefs 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 risk and uncertainties which could cause actual results, performance or achievements the different materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see the bankruptcy filings with the FCC. Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date here of the Bankcorp undertakes no obligation to publicly released the results of any revisions to forward looking statements which may be made to reflect events or circumstances after the date he wrote, or to reflect the occurrence of unanticipated events. And I would like to turn the call over to the Bankcorp chief executive officer Damian Kozlovsky. Damian.
[00:01:51] Thank you, Andre. Good morning, everyone. The Banquo and in 40 cents a share on revenue of 70 foreign expenses of 42 million, revenue climbed 28 percent, driven by a 33 percent year over year increase in net interest income and see growth of 19 percent after removing our third quarter 2019 securitization game. The fee growth was supported by 20 percent growth year over year on card fees because the funds was down seventy seven percent year over year. Illustrating the benefits of our payments funding model expenses were flat year over year and cost control and efficiency continue to be a main focus of management. Net income from continuing operations grew 13 percent. That's 2019 third quarter. Even without securitization gain revenue, loan deferrals for our total loan portfolio dropped to one point two percent from seven point five percent, driven by releasing business that saw a drop to one percent of the portfolio from 19 percent at the end of the second quarter. In the third quarter, we saw continued business momentum led by gross dollar volume GDP in our cars business of 39 percent. We also add assets led by 58 percent year over year growth in our securities, insurance and advisor financing lending platforms. Additionally, our commercial business has renewed momentum with SBA and leasing respectively, growing five and two percent quarter over quarter. In this quarter, we raised approximately ninety eight million net of fees and new senior secured debt at the holding company to support the continued growth of our company. This debt can be applied to the bank as equity to support regulatory ratios.
[00:03:23] We can we continue to add new card programs into our payments ecosystem in the third quarter, as well as adding several new direct rapid funds partners. These new relationships will be announced as products and services enter the marketplace. Our pipeline will continue to be very robust and significantly above historic norms, suggesting continued growth in transaction volumes in the third quarter, we made a strategic determination as to our securitization business. As discussed in previous calls, we have been evaluating our securitization platform and its loan portfolio after assets that occurred profitability, market conditions and credit risk, we have decided to discontinue future securitization activity. The loan portfolio comprised almost entirely of multifamily loans that have experienced few deferrals and delinquencies well and returns over the next three to five years and be replaced by loans originated in other areas. We expect income from the portfolio to be stable. Over the first two years, a portion of the portfolio may be sold as home loans. Aspasia needed our balance sheet for other lending activities. Our real estate team and our commercial SBA business will continue to originate slept transactions. Lastly, we now believe we have enough information to issue preliminary guidance for 2020 one. We expect to earn between 165 and 170 a share. 170 a share, or approximately 100 million in net income is currently our company budget for 2020 one. I now turn over the call to Paul Frankel, our CFO, to give you more color on the third quarter.
[00:04:52] Thank you, Damien. Return on assets and equity for the quarter were respectively one point five percent and 17 percent, which represent an increase from second quarter asset and equity returns of one point three percent and 16 percent. The increases were driven by a twelve point four dollars million increase in net interest income and a three point three dollars million increase in prepaid and debit card fee income was, Damián noted. We are retaining the commercial real estate loans we previously had been securitizing. Those loans will continue to be fair valued. The vast majority of that portfolio is comprised of multifamily loans, with cumulative covid losses estimated by a nationally recognized analytics firm at one point two percent. These loans generally are on our books at a ninety nine dollars price or lower and have a weighted average rate for four point eight percent. Please see the new tables in the press release for Kerry and other loans with a breakdown by loan type and other characteristics. Commercial real estate loans, which were originally originated for sale and which now will be held on the balance sheet total of one point six billion dollars and represent the largest loan portfolio with the aforementioned four point eight percent weighted average rate for the next largest portfolio is the combined one point five dollars billion is block by block and advisor financing portfolio, the yield for which is approximately two point five percent. We generated two hundred eight dollars million of PPP loans. Earning approximately five point five dollars million in fees, which is being recognized over 11 months beginning in April 2020, the actual recognition period may be less depending on the completion of applications for forgiveness and the timing of the SBA loan reimbursements, which have now commenced, including those short term PTP loans, small business loans substantially all SBA total eight hundred forty one million dollars.
[00:06:57] Excluding and excluding PBP loans have an estimated yield of four point nine percent. New vehicle production ramped up in the third quarter and we were able to increase leasing balances to four hundred thirty million dollars from four hundred twenty two million dollars at the prior quarter end leases have an estimated yield in the six percent range. The twelve point four million dollar increase in net interest income reflect an increase in increases in average quarterly CRE loans to one point six billion dollars, while related interest income increased seven point eight dollars million. Interest on SBA loans increased two point one million dollars, including approximately one point five dollars million of recognized PTP fees. Well, combined s block and I block loans increased fifty five percent over these periods, related interest income decreased one million dollars, reflecting the impact of seventy five basis points of Federal Reserve interest rate reductions in twenty nineteen, an additional historic reductions of one point five percent in Q1 2020 as loans are secured by marketable securities and I block are secured by the cash value of life insurance and credit losses have not been incurred. Interest expense was eight point three dollars million lower and the cost of funds was 18 basis points for the quarter.
[00:08:21] Reflecting the impact of the Federal Reserve interest rate reductions. The vast majority of our deposit interest expense is contractual and tied to market interest rates. The net interest margin in Q2 was three point three seven, down from three point five three in Q2 as securities with rates tied to LIBOR experienced a full quarter of lower LIBOR rate. Additionally, prepayments of higher yielding securities increased. The provision for credit losses was one point three million and resulted primarily from SBA loans because as Block and I block, 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 and its internal analysis. Accordingly, the adjusted ratio is one point four percent. Prepaid accounts are largest funding source are also the primary driver of non-interest income fees and related income on prepaid cards were up 20 percent to nineteen point four million in Q3, compared to sixteen point one million in the prior year quarter. Car payment and processing fees include rapid funds revenue and decreased eight hundred thirty thousand dollars to one point eight million, reflecting the exit of nonstrategic, high risk customers. Noninterest expense for Q3 2020 was forty two million, which was comparable to the same period in twenty nineteen, which also included a one point four dollars million settlement.
[00:09:58] Excluding that settlement, non-interest expense increased three point four percent compared to Q3 twenty nineteen book value per share increase to nine point seven one nine dollars and seventy one cents, compared to eight dollars and fifty two cents at September 30th two thousand nineteen, reflecting earnings per share in the increased value of the investment portfolio in the current rate environment, the Q3 2020 consolidated leverage ratio, which is based upon average quarterly assets, was approximately eight point six percent and risk based ratios approximated fourteen percent. In closing, there are certain characteristics of our loan portfolios, as shown in the new tables in the press release, which I would like to highlight, as previously mentioned, the vast majority of our one of our largest one point six billion dollars of commercial loans held for sale are multifamily loans, for which a nationally recognized analytics firm has estimated a cumulative loss of one point two percent in their Koed projections. These loans are already on our books at levels reflecting that discount. Our next largest one point five dollars billion loan portfolio consists of ESPE Block and I block loans which have not incurred losses. Notwithstanding the recent historic declines in equity markets. Approximately sixty five percent of the eight hundred thirty six million dollars small business loan portfolio, including PPP loans, is US government guaranteed. The majority of the other remaining loans consist of commercial mortgages, with 50 to 60 percent origination date loan to value for leases which experienced credit issues. We have recourse to the leased vehicles. While there is uncertainty, uncertainty related to the future, we believe these are positive characteristics of our loan portfolios, which demonstrate lower risk than other forms of lending. I will now turn the call back to Damian.
[00:11:57] Ok, thanks a lot, Paul. We're going to operate. We're going to open the line for questions.
[00:12:04] Ladies and gentlemen, if you have a question at this time, please press the star and then number one key on your touchtone telephone. If a question has been answered or you wish to remove yourself from the queue. Prize to. Thank you, ladies and gentlemen, if you have a question at this time, please press. And then a number one key on your touchtone telephone. Your first question comes from the line of Frank Schiraldi from Piper Sandler. You may ask your question.
[00:12:33] Thank you. Good morning, Frank. Just starting out with Damien. I wonder if you could put any sort of parameters around. You know, you gave your preliminary expectation for 2020 one EPS and any parameters around how you get there in terms of what the growth outlook is for things like the block business and GDB.
[00:12:58] Ok, so we put a new investor presentation on our site last night, so we updated all the prospective analysis and everything. So you may want to refer to that if you haven't seen it. And you know, we I think we've got what we do when we do budgeting is we look at a bunch of different scenarios and think through what are the likely cases on each business line and the under driving macroeconomic indicators like interest rates. And we you know, we run these scenarios and like I did when we maintained our guidance at the beginning of the year, we were fairly confident that we would get to that 125 number. And obviously now with 40 percent this quarter, that looks like likely at this point. So we do the same thing here. And, you know, we're looking for a continued robust growth on the South Block business and, you know, the mid teens and things like SBA and leasing and our GDP growth. Has it had a bump in July, but it settled into the thirty five percent or so range. And we expect that kind of growth to continue next year with, you know, 15 to 20 percent fee growth. So when you put that together with the fact that we were controlling expenses, it's very easy to come to that 170 figure considering we just printed 40 cents a share in the third quarter, which is usually our weaker quarter.
[00:14:38] Ok, and then, yeah, I did not see the investor presentation, so I'm just curious, do you guys provide or you know, I thought I know you've talked in the past about perhaps trying to provide some more detail around the makeup of the current growth and or the size of your largest relationships. I realize there's competitive reasons and partner reasons that you can't go too far into it. But is there any more detail on that or can you share any further color there?
[00:15:10] You know, it's the usual I'm going to say is because we don't want to disclose what our partners want to own. They want to own their information around the growth of their businesses and everything. We let them do that. But we're saying once again, it's a macro. We're seeing growth across the entire spectrum of use cases and payments, period. So, you know, the devices that we use, the payment devices and the different types of relationships, whether they're government gift card, corporate incentive, health care like FSA accounts and fintech debit cards are all growing. They're disproportionate in the fintech area, but they're not the only place that it's growing. That's why. And if you look at our competitors set and you understand the makeup of the types of programs we have, you see that we're growing disproportionately to the market by using something like the Nielsen ratings, which is the market standard for reporting these competitive data. And it's really being driven by the fact that there's this macro trend, but also because we've built what we think is the best in class compliance and DSA infrastructure that overlooks all the different use cases and payments. So people feel increasingly comfortable to come to the banker and know that they're going to have the platform that they need to do business and not have to worry about any regulatory concerns.
[00:16:40] Ok, I'm just a quick follow up on that front, would you be able to say or, you know, just given your point on how diverse the growth is and I know you've added a lot of new partners, can you say when I think about the largest partnerships you have, the largest relationships you have, are those becoming less concentrated in terms of total percentage pie of, you know, a total percentage of revenue pie or deposit pie or those are becoming less concentrated, those largest relationships or more concentrated.
[00:17:15] It just goes back and forth, depending on you know, we've had a lot of dislocations this year. So you've had things go up and down. So there I think over time it will actually become because we know we have we do have visibility on the programs we're adding over time. It will be we're very diversified now. So we're extremely diversified across the products and use cases now. But even if you look in the fintech area with the larger programs that we've added and some we've added recently, which we haven't announced, it's likely to become less concentrated even in that space.
[00:17:57] Ok, and then just lastly, on the direct rapid funds business, is anything baked into meaningful, baked into 2020 one, is that still more of, you know, along the horizon in terms of revenue growth?
[00:18:12] Well, that's we've definitely investigated and signed partners, that's also in the investor deck, so you'll see some new partners in that investor deck, but there is a page dedicated to that. So it's expanding. So, you know, there's a couple million in there when we look at fees, you know, to two and a half or so million. So in that sense, that's the direct and the indirect, which is the Venmo type of stuff. So we're still expecting them to grow that business. It could be much larger than that. But, you know, we're very conservative when we put estimates and for that product.
[00:18:53] Gotcha. OK, thank you.
[00:18:57] Your next question comes from the line of William Wallace from Raymond James. Your line is open.
[00:19:03] Thanks. Morning, David. Maybe staying with rapid sons is should we think about a new customers in that, just like we would any other program where there's a ramp, period, etc.? Or is the Ravitch fund products really more of a kind of instantaneous boost to revenue as the as the customers are turned on to the product?
[00:19:31] Ok, so you're going to hate this answer? I suppose so. That's why in the past it was more of a ramp. We're looking at several large partnerships now that would be more instantaneous, resulting in significant fees immediately.
[00:19:46] So the there's kind of two direct types of partnerships. One are more corporate, some more are our system wide, either attack or a network platform. So we have both those discussions, although we haven't announced yet. But they're both there could be substantial revenue immediately. And then there's ones that are more corporate focused that are have a little bit higher of a longer view. Rampton.
[00:20:19] Ok, OK, fair enough. And then on the on the loan portfolio, you're obviously experiencing very significant growth in the last block line of business and you had mentioned that remaining robust and in mid teens, I believe you said in SBA at least thinking they would get the run off of the securitized multifamily portfolio. Can you talk a little bit about maybe we'll see kind of three years down the road when the multifamily loans are mostly gone? What's the mix of your loan portfolio that you would target? And then what are the margin implications in a zero interest rate environment?
[00:21:03] Well, the loan portfolio, first of all, with the securitization will be very it should be very stable. We still have future funding to do in the portfolio. So you're going to get consistent income for at least two years, if not more. They could potentially turn into longer term fixed rate loans. So what happens is those loans will seek permanent financing after a stabilization program. So we may continue to hold a set of those loans into the future. So we have we're developing a credit roadmap around what we're going to be invested in three years from now to that very question. We're going to be expanding to sets one our house block by block, our adviser loans, all those we're building out the product set on the institutional business. We're also establishing a much broader commercial business where we do business in SBA and leasing. So there's a lot of opportunities there. So we don't remember in three years, we don't want to balloon the balance sheet probably beyond an eight and they eight and a half percent level. And we have some, I think, very good ideas of when those loans do roll off, how to put that capital to work and increasing other parts of the business. But it'll be more it'll be in Aslak. It'll be an institutional it also be in our commercial businesses. And remember, as are we probably will continue to hold in some form, you know, 200 to 300 percent of some type of real estate going into the future, whether they're fixed rate loans or other type of exposure within our commercial business. So, you know, we haven't decided what that's going to be, but we feel very confident that will be able to replace those loans as they roll off with good lending opportunities.
[00:23:10] In my am I hearing that you could be replacing them with another business line, is that is that reading? We haven't. We haven't.
[00:23:19] We're expanding our product. We haven't finalized what we're going to do. And we're creating a three year credit roadmap and we are very rigorous about it. So, you know, there's a bunch of products that we're going to create that are, you know, in the market today that we're going to participate in as extensions that our current platforms. So we're kind of devising of how that's all going to dovetail if we need the space sooner because of the lending initiatives that we're creating, we can always sell a portion of the multifamily loans in the marketplace. Those are extremely you know, they're not hard to sell even in this environment. We've had people who would want to buy substantial parts of our multifamily portfolio at par. So we're not worried about replacing that lending revenue. And it's something that the multiple years down the road. So we still have two billion dollars of room and we still have a billion, five of securities and stuff. So we've got plenty of room to expand our current platforms into the next three years. And then as they as those loans roll off on the serious side will decide at that time whether or not there is you know, we should keep that type of exposure and turn it into a fixed rate, longer term exposure, or we need that room in order to build the other businesses.
[00:24:47] Ok, and so it just sort of stepping back to the east block, I mean that that the growth in the block loan portfolio is twice or more any other line item. So is there a limit as to what portion or mix of the loan portfolio you would you would have with the with the block or would you just let that go? However, it's going to go and be fine. Well, to the extremely healthy person so that we think of that as a platform.
[00:25:14] So we're not only we're raising in a very difficult time, I black is a three percent loan overfunding as blacks more like two and a half. And then our financing can be six or seven percent over funding. So, you know, we're slowly lose. We're slowly raising the total effective yield on the institutional business and the new lending businesses that we do, our products and services we sell like banking as a service to other companies who one of the last block capability will raise the effective yield on that platform over time, over the next three years. So the we you know, like we could easily double the size of the business to three billion over the next couple of years and have enough room. That's what I mean. We would want to put that on. And the reason is, even though it would lower our effective, you know, margin on our lending portfolio, we are growing fees very aggressively across the entire business. So it's very profitable at zero risk, basically, and for the black business. So if you can get, you know, an effective yield of above 250 and 300 block and raise that over time to say three percent on a whole portfolio over funding cost, you know, you would double the size of that business without even thinking about it because it just doesn't have a lot of credit risk. And you might not do that if you were a different business and you were branch funded. But because our payments business is driving such large fee growth, the overall enterprise is obviously going to return it, continue to increase its return on equity during that time. So, you know, we just don't think of it as one business and we have a unique business model so we can actually engage in a larger business in a non risky lending line and still have, you know, increases in margins over the entire enterprise, even though we might lose some ENIM. OK.
[00:27:14] All right, thanks. And my last question is just thinking about the expense base and growth. I know you've got your Jaws targets there and there's a lot going on in the business. So help me help us think about kind of a reasonable growth expectation and the expense line as you as you. You know, unlike some of the leverage in the business, but make decisions to reinvest, to buy from discount.
[00:27:39] This is going to be easy. One we're looking at between 300 and five and three percent of revenue right now for next year. And we're going to have 100 million of net income. So, as you know, we're very rigorous about delivering what we say. So, you know, it depends. And we have variable costs involved in compensation and stuff. So, you know, if we do a little bit better next year and say we have 300 and 15 or 20, some of that will go into net income. Some probably will go into reinvestment in the business, around building the platforms that we want to build. And if we don't meet that revenue number, you know, we were more like 300, we will make sure that we are very rigorous about meeting our earnings per share target. So as much as you can, obviously, we don't we don't control everything, but we we're very rigorous about matching revenue and expense and keeping that draws relationship constant. And luckily, we have sizable amounts of compensation and discretion here that we can we can make sure that we can manage the entire cost base depending on what the revenue environment is.
[00:28:58] Ok, thanks. Thank you, Jamie, and I'll step out, let somebody else ask the question. Appreciate it.
[00:29:05] The next question comes from the line of Brad Ness from Carl Pepeto, it'll give me ask you a question.
[00:29:12] Hello, guys. Thanks for the question. So how do buyback fit into the equation as I look out into the next 12 months or so?
[00:29:22] Ok, so in previous earnings calls, I said that during the current situation that we weren't contemplating at that time, the last couple of quarters saying that, you know, because of the dislocation and we want a very good visibility on what was happening in the overall economy, we would not we would wait to do that. We don't with the raising of one hundred million of capital at the holding company and holding 113 million in cash. And with our performance on deferrals and across the credit spectrum on our portfolio, we no longer have that reservation about doing something on the return of capital to shareholders. That's the only comment.
[00:30:10] Ok. Regarding you getting out of the multifamily securitization, what did that have any one time costs associated with it? That was in the third quarter and yeah, just start with that.
[00:30:27] Ok, so we did take marks on some of those hoteling. It's a small fraction of the portfolio, but there were some fair value marks that were taken in the first quarter. The total and I'll turn it over to Paul on this too. But, you know, there is not a significant amount to get out that we don't have an offset for. There is a cost savings, though, where we've trimmed the team down to, you know, about 30 percent of what it was to manage the book. And we no longer have, obviously, the cost to the people, but also the cost of origination because we were paying based on origination and then securitization of the assets and the gain. So there will be a cost impact, around 10 million dollars, probably over a full year in 2021. So you have to think about a run rate. We didn't have all those costs in 2000 in 20, but we did in 2019. Would you like to add anything, Paul?
[00:31:39] Only that you won't see a material charge in this quarter or the next related to the discontinuance of that business. And as Damien noted, there will be some cost reductions in 2020 one.
[00:32:00] Ok, great. Last question here. It seems like you guys have lost momentum on the card side and the gross dollar volume side is fine, like it should be up in the 10 to 20 percent range. But it looks like you're kind of flattish for the quarter versus the second quarter. You just put any color on that.
[00:32:21] Yes. So there was a big reason it's flattish is because of the whole stimulus. There was a huge wave that came in through the stimulus to us. And if you saw our deposit substantially gapped up and we you know, it's hard to understand exactly what's going on, but it happened over multiple programs. And you saw another that that when we closed the economy and everything went virtual, we saw this big bump due to the stimulus, but also unemployment. And then we saw another even increased bump in July. And that was due, it looked like, to the economy opening up again, the tax, the fact that taxes were delayed and the end of the stimulus funds that were in our major programs that had settled down again. And so you you're comparing two quarters where there was this huge governmental and very extraordinary situation to this quarter. And the third quarter is usually our weakest quarter. And the reason is, is because that's prior. We have two strong quarters. We have the fourth quarter, which is really driven by gift cards and stuff in some health care and corporate incentive. And then you have the first quarter, which is driven by tax season. So, you know, third quarter is usually like quarter over quarter, second to third quarter this year. It wasn't as light because you had to bump the double bump. And so the like comparison is a little difficult to make. But what we're seeing now is continued year over year growth in the mid 30s. If we do get another stimulus, the same thing will happen with our client. Accounts are really where stimulus payments go. So you'll see another bump like that. So it'll be hard to really decipher, but it will be over our current growth rate, which is in the 30s already. So it would be, you know, a significant impact. We're assuming, though, that, you know, that's not built into any of our forecasts at this point. We just don't know what's going to happen. But we're saying we can look at the base programs that everything in our pipeline there is sustainable, you know, 20 to 30 percent GDP growth at the minimum in that portfolio going into the next, we think a couple of years. We think it's going to be high growth for a while.
[00:34:47] Great, thanks, guys. I'll let someone else ask the question.
[00:34:52] I am showing no further questions at this time, I would like to turn the conference back to see our in those key, sir.
[00:35:01] Ok, thank you, everyone. Have a great day and thanks for joining the call today and I'll talk to you soon. Thank you, operator.
[00:35:09] You're welcome. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.