Q3 2019 Earnings Call
And welcome to the third quarter 2019, the Bancorp incorporated earnings Conference call.
At this time, all participants are no listen only mode.
Speaker presentation, there will be a question and answer session.
A question during this session you'll need to press star one of your telephone. Please be advised that today's conference is being recorded if you require any further systems. Please press star zero I would now like to hand, the call for or what's your speaker today Andres Viroslav. Please go ahead Sir.
Thank you Sonia good morning, and thank you for joining us today for the Bancorp's third quarter 2019 financial results Conference call.
With me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This morning's call is being webcast on our website at www dot the bancorp dot com there'll be a replay of the called beginning at approximately 12 PM Eastern time today the dial in for the replay is 855859 choose euro five six with a confirmation code for four six.
8437, 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 statement within the meaning of the private Securities Litigation Reform Act that much 95.
Such statements are subject to risk and uncertainties, which could cause actual results performance or achievements to differ materially from those anticipated or suggested by such statements.
The discussion are these risks and uncertainties. Please see the bank, which probably isn't yet you see.
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 released the results of any revisions to forward looking statements, which maybe made to reflect events or circumstances. After the date hereof or to reflect <unk> current and anticipated events now I'd like to turn the call over to the Bancorp's Chief Executive Officer, Damian Kozlowski EMEA.
Thank you Andrea good morning, everyone. This quarter, our positive business momentum accelerated with across the board increases in bulk spread and fee income driven significantly.
By significantly higher total loan balances from our lending lines and continued acceleration in the year over year gross dollar volume of payment transactions. In addition, our CRM floating rate securitization produced a substantial gain.
Excluding a 1.4 million dollar charged to settle FCC litigation concerning a bank restatement in 2014. The bank were earned 38 cents a share on revenue of 71 million expenses, a 41 million reported Pershare earnings of 36 cents grew 53% over 2018 third quarter, excluding a onetime gain on the.
Sale of our Safe Harbor IRA business in 2018 total revenue climbed by over 25%, excluding the sale well expenses were up approximately 9% year over year, excluding the FCC settlement net interest income after the provision improved to 37 million from 30 million year over year, an increase of 25% genuinely.
Average ratio amounted to 9.36% at quarter end or are we hear today stands just under 15%.
We see continued significant strengthen our payments business with 38% GDV growth in or prepaid debit card transactions and 22% related fee growth year over year, our AC age and indirect pushed card revenues also continue to build with 14% fee growth year over year.
We continue to expect GDV growth in our payments business during the balance of this year trends do indicate that there will be an extended period of GDP momentum and growth in 2020 should exceed historic levels a fee growth.
Net interest income grew at 23% with contributions from each business line quarter over quarter loan balances grew across the board with annualized rate of 533, and 40% respectively for leasing SP and that's block we expect growth to continue in accelerator rate for the balance of 2019, which should continue into 2020.
We currently have a broad based initiatives to continue building our loan portfolios and the current growth is a direct result of new products enhanced technology and large investments in sales and marketing resources.
Our securitization business continues to build on the momentum from the first and second quarters as previously announced we had targeted doubling the size of our Securitizations in 2019 from the 300 million dollar range. In 2018. This strategy has significantly increased our spread revenue while eliminate related long term real estate credit exposure the third quarter securitization result.
In an approximate $14 million gain on a securitized floating rate CRB portfolio of 778 million.
This gain was driven by the sale of the interest only portion of loan pool to an investor. We have previously held this portion of the pool and other securitizations and its valuation goes into the gain computation. This sale also will mitigate any loan prepayment risk associated with holding the security on our balance sheet.
We also believe that we're developing broad capabilities and expertise to address.
What's your growth of the Fintech digital and gig economy financial market and expect to be well positioned for sustained growth. This growth has the evident has been evident in 2019, and we believe long term growth is supported by the many innovations in the banking sector, a new investor presentation will appear on our site in the next few weeks that will detail the opportunity.
That should sustain and improve the bank cores long term performance.
Lastly management has developed a new four year phase two business plan focused on innovation as in the process of developing a detailed 2020 budget.
And that budget, we're now targeting a minimum of $1.25 a share of earnings for 2020 would we believe that this performance is consistent with the productivity and operating improvements made in the last three years and the bank cores current business momentum.
I'd now turn the call over to Paul Frankel, our CFO , who will detail more about the third quarter.
Thank you Damian net income increased $8.4 million or 63%, excluding the 1.4 million dollar FCC settlement in 2019 and $48 million net of tax gain on IRA sale in 2018.
The increase reflected $7 million of higher net interest income, reflecting continuing growth in bancorp's lending lines, including CRT loans originated for securitization.
Average CRT loans increased approximately 459 million were 147% to $771 million.
Okay, and other lending lines reflected respective 18, and 22% increases over prior year balances for combined to ask lock and I block and press V.A. loans.
$7 million were 23% in net interest income to 38 million.
Reflected increase in interest income on CRB loans for securitization of 6.4 million to 11.1 million.
Interest on EPS blocks, and I blocks increased $1.7 million to 9.4 million and interest on SPJ loans increased $1.8 million to 7.8 million.
As a result of the September 2019 securitization gain of approximately $14 million was recognized compared to a gain of $9 million in Q3 2018, while market spreads declined the higher 2019 gain resulted from larger securitization told totaling 778.
$1 compared to 341 million in Q3 2018.
We anticipate that fourth quarter 2019 will show a decrease in CRT interest income as balances peak in the quarter. They are securitized.
Each of the past three years, there have been two securitizations per year, and any gain or loss is subject to market conditions.
In addition to loan growth the increase in net interest income reflected the positive impact of the federal reserve rate increases in 2018, partially offset by the July 2019, FRB decrease which impacted the majority of the quarter.
Proxy yields on the loan portfolios were 4.1% for asked block 5.7 for SPJ and 6.5 for leasing.
Well the yields on CRB loans originated for securitization has recently approximated 6% that yield varies with market spreads and timing of Securitizations.
Lines of business have historically had low charge offs.
Overall cost of funds was comparable to Q2 and increased 13 basis points over Q3, 2018 to 96 basis points.
13 basis point increase reflected the net impact of the federal reserve.
Reserves rate changes, which also contributed to the 28 basis point increase in asset yields. It also reflected the Q3 2019 use of more costly short term time deposits and borrowings.
To fund increased originations of the higher yielding commercial loans, which were securitized at the end of the corridor.
The 13 basis point year over year improvement in NIM to 3.35% resulted primarily from those higher asset yields compared to the lesser increase in the cost of funds lesser increasing cost of funds, primarily reflected prepaid card deposits, which contractually adjust only a portion of increases in March.
And interest rates.
The 3.35% NIM for the third quarter was down slightly from the 3.41% for second quarter 2019, reflecting the aforementioned higher rate short term time deposits and overnight borrowings. It also reflected the impact of deposit rates, which decreased less than loan rates due to the aforementioned state.
Fed rate decreases during the quarter.
Those factors were partially offset by larger securitization originations with relatively higher rates.
Prepaid accounts, our largest funding source are also the primary driver of non interest income these and related income on prepaid cards were $16.1 million in Q3, 2019 compared to 13.2 million in Q3 2018, 22% increase.
Card payment in a CH processing fees, including rapid funds revenue.
Card payment and Hgh processing fees include rapid funds revenue and increased 14% to $2.5 million non interest expense for third quarter 2019, excluding the non deductible $1.4 million FCC settlement was $40.7 million.
That's slightly above the 40 million dollar quarterly target discussed in prior calls.
Salary expense was $5.3 million higher during the quarter and reflected higher commercial loan securitization incentive as flock information technology and other incentive compensation expense compared to Q3 2018.
That increase was partially offset by $1.1 million onetime credit in FDIC insurance and reductions in software legal and data processing expenses.
Book value per share increased to 8052 cents compared to $8 in seven cents at June Thirtyth 2019, primarily reflecting the 36 cents of earnings per share and the increase value of into investment securities, resulting from lower long term market interest rates. The Q3 2000.
19, consolidated leverage ratio, which is based upon average quarterly assets was approximately 9.3%.
Compared to approximately 10% at the at the core to prior quarter end the reduction reflected higher average assets, resulting from loans originated for securitization.
Our more than well capitalized position provides a solid base to conduct our operations and take advantage of opportunities in our lending and payment space.
On October 22nd 2019, certain LCH transactions return from another financial institution, resulting in a receivable in the amount of 11.2 million on the books of the Bancorp.
Which amount is net of 5.5 million in funds on deposit, which the bank believes it can offset against the receivable.
The returns resulted from the failure by an AC age customer to properly funded disbursements bank is working with the relevant parties to resolve the issue as soon as possible.
Any amounts not recovered from those responsible parties, where reimbursed by the banks insurance carriers will result in a loss to the bank.
That concludes my comments and I will return the call back to Damian for questions. Thank you Paul Operator would you. Please open the line to four questions. Please.
As a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound key please standby walby compiled the kiani roster.
And our first question comes from William Wallace of Raymond James Your line is now open.
Thanks, Good morning, guys.
Morning.
Hi, maybe let's just start with where you guys ended on that on this AC age issue that you disclosed.
Can you just I.
I thought in Hgh transfer was a direct wire transfer out of cash out if someone's accounts I'm just curious how.
How there could be transferred funds, where there was no cash and if theres.
And if you guys feel.
Sure that this isn't something that could happen again within without declines.
I can say that the type of payments involved BREP represent a minor part of our revenues and our unrelated to the card business, which comprises the vast majority of our business. We hope to situation will be resolved, but wanted to communicated as an abundance of caution. That's all we can really say for the moment.
So can you I mean, theres you can't walk through kind of the mechanics of how how a transfer to the car without cash to support the the transfer.
But this is an area of growth focused for your bank right. I mean, I thought that you guys were spending a lot of time chat.
And it's not as I said at very minor part of it rather than is this is a very minor part of our of this part of our business.
This is the situation we can't go into detail about.
As we've already said.
Generally a stage transactions are prefunded.
And there are matched so there was an issue at another financial institution and we can't go into it. This is obviously this earnings release was produced prior to this occurrence on October 26 and.
We just can't speak to it for various reasons, which we can't disclose.
Okay.
Okay, all right well I'll move on them.
So.
The guidance you guys you guys put out a EPS target thats. The first time I can recall that ever occurring for for the Bancorp I think it's great that you're putting a target out there I'm wondering if you could.
Help us.
Kind of walk through some of the mechanics of how you anticipate.
That you will achieve that target as this is this going to be driven by continued growth on the fee income businesses are you seeing more momentum in the loan businesses just kind of help maybe talk through some of the mechanics of how you think you achieve that target.
Yes. So the first remember we talked a lot about our phase one business plan, which was about getting the bank operating at the level.
That we wanted to be fishermen and generate about a 15% return on equity we believe were there.
And also focused on remediation of or regulatory issues, which we think we're very close to being out of so we have sat down the Sharon and spent six months working on the next phase in our business plan.
And.
Where we were a little delayed on the ROI, we number because we had the sales the safe Harbor, where we lost fees, but also deposits. So we're about at that now in the third quarter of 2019. So.
After a lot of both bottoms up in top down looking at what the what the business should perform over the next four years, we're very comfortable with our current business business momentum that the revenue will continue to be driven by growth in balances. So.
SP A.S. block and leasing balances.
And also with above trend, especially for 2020.
Fee growth.
So I think we'll be able to give some guidance on where we expect to be on.
Balances as we finalize our 2020 budget, but it becomes clear to us that looking at a at that business plan that for your business plan that will be able to get to a minimum of $1.25. We cited as a minimum we'd really like to get the 15% plus our away and so.
That was where we really like to be next year. So if you simply times, 15% times, our capital base it looks more like in the one thirtys.
So thats, where we'd really like to be.
In 2020, and I think the momentum of the business and what we've been looking at through our modeling an understanding of new products and services the enhancement of technology and both SPJ. That's lay a platform Ines block, but also reengineering leasing that we'll have the scale in order to support balanced growth, but then also with the.
Estimate and our technology and operations platform for the primary the payments business the card business.
And the expansion of Fintech debit cards throughout the industry, where we have.
Very large portfolio of transactions, we think it will support that type of revenue with minimization of expense growth.
Okay.
A lot there. So there's there's two maybe curious I wanted to question you said in your prepared remarks and you just you just tend to that again about.
Momentum on the prepaid business, giving you confidence that the growth and GDV and revenues should be I think you said above trend or above industry.
In 2020 can you can you.
Got a little deeper there, what's giving you confidence.
In this well there's a shift.
Yes, well the shift is happening.
Throughout the industry, so theres clearly a shift too.
Alternative banking providers.
And where our sponsor of those so you're seeing a change in buying behavior with new Fintech companies, where people are selecting them as their primary banking relationship of which were enabling so youve back growth that you are saying and GDV growth and within this is something has been talked about the industry for years, but it seems to be that theres a mark.
An inflection point.
Between consumer buying behavior, that's supporting that GDV growth at least we're seeing it in our portfolio. So thats. What we think supports the continued above trend GDV growth and our cards business.
Okay. So if I look at the first three quarters of 2019 year over year, the GDV growth is averaging 30%.
And the to the revenue growth is averaging 16% I mean are we talking about a continuation of those levels or an acceleration of those levels.
We think it'll be a continuation of those levels somewhere in that range. So we're still slight believe it or not we're seeing slight acceleration in GDV.
In the fourth quarter so.
That doesn't always translate one to one to fee growth.
So at the caution you there, but generally it's a good track so we're seeing that continued.
You know market trend.
That's that's that's been.
Basically started.
In the end of last year, but carry very strongly throughout this entire and the growth has been accelerating quarter to quarter. So that that is what spacing our understanding so even over if you look year over year as the fees have grown youre going to get some just from the year over year impact and then from the continued.
Acceleration that we're saying.
Okay, and then with some continued expectation that we'll see.
Some pressure on the.
Margins, just due to competitive pressures.
Well.
Not really that really I wouldn't say competitive pressure in the short term.
Some of the.
Programs that we have our layer so depending on the volumes that you process.
I have lower.
Fees as volumes go up so competitive pressures don't really there longer term impact because in the short term we have long term contracts. So it really.
If market pricing goes down tomorrow, we wouldn't feel it for one to four years in some cases so.
We don't have.
We don't have competitive pressures that directly affect our long term and 20 of our programs represent about 95% of our volume and all those are.
Our print predominantly in one or to for your contracts.
Okay.
Okay, Alright, great well that's.
That's great to see I guess.
And then just.
Question on the on the asset side I did notice the pretty big jump in the block line. This quarter on have you been onboarding new clients with the to layer product or is this growth from from the existing base.
No it's coming from both where we're in the process of finally.
Switching over to all to layer. So we have to integrate with the platforms that deliver the EPS block anti block product, so thats ongoing but there is definitely.
A significant increase.
Due to the technology enablement.
Hi block also has been growing so.
We want to increase our products and services overtime, but but ultimately we want to make it easier for people to get the money. So thats really what the push as we set a $1 billion as our target for the end of this year were feel it will be very close or over that and we think we can get significant amount of growth for 2020.
In that envelope of activities and will hopefully be able to give more clarity as we approach.
2020, we finalized our budget.
Okay, Thanks, and I'm, sorry, so two more questions and I've asked a lot, but theres only a couple of US left falling you. So if you will if you'll bear with me out to two last questions.
You put on 475 million in time deposits this quarter.
Yes.
Can you.
Expand on that was was that just though because of the higher securitization are.
Securities loans that we generated for securitization averaged.
Over 700 million died of $771 million. So so we short term funded those.
With those overnight borrowings in short term Cds.
Okay. So are those gone already.
They will be gone, but from time to time, we may use them again, we use borrowings and short term Cds to manage our liquidity okay.
Gotcha fair enough.
And.
The last question I had is.
If you could.
Give us an update on the consent order Jamie you said you feel like you're getting close can you just let us know what is left I assume you've put together your business plan presented it.
What's your expectation.
So we're we're going to go into a full review in the beginning of 2020.
We've made I think.
Tremendous progress from where we were in 2017, we really set out to build a real center of excellence for this capability. We have been closely working with our regulators to meet the expectation that get out of the consent order to really but really build a new model.
The problem is we're in the snack of this industry, where it's it's unusual it's not fully understood across the industry of of our role as a sponsor bank and so we've really worked.
And because more banks are wanting to become sponsor backed so we've really try to build a a new paradigm and how you.
Do this type of business, we're very close we identified a short list of items that we wanted to.
They are regular is one of the get clarity on and I think were pretty much there for the next review. So hopefully we can always guarantee what our regulator our partners will do but we feel confident that we have a capability that is safe and sound and.
Meets the requirements.
Okay. So that the next full review as early Twentys have you said.
Early 2000.
Great and we're hoping you guys time that that we were we have a meeting of the mines.
Okay, Alright fingers crossed our step out of to ask a lot of questions. Thanks. Thank you well.
Thank you as our next question comes from French royalty of Sandler O'neill. Your line is now open.
Good morning.
Frank.
Hi.
There's only a couple left.
Wanted to ask about.
The growth next year, the the preliminary guide of get into at least 125.
I know you guys have talked in the past about your direct push to card initiative.
I wonder how much.
Growth you anticipate how much you anticipate that to be a.
To impact.
Growth year over year that part.
Well the latest away say this isn't a minimum we wouldn't need any of those revenues. So we're not considering those revenues when the minimum we're discussing the minimum we think we could do that and a 15% our away.
With the balance growth and the payment side growth.
We are hoping we're hoping that to be a nice to have.
And and and push further growth, but we think we can get to the minimum without a significant growth in that area.
Okay. So I mean, I know, it's a big initiative for you guys. So in terms of you talked about 120.
125, maybe getting into the trying to get into the one thirtys.
It is the push to card is that initiative really just going to bear a lot more fruit and you're in your mind in 2021 is just a longer lag time.
Once again, where.
Where this is.
It could be a potentially very large initiative.
And there is a lot of interest in this area.
We are prepared where we're working down the avenue of doing it the right way and taking advantage of the opportunity.
But.
It it we don't know yet, we still don't know whether or not that it will be.
A substantial.
Revenue.
To make a difference in our overall enterprise.
Earnings. So we can do really good next year and generate.
345, not saying, we will millions, but it really won't make a lot of difference to our bottom line. So we're going to build it out the right way, we just don't know yet what that what that is but generally when we when we've done our own planning around this phase two business plan. Once again, we haven't finalized our 2020 budget, we became very careful that.
Very confident let's put that way that that 125 was attainable under current.
Our current momentum of our business and our product sets that we have.
Okay, and and then back to the really strong GDV growth. That's that's anticipated to continue here.
Is that mostly.
Current programs that continue to ramp up or are there big partnerships, so or new programs coming on board.
Yes, both so work we're getting we have an amazing pipeline of around 70 programs I would like to join our platform.
And there are significant new.
Flattened.
Partners that will be joining us over the next three months. So it's a combination we're seeing very good growth I think the last time I looked at three months.
Excuse me three months three days ago was we're seeing growth in almost every program of our top 20 programs quarter over quarter in year over year. So it's it's a very broad based it's focused mostly.
The higher growth rates are on debit programs, because that's why we're making that market statement about the conversion between traditional a non traditional banks.
And we have significant programs that are joining us over the next three months. So thats why we become very confident that we have sustained GDV growth and we believe it or not in the fourth quarter we've seen.
Preliminary numbers and I'll stress that preliminary numbers have increased.
Once again, the GDV is increasing so we have that we have all those three areas.
To support our continued.
Payments growth into 2020.
Okay, and then I think you used the term alternative banking I mean, I, just challenger banking or whatever the challenger banks, I mean, what sort of percentage.
If you can give.
Of your GDV either growth or current GDV is these challenger banks and.
Where do you think that moves to over the next 12 months.
There are higher growth only thing, where we haven't really.
And we've thought about that because people are very interested in that obviously, so they're higher growing.
But theyre not alone so there's a there's a clear move towards the the challenger side.
That you say, but there is an adoption across a broad spectrum of program types.
Of this enabled technology that we provide so if you're getting higher growth I can't give you a percentage, we haven't decided whether or not we would publish that.
There's some reasons that we have been asked not to buy our clients. They what they want people backing out. Thanks. So that's where we are in that so youre getting higher growth. We can't disclose at this time, how much is X versus y and Z, but youre getting higher growth definitely from those programs and you're getting from their usual.
Ramps.
Right I mean can you say at this point roughly.
A broad range.
What percentage that makes up forget about the growth just what percentage those challenger banks make up in terms of GDV versus the entire pie.
We will put that under advisement for future disclosure, that's not we would love to put a page and have all the programs in their growth and all that stuff, but you know our clients have confidentiality and sometimes they don't want certain things distributed and.
No and not necessarily helpful. Because they can be volatile so we'll put that under advisement.
Okay, and then I guess, just finally I'll ask about the.
The continued book.
Obviously, we're rolling down one major.
Our larger sized loan you continue to have in there seems to be that that mall in Florida, and there's been some price out there that that seems to be moving along just wondering if you anticipate any movement.
In that off the books over the next few months.
We would like it to move so what you're probably referring to is the ground lease was purchased that was one of the major reasons why our previous deal fell through were hopeful.
That there are two parties very interested and now converting.
Or purchasing the mall. So we're hopeful we're hoping that it will.
Luckily the mall as income producing so we have taken income over the last two years.
When weve.
Lastly, when the operating results suggest we should so we have.
We're not losing money at the mall right now we would like to dispose of it at par.
And.
Both parties that are looking at doing a transaction.
Our looking at that rate. So that's all I can say, we don't have assigned deal on the table right. The second but we're hoping we're working.
Constructively.
The disposal the mall.
Right.
When you said par I mean, youre talking about where that where it's been Marcelo right at the marketing fit Mark Mark.
Yes, not apart from but where it's been marked down to what kind of quarter by appraisal. Okay. Great. Thank you.
Thank you.
Ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Damian Kozlowski for any closing remarks.
Yes. Thank you operator I appreciate your attendance and we'll talk again in the fourth quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.