Q4 2019 Earnings Call
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I would now like to hand, the conference over to your speaker today Mr. Andres Viroslav, Sir you may begin.
Thank you Crystal good morning, and thank you for joining us today for the Bancorp's fourth quarter and full year 2019 financial results conference call on the 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 coal beginning at approximately 12 PM eastern time today.
The dial in for the replay is 8558 Fivenine to 056 with a confirmation code of 7.97 to three eight before I turn the call over to Dave you know 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 that much.
95, such statements are subject to risks and uncertainties, which could cause actual results performance word shipments to differ materially from those anticipated or suggested by such statements for further discussion of these risks and uncertainties. Please see the bankruptcy filing for the FCC.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof Bancorp undertakes no obligation to publicly released result in 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 that would like to turn the call over to the Bancorp's Chief Executive Officer Damian.
Blocky Damian.
Your Andres good morning, everyone in the fourth quarter. We ended the strong 2019 with continued strength in our payments GDB gross dollar volume growth and increases in our loan originations. We also continue to resolve issues with our regulators.
Decreased our discontinued Walnut Street portfolios and position ourselves for continued net income growth and 2020.
Excluding a $7 million charge from an FDIC CMP civil monetary penalty for B S. A bank secrecy Act.
Related activities. The bankcard 18 cents a share from continue operations on revenue of 56 million expenses, a 40 million compensation expenses and allowances for loans were slightly elevated in the fourth quarter, mostly due to accelerated lending growth that will provide for future increases and profitability.
The adjusted earnings per share of 18 cents grew 64% over 2018 fourth quarter total revenue climbed by over 17% while expenses were up approximately 7% year over year, excluding the civil monetary penalty.
Sure one leverage ratio improved to 9.7% from 9.4 quarter over quarter continue operations, our away year to date adjusted for the CMP, which also included a charge in the third quarter related to the FCC stands at 13.5%.
For 2018, 19, EPS adjusted for the non tax deductible cm piece was dollar five compared to 72 cents for 2018, which excludes the gain on the sale of a safe Harbor IRA business in 2018.
For 2019 revenue grew 70% over 2018, excluding the gain on sale from the Safe Harbor business, while expenses increased 6%, excluding the C. M. P's pre tax income excluding the gain on the IRA sales increased by 49% to 81 million.
GDV growth for the year was 34% driven by the innovation in the Fintech market. We expect continued GDV growth and our payments business in 2020 trends you indicate that there will be an extended period of GDB momentum and growth should continue to exceed historic levels of fee growth.
Our year end loans and leases expanded in 2019 by 22% over 2018.
This growth was led by 30% growth in our as block I black portfolio for which.
We exceeded our 1 billion target through our enhanced to lay a platform.
Our other lending businesses also expanded with 22 per cent growth and SBK and 10% growth and leasing balances our pipelines in each of these lending lines continue to be Boston, We expect continued growth in 2020.
2018, we also simply reduce or discontinue than Walnut Street portfolios discontinued commercial were was reduced 47 million or 40% from 2018, while Walnut Street was down 20 million or 34%. We continue to aggressively manage the disposition of these assets and hope to make similar progress in 2020.
Our securitization business continued to build on positive origination momentum in 2019, we completed two securitization transactions for substantial gains our whole levels or average balances of these loans increased from 273 to 574 million from 2018 compared to 2000.
Excuse me 2009, compared to 2018 and 2020, we plan to complete three transactions that will either securitized or sell loans to third parties in the second third and fourth quarters.
A sale of loans is expected to produce again similar to securitization gains in the past it may exceed 10 million wholly subject to market conditions. The sale of loans eliminates prepayment risk and allows the bank to establish another avenue for the monetization of loans, while eliminated our long term real estate credit risk.
We believe that we are developing both best in class lending businesses and broad capabilities and expertise to address the future growth of the Fintech digital and gig economy financial markets, we expect to be well positioned for SEC sustained growth to this end management has developed a new for your.
Phase two business plan focused on innovation, we believe our current targets a financial performance are reasonable and attainable in 2020.
These targets can be accessed in our investor presentation located on our website next I turn the call over Paul Frank Our CFO , who will detail more about the fourth quarter at 2019 full year. Thank you Damian quarterly net income increased $2.2 million at 31% over 2018.
Excluding the $7.5 million nondeductible FDIC civil money penalty in fourth quarter 2019.
The increase included $5 million of higher net interest income, reflecting continuing growth in bancorp's lending lines, including CRT loans originated for sale or securitization average related balances for these loans.
For the quarter increased approximately $320 million or 164% to $515 million growth and other lending lines reflected respective 45% and 21% annualized increases over the linked quarter for combined ask block and I block and for us.
Leasing.
The $5 million or fit Dean percent increase in net interest income to $35 million reflected an increase in interest income on CRT loans.
Just held for securitization or sale of $3.5 million to $7.1 million interest on EPS blocks, and I blocks increased $650000 to $9 million and interest on ESPN loans increased $1.6 million to $8.2 million.
The proportionately lower increase in S. flock and I block interest.
Reflected the impact of three Federal Reserve bank rate reductions in 2019, which resulted in proportionate reductions in income on a lower yields relative to other business lines for fourth quarter 2019, as flocks and I blocks yielded 3.7% because these loans are.
Secured by marketable securities or the cash value of life insurance credit losses have not been incurred. Additionally, as a result of the automation of related collateral management overhead can be managed to relatively lower levels.
Those factors should be considered in light of these loans lower yields.
Proximate yields on the other loan portfolios were 5.7% for SBK and 6.5% for leasing.
While the yield on CRT loans originated for sale of securitization has recently approximated 5.5% that yield varies with market spreads and timing of Securitizations. These lines at where sales. These lines of business have had historically low charge offs overall cost of.
Funds was 0.77% compared to <unk>, 0.96% in Q3 and 0.87% in Q4 2018, the decrease reflected the impact of the Feds 325 basis point rate reductions.
The impact of those reductions was partially offset by higher rates short term time deposits to fund higher commercial real estate balances prior to sale or securitization and other changes in the deposit mix the lesser increase in cost of funds compared to loan yields also reflected the impact of prepaid card deposits.
Which contractually adjust to only a portion of increases or decreases in market interest rates.
The 20 basis point year over year decrease in NIM to 3.12%.
Resulted primarily from lower asset yields, resulting from the fed's rate reduction.
Reductions compared to the lesser decreasing the cost of funds.
Prepaid accounts, our largest funding source are also the primary driver and non interest income fees and related income on prepaid cards were up 23% to 17 million in Q4 2019 compared to 13.8 million Q4 18. After adjusting Q4 18 for a 700.
39000, atypical write off card payment in a CH processing fees include rapid funds revenue and decreased 416000 to $2 million year over year, reflecting the exit of certain non strategic higher risk CH customers.
Non interest expense for fourth quarter 2019, excluding the non deductible $7.5 million CMP was 40.2 million slightly above the $40 million quarterly target discussed in prior calls.
Salary expense was 3.5 million during higher during the quarter and reflected higher commercial loan securitization incentive as flock information technology and other incentive compensation expense compared to Q4 2018.
That increase was partially offset by $1 million reduction legal expenses, reflecting lower regular regulatory related legal costs.
Annual results for 2019 included the gains on two Securitizations in the first and third quarters.
Thus continuing operations return on assets for full year 2019, adjusted for the Cm piece was 1.28% compared to 0.83% in fourth quarter 2019.
Book value per share was 8052 cents compared to $7.22 at the prior year end, primarily reflecting 90 cents of earnings per share and the increased value of investment securities, resulting from lower long term market interest rates.
Q4, 2019 consolidated leverage ratio, which is based upon average quarterly assets was approximately 9.7% and risk space ratios approximated 19%.
More than well capitalized position provides a solid base to conduct our operations and take advantage of opportunities in our lending and payment space that concludes my comments and I will turn the call back to Damian for questions. Thanks, Paul operating pretty open up the call to questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish are moving yourself from the Q. Please press the pound key once again to ask a question. Please press star and then one now.
And our first question comes from William Wallace from Raymond James Your line is open.
[music].
Thank you.
Damian.
The steadily.
Actual mortgage transactions that you've guided or in your prepared remarks, what's driving the increase volume. There is it just market dynamics or are you building out the segment.
So we've been spending last couple of years building out our.
Origination capability around the country.
So and this is a remember we started this business at the end to 2016, when we shut our CMBS business down and our product both the loans in the Securitizations have been extremely well.
Received in the Investor community. So we've been able to originate more but we also been able to distribute theres also it's come to our attention through real estate.
Firms that there is a broad market and just the loans. So instead of US securitizing. There is many people who want to hold those loans put those in you know.
Investment vehicles or securitized themselves so.
We were originating more but we think we'll do three insight into first quarter, we'll do three securitization or loan sales and the second and third and fourth quarter this year and what.
Our understanding the economics will be similar to what it's been in the past several be around 10 million or more for a gain in those three occurrences.
Okay. Thanks.
[music].
On the net interest margin. If you if you look to detect that you guys put out intra quarter that provides.
Guidance you have.
Very bullish expectations on growth in DS block business, we've seen that.
In the numbers that the loan growth in that segment is accelerating.
I'm wondering.
What the margin impacts to that business will be two to the Bancorp overall, Paul Paul spent some time talking about the.
The lower risk characteristics in the the lower interest on the loans, which is fine, but help us kind of think about.
What that does to the net interest margin and what it means for net interest income.
As the mix of your loan books shifts more towards these lower yielding loans.
Well for one I think one significant offset to the lower yields if we just want to talk about the net interest margin exclusively and not.
And not consider the lower overhead and basically non existence of credit losses.
We have on on the other we have the other lines of business with higher yields. So we're we're also projecting higher average balances.
The loans held.
For sale or securitization.
So those will be an offsetting factor to the hot to the growth and the asked block and you have extremely high rates of growth in the SBA, which.
Our yielding which were still yielding.
5% and in the fourth quarter significantly you started to see additional growth in the leasing were also targeting the leasing for additional growth. So I think you're going to say I know.
Not to the ruptured Paul your deceased if you see stability and the fed rate.
We're going to seeing stability in our margin also the off the growth which were targeting fairly good growth in our presentation about 30% or more and the EPS block market that that growth will be offset by the higher rates and all the other businesses, so you're probably going to get fairly good margin stability as if you go.
Stability in the and the feds target rates.
Yes, Okay. Thanks, and you know what as you were as you're answering the question that thought of a better way to maybe think about it.
Your net interest income in 2019.
$20 million roughly.
You think that that level of growth accelerates in 2020 adds your growth accelerates in these portfolios.
And if so can you talk a little bit about how we might think about the growth in net interest income in our models.
So I think.
You have to look we don't make predictions and we don't give guidance on that specifically, we did give the guidance on dollar quarter and in dollars and $1.34 because.
We have several ways and alternative ways of achieving that.
But if you want to for your modeling purposes. I think you have to look at the growth rates and each line of business and especially CR AG loans held for sale because they they really were the driver as I said in my comments of the of the main driver of the increase.
In net interest income so it's basically a mathematic for mathematical Formula where you you have to assume you have to determine your own estimates of the growth rates for each category and apply the interest rates, we can't micro manage the growth in ask block.
In any given quarter in terms of how much we're going to generate.
But in the short term even ask block in terms of.
Earnings per share and.
Return on equity.
It's it's a distinct positive because it's so low risk and relatively low overhead and remember the we're simply maintaining forget about the interest income.
Yeah think about the fees to obviously you know this but we're just not putting the the expenses on at the same right. So your as you have this similar growth rate over larger portfolios of course are going to have.
And that absolute level more interest income and more fee income because if you're having the same growth over larger portfolios and our expenses are simply going to be maintained at a level, where you're going to still be in that 10%.
In 2020, and probably beyond that of having a fairly good continuation of that jaws ratio were around that 9% to 10% range. So you're going to see an expansion continued expansion in our away continue expansion and return on assets and therefore.
The absolute level of earnings per share.
Okay. Thanks, and Damian My last question for I'll, let someone else pop in I've had several questions throughout the quarter.
Relating your relationship with shine.
They are they're signing one of stride as a partner as well and what that means for the Bancorp would you be willing to just give us some commentary around what China.
Means for the Bancorp, maybe in GDV terms or prepaid revenue terms just anything you could you could give to us that would help us understand how their.
Edition of the new partner on the on the on on there.
Processing side will impact you.
Yes, so thats not a lot for a program that is maturing to have more than one partner our partnership with time started from the beginning.
I think we'll less way into the future.
We have a very very close relationship with them.
Including with the processor Galileo who they use.
And we've been we've been working together to help them build their business. They are one driver of many.
And our GDV growth.
We have other fintech like companies like Paypal and Venmo or also big drivers of growth that whole segment is but also we have other areas that are growing and very significant rates to like in healthcare. For example, these are very early numbers.
Don't want to set an expectation, but here's here's an example and in.
Seasonality to these things too so debit tends to peak in December and then flatten out in January .
And.
Our growth is still in the mid Thirtys in January at a total level and it's not coming from those debit fintech areas is coming from places like healthcare. So we have a very diversified portfolio in many categories chime. It's been a great success, but we've had other great success is our portfolio.
And our first our relationship is exceedingly strong with that company. So we.
While they decided to have another partner, which is an odd.
It's not.
That in itself will not affect our relationship or affect our growth prospects around our GDV growth across the portfolio.
Thanks, and I said dose in the last question, but you commented on health care.
But you're not talking about HSH, so what do you need by healthcare.
So we're actually the market leader, we control but.
Between 60, and 70% 75%.
Of debit cards for.
Fs say and medical spending so those for instance.
In January where people are trying trying to use up their annual allotment and allocation of funds back at that gets heavy seasonality.
The first part of the or they have you have basically 90 days into the next year to use up your prior year. So.
So thats not as Damian mention.
And that's only one of them. We also do of course, the incentive cards and.
Gift cards, and many others I refer you to our 10-K.
Where we go through the various.
The various lines of business that we have in that area and we had the.
The pipeline we have today.
Sure as dramatically different than it was two years ago, we work on maybe 20 or 30.
Programs or product additions today, we're looking at over 100, we have 19, which are new.
Companies that are significant relationships across our portfolio.
Up around 40% of those are Fintech. This debit card related but its extracting it's very strong and it's across all those categories that could support future growth like rapid funds, we've talked about before we recently.
Announced new partner for this direct corporate disbursements business that that continue to be rolled out with our partners visa and Mastercard Theres, just a lot going on to support the business and while I can understand that.
China is a great success story.
This is our company is dedicated to providing an ecosystem to to hopefully make many people successful in this space.
As the market changes.
And we.
We continue to do that so we're experiencing not only great growth from specific partners, but we have a great pipeline to support the business going in 2020, but you know substantially beyond that because these are contracts that are one year contracts and generally there three to five year contracts and so once you sign that contract specially with somebody's wealth.
Financed and growing that those those GDV growth come over years not just months.
Thank you Jamie I appreciate I'll, let somebody else on some question.
Thank you. Our next question comes from Frank Schiraldi from Piper Sandler Your line is open.
Good morning, guys.
Good morning, Frank.
Just on the Uh huh.
On the Securitizations Damian you mentioned through so three for 2020, and you talked about gains maybe being I guess around 10 million per.
Just wondering if you could.
Give us some sense of what that means the bottom line in terms of margins in that business and so what sort of.
Contribution that as to the bottom line in 2020.
So it.
You know it its first of all we don't.
It's the best guidance, we give on the gains.
And the gains are at least the first securitization. We believe excuse me sale will happen in the second quarter. The reason that we timed it for second third and fourth quarters, because we have the kind of peak liquidity in the first quarter. So we're able to hold the loans, a little bit et cetera ourselves up for the year on the securitization. So.
The.
If our average balances are likely to be higher than they were last year, probably 20 or 30% higher.
There's been some compression in spreads.
Over the last few years, so the rate on those loans are around a 5% range.
And you can we have been guiding five to seven ish million in the past and we think thats more like 10 million.
So that's pretty clear so that.
Thats going to contribute significantly now do is that in our model is your question. So the answer is no.
So when we say $1.34 target, we had 7 million.
In there we had three but we had 7 million and we had lower average balances than we think we're going actually hold so.
There could be upside on that Dollarsthirty four based on how the performance of the securitization business is and 2020.
Okay. So yeah that was my next question so nothing else in terms of your modeling.
Has changed to offset a greater revenue contribution from.
Securitizations.
No well so when we.
When we have a that's our best guidance right now so if you think about $1.34. We've put on the table that that's basically what we think is the the likely scenario for the bank. In 2020 dollar 25 is much more of a downside based on not getting.
The gains and securitization not getting the growth that we've been having not getting quite as much GDV growth, but it's clearly.
There is upside.
On that projection based on Overperformance and securitization, but also in the other businesses. So we feel very comfortable very very comfortable at $1.25 and considering the trends and where we think we're going to be building the business and where we are on expenses, we fill a $1.34 is a reasonable.
You know target for the bank for 2020 based on those dynamics.
Okay I'm just curious maybe the slide deck you have out there you have some detail in terms of growth expectations, and GDV and expense level expectations for 2020 have those change will I mean, I guess expense level has to change with the securitization the gains changing there there could be some more variable expense tied to that.
But other than that or are those still have pretty good.
Spectator once they are once again, it's a normal distribution thats, how we do our budgeting. So so our dollar we're trying to share a lot with you. So that dollarsthirty four is basically our budget period. The dollar 25 is our downside if things don't work out well right. So obviously, if things all work out well, it's more than that so.
That that that's what we're telling you when we say our target is dollar 34, thats our managerial target for the back that's something that think we think is very attainable.
And it through like a lot of banks or a lot of companies do you know they they think about it as an upside in the downside, but we're where we think that $1.34. Some things don't go as well or some things do better but right. Now if you look at just the securitization business. It looks like just that category and that dollar 34.
I would exceed our expectations. So will we want to keep on investing in this business, we want to deliver our target to the investor.
There is in the bank and we want to do better, but we're not if we have to take five cents off the table invested and more ability to to service our clients or build better infrastructure will probably do that but what we're saying is that we're comfortable with the dollar 34 and were at least going to deliver that dollar 25, regardless of what we think are reasonable market conditions.
Yeah.
And how much of this a securitization do you intend in terms of these.
These Cree loans do you intend to retain on the books.
So we get rid of mall. So the reason we're doing what we started building the securitization business because we thought that was the best way to through lower the long term.
Real estate risk.
Right most people would hold those.
We didnt hold those for various reasons.
Including the community Bank portfolio, which has now pretty much gone now Walnut Street, just continues pretty much gone out. So we have much more room to have real estate risk in our portfolio, but what's happened through the securitization, where our bond actually trade in the marketplace was that everyone became very very interested not only in the securitization.
Tons per day, the next question bolt.
Hi end.
Real estate firms, but also the top tier banks all looked at our loans and said Hey, why are you while you're doing so where did you come from we'd like to purchase your loans, maybe and do things with them because we think they're high quality. So that created all other channel now.
The distribute distributed that product. So we think we're going to be doing that this year now that we have a securitization brand will probably sell whole loans, which are great for us because we we don't have any future risk of alone. Obviously, we don't have any prepay risk, we don't have any and weve and a few instances we kept our.
Whiteboard strip so.
So it gets rid of all the risk and it has a similar gain so it builds another channel to distribute those loans, so thats, where we are on that.
Okay.
And then then on on the GDV growth, obviously, just continues to accelerate in the and the the year over year growth.
Do you guys were willing to give any sort of detail on concentration there like if I think about your top three contributors in terms of partnerships or your top five like what sort of contribution what what sort of percentage of that growth is being driven concentration everybody would love me to do that so I get a question on that I don't know.
Three times, a day and it's not only you its investment bankers and analysts then.
They all want our information because they want to back out a market participation map and the industry.
And we're reluctant to do that because we're not trying to pick winners or losers. The minute that we do this to the right detail youre going to back out exactly what each company is doing and that we want those companies to be able to report their own progress. We don't want to front run anybody and we don't want anybody making us.
Assessments of success or failure of companies based on our information Thats why we don't do it.
We've thought about it we may do it in the future in higher level categories, but we've sat around and said, okay. Let's do it this way and then.
Storm and.
Okay. There is enough information to back something out now so we're very reluctant to do it.
We're reluctant to do it because we don't want to front run anybodys.
Anybodys and it's very.
It can be misleading. It's it's it can be very bumpy people are in different stages of growth. So comparing one company to another depending on their lifecycle and we don't want any of that information, which we think a strategic that map that we would produce is very strategic these were the number one provider a prepaid in the United.
States, where the number eighth or ninth issuer of debit cards Theres a lot of information, we broadly participate across the fintech and other product category. So we're we're reluctant to do that but we it's under advisement. If every I'm going to stay the same thing every quarter. It's under advisement, we're trying to get to a level, where it's meaningful and.
Up to you that doesn't irritate you, but not too meaningful you start doing exactly what I think you're going to do once we give you the information.
Fine, but the indication then is that the concentration is high.
In terms of your top partners.
Yes.
Not so extremely diversified.
And our top 20 programs is about 80%.
But theres a lot of diversification in those programs. So this is another thing the things that you might think our true because you have one that we don't want to change or we don't want to be the people change People's expectations. All I can tell you is that yes, we have some concentrations, but they're they're they're they're not.
They are not they can't jeopardize the growth of the portfolio, let's put it that way and they're not and it's fairly if you look at the top tenants very diversified if you look at the top 20, it's even more diversified so 60 and the top.
Ted and about 80 in the top 20, but there are new programs are all long term contracts there long term relationships theres going to be new programs coming on over the next year that we'll announce that are I.
I think will be significant to future growth all those things will continue to drive GDV as we've said at least 20%, but we're talking about probably as like it was last year as we're seeing in January and the Thirtys.
Thats something that looks pretty.
Solid for 2020.
Great.
Thank you are kind of given some of the concentration there by saying the top 10 is sick I think you said 60% of.
Yes, I'm not giving you category, though so no I'm not asking.
If you could give top five what percentage top five is I think that would be helpful and I wouldn't I don't think if if if people know how the percentage of top five I don't think thats going to help anyone back into a lot. So okay. That's very helpful. I just think that'd be that helpful to you guys, but we can we can what we can do is top 10 programs and showed maybe category, maybe we'll do that are top.
I want it we'll put that under now we're going to put that under extra special advisement.
For two thats okay.
Okay, alright, well see where that those for one Q, but but so the topic, but you did say the top 10 partnerships drove 60% of the growth right is that that's a little bit it's a little bit less numbers.
No I'm talking about the concentration.
So the but it's also true about the growth most likely so it's in that range. Okay.
And then just a just finally on the.
On your comments about the next several years here.
In terms of innovation.
In terms of investment.
Does 20 2020, you've given guidance for I'm Tsum. Your we're still ways away from giving guidance for 2021, but as you think about growth.
And you think about investing in the future I mean do you expect that to is it reasonable to say that that that theres additional investment that could slow.
Your rate of growth.
In 2021 [noise].
Slow at more than your long term EPS growth expectations or is that.
No no. So we put we put long term targets for our new when we did our new business plan. We've built in plenty of expense to take we went to a fairly detailed letter level, because we're actually changing our operations the technology platform not for current but for where it's going to be in the next five to 10 years, So theres a lot.
Of investment that's already gone end, but we've we've scoped out very carefully what that's going to take for the company to actually realize you know the long term target of a 20% our or a one 1.75 ROI. We're we're fairly confident like we were confident we're more confident in the phase two business plan their phase one.
You know where the company was in phase one and 2016 that had a lot of things out of our control period out of our control like you know.
When you think de risking of bank and you've got a bank with a 150 million to revenue to 20 of expense.
That is a more risky business plan.
For those you haven't Remediated, a bank, where you have consent orders and FCC investigations.
I have protect my word for it the phase two is all about growth Weve, what's amazing is de risking the bank. We sustain this amazing growth through the last three years and its accelerating exactly at the time up and like to play a platform for the ask block or we reengineering. The back end of the leasing business or we're changing our ops and tech platform.
Arm we've.
Just for example, F. CRM, we built the center of Excellence, where we took all.
For sanctions tolls and turned it is one we fully implemented our process and now have we believe we're at the precipice. We've already we believe we've got the best we're one of the best Fcr capabilities and this neck of the industry. So we think we're going to move forward on the regulatory issues. So.
It's.
It's we're in a much better placed and we were three years ago with the first business plan, but remember the first business plan to accompany that make no money, that's now, making a 13.5% Aro we run rate and looks like next year. Our target is a 15% our away right and I'll tell you as a CEO I'm much more comfort comfortable in phase two that I wasn't phase one that's only way too.
Explain it it's more exciting it's more fun, but I'm more comfortable with the dynamics of the business that I was three years ago.
Okay, Alright, I appreciate it.
And also ask your question. Thanks.
Thank you and we do have a follow up from William Wallace from Raymond James Your line is open.
Yes, Thanks I.
I had I couldn't figure out how to get out of the queue. I'd hop then I wanted to to push the issue that Frank was bringing up about the concentration in the prepaid business.
You're right I think there's some investors that are trying to back into the growth in some of your clients, but but there is there are other investors that are trying to.
Figure out how much concentration risk there is at the bank work with one or two customers representing.
X percent of of the revenue in the in the prepaid line. So any any clarity you give there I think with what would help.
The interest subs.
View as stewards of shareholders.
And I'm, telling you I'm, telling you there is not an over really I'm going to be very clear. There are people that always make comments. They see things in marketplaces are they they want to manipulate the market, maybe I will make comments about things.
That are.
That could appear to be true.
But I'm, telling you they're not there we have great diversification across our programs, we have long term contracts.
We have an amazing pipeline.
As we're telling you that the the GDV growth is going to be supported through 2020 and beyond and it's easy to latch on to one or two like become latch on to Venmo, two and say that's driving our growth because it is paypal after all.
He can do that or you could say you can look at our fsh business and say all that must be the driver, but what we're saying it's not it's gift cards. It's not just FSS. It's just not the fintech, while fintech is exciting and that's where we've really been able to have a beachhead. That's not the only product category were also on government cards and this technologies.
We're also in direct rapid funds, where were the early adopter and one of the leading providers in that area. There's a there's lots of delays were not on a three legged stool.
We're on a.
15, like still it's not Theres not one program driving the success of this company and it's also a back so it's not one.
The fees for this quarter were 17 million, but what was the interest income that was double that right. So so there's a lot of opportunity across the board there isn't one company driving the success of the bank core Theres not one company Thats jeopardizing the sense of the bank core we applaud the success of everyone every one of our partners.
And we hope to continue to al have.
Healthy building and expanding relationships with every one of them.
And we'll put out under advisement special advisement extra extra special advisement.
So by but once again.
I don't want you to back it out that everybody asked me about these two three fintech companies and what their growth rate of so no thats right.
But you're saying that youre seeing pretty clearly that it's not one or two or three relationships that are driving revenue whatever information you can give to help.
Yes, as analysts and investors.
See that then hopefully that would help provide support to valvoline loans, we unfortunately, a perfect knowledge.
And the market doesn't let's put that yes, we have a perfect knowledge of what these companies are doing we have perfect knowledge of their financial statements. We have perfect knowledge of their volumes, we have perfect knowledge of their account size and it's unfair for us unless we were to tell everybody everything about every one which would be also strategically damaging.
Every one of these companies, it's not fair for us to two to pick and choose and to validate our are not validate people's understanding in the marketplace is extremely broad once again, we're doing you know January we'll probably do a over 7 billion in GDV on these cards are.
Dreamily valuable information and we either share or we don't and we're just we're just reluctant to share it too much and maybe like we said to Frank will give you will give you very general things without without saying anything specific.
Yes, I think that would be helpful.
My last question since since someone on the expense that will you finished up year last few quarters at or kind of adjusted run rate around $40 million, you've got one more securitization coming in 2000, Im sorry, not securitizations.
On sale coming in 2020.
What what what's a run rate expense level that we might anticipate.
Ill now accounting for that thank you.
Yes.
Well, that's giving you the answer [laughter], but it'll be a couple of it'll be a it'll be a couple of there'll be a couple of million more than it was if you add everything if we get sick, let's put so if you end up with a the target of $1.34 it'll probably be a couple of million more than it was.
On a run rate this year and Thats for additional it's mostly on the we have it might not be because we do have some saves potential saves in there but.
It'll be up it will it won't be a lot. We're talking once again that draws I'm going to go back to the jobs, we're talking about if the revenue is 14%.
The expenses will grow for at the revenues nine.
Preset growth, you're probably not going to get any expense growth. That's the way to think about it. So if you put those estimates that we've already given on the phone and inside our presentation obviously.
And understand that if you model out, but upside or downside case, you should think be able to figure out with that draws information what's the potential. The company has once again, we're comfortable with the target of $1.34 and in that case, where we meet our revenue expectations, you'll see that you us and you'll see growth of couple of million more on.
Run rate quarterly basis than we had in 2019.
With that.
Yes, Thank you very tied a lot without paying anything.
Yeah pretty soon [laughter].
Thank you thing we do have all thank you follow Wally.
From Frank Schiraldi. Your line is okay, Oh Wow. This is good.
If you're going to.
Hi, guys. That's just take the more technical I guess question I'm, just looking at the margin.
And obviously the excess liquidity.
That.
Will drive that margin down you have the Cds on the books and Paul you might have mentioned something about this but certainly in the past you've talked about short term Cds being used to fund.
The Cree growth and there were still on the books at the end of the.
Quarter.
And we're driving a.
Negative spread.
Yes funding that cash on the books, so just kind of curious.
You know why you kept that on through the through the quarter.
And if you can kind of talk about the average deposit growth.
Year over year was lot lower than the on the period growth.
For Q over Fourq you.
Well, we wanted to make sure that we had the good primary liquidity at the end of the year like it's good for every bank to do that number it's like a cleanup area, we want to make but we also it actually foretells that we under we expect significant growth to cover that primary liquidity in the first quarter.
So.
You have to think of it that way why why do we have excess liquidity at anytime we're managing the bank as an enterprise and we expect that act excess liquidity to be used in some way.
So so Frank one of the things that.
You saw in the increase in the average balance and the increase in the.
CRB loans originated for securitization or sale.
Is it's not that easy to determine the timing of those closings, but at the same time, we're really closing hundreds of millions of dollars in any given.
In any given monthly periods. So to some degree we decided because we were surprised very honestly that we had such robust demand and we were able to generate.
These numbers, which were beyond expectations, we actually added liquidity in advance of that.
Just to make sure that we had more than.
Just to make sure that we maintained our consistently high historical levels of liquidity.
Okay.
So.
Okay. I mean, just lastly on that it seems like the a the FHLB short term borrowings would be a cheaper option just wondering I mean, the Cds don't bring anything along with them other than.
The funding right I mean, they're not.
I don't.
From a related at all good question very good questions. A very good question and it's one that we consider when we make those decisions. It's somewhat of a balancing act as Damian flora and other got weekly or parts of the ziad to the year going into the first quarter. Two yes, so we like to <expletive> the cost difference.
Central is in terms of the interest cost is actually the FHLB charges.
20, 535 basis points over.
Over a daily fed funds rates.
And the brokered CD market, which is what we used.
Is very close to that actually so in that Theres no big difference in the interest differential what you do have is a difference as I'm sure you're where like the FHLB you can do daily, but we decided for liquidity purposes, we wanted a balanced.
Our balance sheet, and so we thought that a modest amount less than 10% of our total assets in Cds really.
Presents a better liquidity.
Posture, but it did have a modest impact.
On.
On the net interest margin the other thing that happened in the fourth quarter, we actually.
Got more towards the end of the year end deposits them. It ought we from the regular business in the regular business. So.
And if we could totally predict the future we might have done things slightly differently, but.
And we always we never play it we're not a bank that as 5% or 9% primary we don't we don't manage were low risk bank.
Right. So so we're we're low risk out are definitely low risk on our lending portfolio and our investment portfolio period, we have higher than peers and liquidity we have lower.
We're not like hi.
Asset sensitivity is low liability sensitivity, we're kind of the anti bank and we want to run the bank long term low risk and we don't we don't.
We're not trying to use the bank as a hedge funds so we take reasonable.
Knowing our business file we make reasonable decisions throughout the year, whether its borrowing or at the end of year deposits in order to match the.
Low risk profile the bank.
I don't take a lot of duration risk and we don't take a lot of interest rate risk to be.
Obviously as we build our portfolio from the Fortys to the 50 to 60% to 70% loan to deposit ratio, we're going to be taking on more of that risk, but in low low risk businesses, but obviously.
I will expand the interest income substantially in the margin substantially so net net interest margin, but the operating margin. So we're where we sit down and talk about those all the time, but we're now we don't have when we think when we think we don't know is when we go conservative and that's why if there was more deposits rather than borrowings.
Okay alright, thank you.
Thank you and that does conclude the question and answer session for today's call I would now like to turn the conference back over to Damian Kozlowski for any closing remarks.
Walmart that there's not a third follow up but I want to thank everybody for joining us today and we're looking forward to a great 2020, we had a really great year.
2000 that we really put a lot of things in place we were so happy to see the growth in our lending businesses, but also the GDV growth and we're really excited about 2020.
Throughout the year, we'll be making.
Announcements about new programs, a new relationships and extending relationships and we look forward.
Two presenting those in the marketplace when they when they become active so thank you so much for joining us today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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