Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Bancorp incorporated first quarter 2020 earnings Conference call.
At this time, all participants' lines are in listen only mode.
Speaks presentation, there will be a question and answer session. Just a question during especially with the per store wondering telephone.
Please be advised to today's conference is being recorded Newport and further sisters. Please press star zero or now like to hand, the copper surgery speaker today Andres Viroslav. Thank you Maam. Please go ahead Sir.
Thank you operator, good morning, and thank you for joining us today for the Bancorps first quarter 2020 financial results Conference call.
With me today are Damian Kozlowski, Chief Executive Officer can pull Frankel, our chief Financial Officer, that's what's called the webcast on our website at Www Dot the Bancorp dotcom there'll be a replay of the call beginning at approximately 12 PM Eastern time today.
I went for the replay is 8558 fivenine to 056, but a confirmation code 8676348 before I turn the call over to Damian I'd like to remind everyone that when using this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements with the meeting the private security.
I guess reform act like nobody thought such statements are subject to risks and uncertainties, which could cause actual results performance or achievements to differ materially from those anticipated well suggested by such statements.
Further discussion are these risks and uncertainties. Please see the bankers filings with the FCC.
Centers are cautioned not to place undue reliance on these forward looking statements speak only as a date hereof.
Bancorp undertakes no obligation to publicly released the results of any revisions to forward looking statements may be made to reflect events or circumstances. After the date Europe or to reflect the occurrence of unanticipated events.
Like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andrea good morning, and thank you for joining us today.
Well, we observe work from home and making sure people are safe we've continued to experience momentum in our core earnings regardless of the current cobot 19 developments.
In the first quarter 2020, Bakeware earned 22 cents a share from both increased the and spread revenue total loans increased 9% forwarder over quarter, and 31% year over year loan interest, including loans held for sale increased 25, and 29% respectively.
Payment card gross dollar volume GDV increased 36% year over year, well fees increased 15%.
<unk> expenses were down 2% year over year as our unit transaction costs drop with higher volumes, resulting in increased efficiency.
Pre tax income decreased 25% year over year, but excluding the gains and losses on loans originated for sale, which vary with market conditions pre tax income increased 79%.
Well the pandemic continues to be fast developing and could be prolonged we'd evaluate the impact of lower interest rates and potential lower business problems on a profitability for 2020.
We believe that the previously announced 125 minimum earnings per share guidance for 2020 is still attainable well Dollarsthirty four earnings per share has become less likely.
Accordingly, the dollar 20 <unk>.
Dollar 25 earnings per share now constitutes our guidance for the full year 2020, we've removed the range of earnings performance I made the dollar 25, our target.
There are some key developments.
In the first quarter that are worth noting these events are listed in the earnings release.
In addition, we continue to expand our key relationships and add additional business partners and the first quarter, we announced an extension with time and the addition of so fight to our client portfolio.
We currently have 20 products and implementation in our cards franchise expect execute three to four new program contracts in the second quarter.
Overall, the bank work continues to concentrate on its building of its payments ecosystem to sport changes in financial services, driven by Fintech digitalization indicates economy.
We continue to make keep payments investments are making progress even in this turbulent time. In addition, our niche lending businesses are squarely focused on helping our clients. During this dislocation and then long term growth of what we have been true have been traditionally lower credit credits.
Lower risk credits in our lending likes the base capital base is strong and we continue to closely monitor the fast developing situation and will advise of any changes to our earnings outlook.
I'll now turn the call over to Paul Frankel, our CFO will detail more about this first quarter.
Thank you Damian.
Moving $5.2 million of unrealized losses related to CRT loans held for sale first quarter pretax income was $22.7 million and the adjusted return on assets an equity through the quarter was 1.19% and 13.4%.
$5.2 million of unrealized losses, approximately 2.2 million resulted from hedges related to $44 million a fixed rate CRB loans held for sale.
Substantially all of that $2.2 million unrealized loss related to swaps maturing in December 2025 through December 2026, thus there remain oh five to over six years, and which some of these losses might reverse should interest rates increase over there.
Out period.
The majority of the remaining $3 million had the unrealized loss resulted from estimated fair value adjustments to loans in the held for sale.
He portfolio, primarily for $58 million of hotel loans. These hotel loans may reflect an elevated risk compared to the rest of the $1.5 billion see I read portfolio. The vast majority of which consists of multifamily loans.
Expected cumulative losses for multifamily loans resulted resulting from poll that are projected by nationally recognized analytics firm to be below 1%.
These loans generally they are on our books at a $99 price net of fees and half weighted average floors in the 4.8% range. Please see the new tables for CRM belongs in the press release, which provided breakdown by loan type and other characteristics. If not sold these loans will be retained as into.
Returning assets.
In addition to the 5.2 million of unrealized losses in continuing operations. There were approximately 819000 of unrealized losses in discontinued operations.
So there was a total of $6 million.
The unrealized losses relating to fair value. Additionally, based upon economic uncertainty in the seats on model. An additional 850000 was added to the first quarter 2020 loan loss provision, bringing the total of unrealized loss to approximately $7 million.
Those losses could reverse in the future, but if covert related losses materialize, the $7 million represents potential future offset against such losses.
The approximately 4.8% weighted average floor on the CRB loans less the cost of funds estimated to have fallen below 0.4%.
Results in a spread at 4.4%.
That's significantly exceeds 3.34% overall NIM in Q1.
The 1.5 billion dollar quarter NCR read loan total compares with a 1.11 billion first quarter average and the 4.8% floor will have a full quarter impact on that higher balance in Q2.
The largest variable rate portfolio is the combined 1.2 billion S. block and I block portfolio the yield for which is estimated at 2.3% after the that Ephedra reserve reductions.
Compared to 3.5% for first quarter 2020.
Our participation in the page protection program is estimated to generate $200 million. The findings with an estimated $5.5 million earned as fees and interest, which we believe will be recognized primarily in the second quarter.
Those estimates include both at first and second rounds of funding.
The Q1 2020 pre tax income of 22.7 million.
Excluding the 5.2 million of unrealized losses compared to 12.7 million for Q1 2019, after adjusting that quarter for $10.8 million of net realized gains on asset CRT securitization.
The resulting 10 million dollar increase in pre tax income resulted primarily from an 8.8 million dollar increase in net interest income primarily due to higher loan balances.
Average quarterly salary loans approximately doubled to 1.11 billion and related interest income increased 5.6 million.
Interest on SBK loans increased 1.6 million, while interest on leases increased 1.2 million, reflecting respected period end balance increases of 21 and 16%.
Well combined.
Yes block and I block increased 46% over those periods.
Related interest income increased by less than $1 million, reflecting the impact of 75 basis points of federal reserve interest rate reductions in 2019.
As blocks are secured by marketable securities and I block our secured by the cash value of life insurance and losses have not been occurred incurred.
Overall cost of funds was 0.70 for the quarter and as noted is expected to decrease below 40.4% in second quarter 2020.
We implemented current expected credit loss Cecil accounting as of January one 2020, as a result, we booked to $2.6 million accumulative increase to the allowance for loan losses, and 569000 to other liabilities for unfunded commitments to 3.2 million dollar combined total of these items was offset through.
We retained earnings which was net of their future tax benefit.
The provision is determined through the seasonal model resulted in a $3.6 million provision for credit losses for the quarter ended March 31, 2020 majority of $3.6 million provision resulted from a higher provision for leases, which had greater charge offs during the quarter.
Because as block and I block loans are respectively, collateralized by marketable securities and cash value of life insurance management excludes those loans from the ratio of the allowance to lump to total loans and its internal analysis.
As adjusted that ratio is 1.79%.
Prepaid accounts, our largest funding source are also the primary driver noninterest income. These unrelated income on prepaid cards were up 15% 18.5 million Q1, 2020 compared to 16.2 million in Q1 2019.
Card payment in a CH processing fees include rapid funds revenue and decreased 457000 to 1.8 million, reflecting the exit of non strategic higher risk AC age customers.
Non interest expense for the quarter was 38.9 million were 2% below the prior year and below the $40 million quarterly target discussed in prior calls.
That reduction was driven primarily by lower salary expense, which reflected lower incentive compensation expense a significant portion of the Q1 2019 incentive compensation expense was related to the net 10.8 million dollar realized gain on the loan sale in that quarter.
Book value per share increased to 8069 cents compared to 8052 cents and at the prior year end, primarily reflecting first quarter earnings per share.
The Q4 2019 consolidated leverage ratio, which is based upon average quarterly assets was approximately 8.9% and risk base ratios approximated seven teen percent.
In closing there are certain characteristics of our loan portfolio as shown in our new tables in the press release, which I would like to highlight.
As previously mentioned the vast majority of our $1.5 billion of commercial loans held held for sale, our multifamily loans, which by a nationally recognized analytics firm have unexpected cumulative loss rate of less than 1% in their covert projections. Our next largest $1.2 billion loan portfolio consists.
As of S. block and I block loans, which have not incurred losses, notwithstanding the recent historic declines in equity markets.
Approximately half of the SBA loan portfolios U.S. government guaranteed and U.S. government is paying principal and interest on those loans for six month period. The majority of the other SPD loans consist of commercial mortgages with 50% to 60% origination date loan to value.
For leases, which experienced credit issues, we have recourse to the lease vehicles. While there is uncertainty related to the future. We believe these are positive characteristic of our portfolio, which demonstrate lower risk than other forms of lending.
That concludes my comments and I'll turn it back to Damian.
Okay. Thanks, a lot Paul we're going to open up for questions operator.
Thank you.
As a reminder to ask a question, we'll need to press star one of your telephone.
Your question. Please press the pound key please standby mode, and probably 20 roster.
And our first question comes from the line of freight.
Screw route.
I appreciate your line is now open.
Morning.
Correct.
First I just wanted to.
Your.
Thoughts on.
The held for sale book now that the deal didn't go through and you made your fair value Mark and it seems like pretty nice.
Deposits that you get to keep as well.
You know are you actively marketing this.
So.
At this point as you know that there's a wide open for the shorter sales at this point or.
I think it'll be at least some balance sheet for some time.
No I will keep that weve.
[noise] have not look to sell for the next 90 days and then we're going to review.
How the market is at that time, there really isn't a lot of being issued right now.
So we're going to wait 90 days and see if the market firms up weve getting we're still getting very good as we've disclosed I think the last disclosure. We made there have been very little to date.
Request for deferrals or anything from the portfolio. So it's generally you know performing across.
The gamut.
Early well we've seen in the marketplace.
Right collections are very strong, especially.
The markets that we're participating and so there.
But it's early days, though we have to really see what happens then.
In April and May.
May especially in June so, we're we're just holding them for now and hopefully if the market gets better we will continue to do what we have done historically.
Okay, and then just in terms of credit obviously areas like US block just sort of Korea create a fortress balance sheet for for a big portion of your loan book I'm. Just curious if you could talk about where you see the greatest risks outside of that portfolio and.
Side of the 58 million I guess, you mentioned in the hotel on the held for sale, but is it.
Yes. The book is at the hotel portion within Us BA or those LTV low enough where are you feeling pretty good about that thanks.
Yes, well I think I think what you said is correct I think where we don't have a government guarantee.
And we've got exposure to obvious assets that are dependent on the economy be open and things like travel.
The good the good part of that is very low exposure for us and the LTV is like you said are low we have not taken historically a lot of losses in the and the leasing area, which would I guess most people would focus on sets its car based but the auctions are starting to open.
We havent taken losses during any other cycle so.
That would be the second my first would be the SBK unguaranteed portion, especially in hotels.
And it would be.
Wait and see on the leasing, but then also the small amount of hotel exposure, we have in the C CRT securitization portfolio.
Yes block and I block with stressed substantially and it didn't even at a card any losses recently and obviously the guaranteed portion of our loan portfolio from SP is not a concern at all.
And when you're thinking about the leasing book.
You offer these deferrals I guess for 90 days do you expect to do a deeper dive or take a harder look after 90 days and maybe some of these things will.
You will take the good leases the lease vehicles back or do you just assume you probably offer another 90 days.
For a total of six months and deferrals that lease.
Yeah, well, we're well thats the guidance now from fast speed to do the six months and would it be seen as a troubled debt restructuring. So we're going to file the guidance like everyone else is so if people need another deferral, but up due to their business is being shut down because of cobot.
We definitely will do that it's we're really not going to know.
Probably first six months when those deferrals and if they're not extended again. So this is.
If there is credit events in the portfolio, that's probably going to be a fourth quarter at the earliest or probably first quarter 2021, where you really start seeing that not only us but other banks do.
Right.
Then just finally from me.
If you think about some of the new partnerships you put on obviously tremendous GDV growth from the first quarter.
Yes, some questions about how.
The data usage holds up I'm in the second quarter with the economy shuttered.
Certainly should hold up better than credit I would think and.
But trying to get your sense if you can.
In terms of your thoughts on GDP growth from skier.
Yes, I was just kind of the wildcard. Thanks, yes. It is kind of a wildcard so one of the things that than those we started getting stimulus payments into our.
Into our debit cards, so we had over a million stimulus payments and over 1.6 billion you could see our funding.
You know that impact that funding has been very positive for us and the ended the first quarter now in April.
What we're seeing the only area that we've seen in the first quarter that was actually down was gift card.
And in certain a couple of the rapid funds programs. The growth was negative right well one other was positive. It's I think it's just too early.
If the economy reopens.
You know sooner rather than later it will be mitigated by that because I think people have money right now across at least our deposit base that they need to spend on something and we're seeing the same things that other people are saying there. It's on more of a necessity basis is that a lot of restaurants et cetera. So the spend as.
Shifted but it hasn't slowed down yet like you'd expect and that's going into April so we don't know.
We do have a lot of programs and new products that are being implemented that might mitigate that too like I already said, there's 20 products were implementing and we expect to signed three or four major programs and the second quarter as well as well as for just example, so far as a good example, where the volume is just starting to hit now.
From their program so.
It looks like there's for the for the there it looks like Theres business Mitigants from new business.
And from things like the stimulus that will at least have an impact on the second if not the third quarter and by the third quarter hopefully the economy will be open again.
And then so low stimulus those just came onto cards I guess that people had filed with the IRS and is that 1 billion.
Most that's all through eight.
That was some of it was most of it was a quarter one it lags into quarter. Two there's probably another 300 million we were expecting in these type of deposits.
And we're actually getting checks now too so.
That that stimulus impact is going to carry through into the second quarter.
But that was all like on a chime card or anybody like given a that account number that represented a bank core account when they have filed their taxes it came onto our platform.
Right, Okay, but just a follow up on your comments about Oh.
Prepaid categories. You noted gift cards were really only close where you saw weakness within prepaid I know, there's a lot of detail that you guys offered in the release, which is great, but I don't know if you broke out.
Types of prepaid it can you talk about how big gift card is as a whole as a whole percentage about of prepaid.
The total amount or gift card I'm not I don't know if Paul knows that statistic no we actually don't.
We've looked at that Frank in terms of giving detail, but because it can be specific information thats related both to a certain third party were reluctant to.
To release third party information so we don't we don't disclose that.
Okay Alright.
Thanks Scott.
Okay. Thank you very much Frank.
Thank you know last question comes from the London, William Wallace with Raymond James Your line is now open.
Thanks morning, guys.
Good morning, maybe just as a quick follow up to the last question is is.
The gift card just kind of anecdotally do you feel is it is it 50% of of the.
Of the business or is that.
So it's hard to mortgage notes, we don't give that out but it's less than 50 per it's far less than that.
Okay.
So you kept your you kept the low end of your guidance and tax which is.
Maybe a bold moves given the uncertainty I'm curious if you could just talk a little bit about the confidence that you have in the visibility to your ability to achieve.
The target and then maybe if you would help us with with some of the moving parts to get you there.
So what we did was we ran.
Did what we're supposed to do so we we looked at the situation and then we ran the numbers a bunch of different ways, whether we securitized loans. If we don't if we get growth in certain areas of course, the impact of interest rates had a very low level and we ran it it with our new outlook for expense growth.
And things like the.
Payment protection loans.
Yes that would come in and we became comfortable with the the 125. So we ran at enough times in different scenarios to think that 125 is a reasonable target to continue with the bank.
So it's not one thing we ran at a whole bunch of different ways with different things being down it up based on our assumptions and we kept coming in that range. So we decided it is a little bolt I guess I guess, it's easy justice.
Throw up your hands and say, we don't know what's going to happen, but we think we have a responsibility to investors to say that what what we really think is going to happen. If we have putting guidance out there.
We don't know about the credit shocked that might occur.
To all the financial services industry, but there seems to be.
That's why we have reserves and Thats why weve implemented Cecil.
So we can't second guessed that either that's obviously therefore reason so it seems we can't just say rolls through up or heads and say that Oh, our reserve and see that adult all doesn't matter.
Because there might be some of that in the future well that's always true. So we try to give the best guidance, we could add we did it through doing the model over and over again with different.
Scenarios around product set growth without one like we were more deterministic I would say and our 125 to 134 guidance, where we in our presentation, which will be updated on our website gave real targets for each of the businesses. The 125 comes out of us.
Looking at.
All the different.
Possible outcomes, that's how we became comfortable with the 125.
Okay. Thanks, that's interesting it's interesting approach maybe.
Hello.
Is there is their balance sheet growth expectations is that on the loan portfolio growth I should say.
That you would expect right.
Yes, yes, yes, there are some but weve ratcheted them down from where they were.
For the.
For the original target of 134, so they are in there, but there are lower.
And as David said, Yeah go ahead.
No Im Wally there's things like the I block and as block portfolio were still seem very good growth.
So people are looking at their securities and they need liquidity. So we're having a very good pipeline in certain areas of the business. So, though it's lower spread than say, our leasing business, where we don't expect as much growth. So weve ratcheted down those forecasts and Weve. When we were modeling. This we took some things down to zero.
Just because it's easy to think that looks nobody is going to be refinancing right now and you got six months deferral. So it's easy to think that you're not going to have a lot or prepayment.
So you know you've got to probably a lot of assets stability. So you really take a hard look at each product line and look at the pipeline and see how reasonable it is and what the renewed growth rate would be.
Okay.
Okay, and so it sounds like maybe you said it in your prepared remarks, I apologize I got a little bit late did you did you give some commentary around.
But at the expense expectations.
Yes, well right now where you know it's right around this level the.
At 38.
And a half or so in the first quarter, that's where we expect kind of the stay until the situation improves so the second quarter look similar and then.
Hey, real it will depend on how the world opens up for business and once again, we have.
A lot of.
Our least enough tied to the revenue in the business. So we're going to maintain that 10% between revenue and expense growth right now it seems like the expenses are going to stay at this level until revenue.
Growth would have improved.
Okay great.
In the CMBS business.
Are you have you can you see stole all originations and underwriting are you kind of continuing to underwrite, but waiting to see if the market opens you talk a little bit about what you're doing with that business now.
Yes. So there was the tail end of transactions. Once we were it was clear that we were the loans weren't going to be sold.
And Weve.
Dramatically change the turbine. So there was about 75 million I think we're down to about 35 million now of transactions that we committed to prior to the loan sales not going through but there they are substantially different they are lower LTV.
And they have a one year reserve.
In them. So they are extremely if I could do a billion dollars of those loans I would love to but we obviously have to.
To exceed area as a proportion right now to do that we wouldn't put $1 billion on fees, we wouldn't want to go over 300% of capital but.
They are extremely attractive loan sound were just finishing a few a few left from previous commitments. Many have just dropped out from themselves. So lot of deals. Just died and then with our new terms, which are pretty restrictive if you're gonna have to put up a year reserve.
Debt principal extremely principal and interest reserve, that's very difficult to do.
Okay and then so you said you're going to review the market and your revisit the market 90 days and see if it's open back up is there a point where.
If the market remains.
Closed that these loans become two older seasons to sell and you just have to make the decision to move them into the held for investment portfolio and if so.
What would the Cecil reserve feed as of today that you'd have to put on those.
The first the first to securitize, yes. So.
The if you're going to securitize the loans if they go past six nine months, you're probably not going to securitize those loans, though there is still a market for those loans. So that doesn't mean, you can't sell it to an institutional investor like an insurance company that wants that kind of exposure.
So the loan the securitized, yes, the loan sale now of course, we were selling the loads for someone else to securitize in the last transaction. So in that case I would also preclude that loan sale, but there are other investors, who would want to buy loans.
The.
And what was the second part I'm, sorry, I can answer that you.
I can answer the second part it was on the loan loss reserve implicate, yes, that's really data so anyway.
Yes so.
So you would actually retain the fair value accounting.
Regardless of where you hold them you can.
Switch that and.
Bear in mind that we own those loans net of fees at 99, So I don't think its.
That would be an issue and we have the we don't have.
Significant loss experience.
For those loans for the multi families which comprised the vast majority the portfolio. So I don't believe that's going to be an issue.
So the so the 5 million dollar loss that you booked this quarter, you think would basically cover.
What would cover you don't think about or more print out we don't we don't predict that would what I'm basing. It off is is virtually aside from the 58 million in a small other.
So theres, a little bit of retail and a small other tail with which we have disclosed in the tables.
The vast majority is multifamily multifamily even in Cove bid. According to the analytics firm that we use will have less than 1% cumulative losses.
So it doesn't appear that there's going to be an issue there.
Okay, and then the 12 and a half million dollar last question I have one this portfolio the 12 and half million dollar deposit how how he said you book it based on accounting standards, but can you tell us.
How that works yeah, we can't really comment that was illegal disclosure. So we only comment we can have is what's in the press release.
Okay.
Okay Ali just to be clear that 12, and a half is not in our 125 guidance.
Okay. Thank you.
I think that's why you're probably in Canada.
Well I was just curious if you are going to like well get three fee income over a year or two and then it would be a booster or not so thank you thats helpful.
Last question.
Can you update I believe last quarter. You said there was the regulators were were coming in and you felt like you had checked all the boxes as it relates to the consent order can you give us an update on where you stand I know obviously the world has changed since then so so any update you can help us to think about the consent order and the restrictions.
It would help.
As you can imagine the world is changed dramatically and we're not fee.
We're not the banks that the regulators are concerned about so maybe we're not such a priority as we maybe use debate, but the.
We still expect as we've said before that we are in full can we believe we are in full compliance and we expect hopefully that the.
Our regulators will agree with our assessment and very soon will.
You have acknowledged that we.
We think that will happen and a fairly short period.
Oh, yes, so they did come in and do the review I don't know fills an annual or or.
Yes, they did comment.
Okay, yes, okay.
More than that that's all I can understand.
I understand thank you, okay, I I sound like there was nobody else ask questions, but probably divest enough. So I'll step out thanks guys.
Thank you.
This does conclude today's question and answer session I will now, let's turn the call back to Damian Kozlowski for closing remarks.
Thank you everyone. We appreciate your being on the earnings call today.
The state of course.
Most important I think.
Obviously and these very interesting times.
Thank you operator.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating in you may now disconnect.
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