Q2 2020 Bancorp Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q2 2020, the Bancorp Inc. earnings Conference call. At this time all participant lines are in a listen only mode. After the speakers presentation. There will be a question and answer session tougher question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today on dress Viroslav. Thank you. Please go ahead Sir.
Thank you operator, good morning, and thank you for joining us today for the Bancorp second quarter 2020 financial results conference call on the call to be 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 dotcom.
A replay of the call beginning at approximately 12 PM Eastern time today the dial in for the replay is 8558 Fivenine to 056 with a confirmation code of 2755988 before I turn the call over to Damon I would like to remind everyone that when used in this conference call that words believes anticipates expects and similar expressions are intended.
To identify forward looking statements within the meaning of the private Securities Litigation Reform Act at 90 95.
Such statements are subject to risks and uncertainties, which could cause actual results performance or achievements to differ materially from those anticipate or suggested by these statements.
For further discussion of these risks and uncertainties. Please see the bankers filings with the SEC.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof.
The bankrupt undertakes no obligation to publicly release results of any revisions to forward looking statements, which may be made to reflect events or circumstances actually date hereof or to reflect the occurrence of unanticipated events.
I would like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andrew Good morning, everyone and thank you for joining US we have continued to experience momentum in our core earnings driven by higher interest income with falling interest expense increased loan balances and higher payments volumes.
In the second quarter, 2020 bank or earned 35 cents a share from both increased fee and spread revenue.
Some of the highlights total loans increased 49% year over year loan interest, including loans held for sale increased 39 total revenue increased 30% year over year with net interest income climbing 45%.
Net interest margins increased quarter over quarter 19 basis points to 353 payment in.
Payment card gross dollar volume GDV increased 43% year over year, while fees increased 18.
Noninterest expense was up 8% year over year as expenses continue to be tightly managed even as total revenue climbed 30% pre tax income increased 91% year over year, and 55% quarter over quarter, while the pandemic continues to be a significant source of market uncertainty, we have been able to achieve better revenue productivity and operating efficiency.
During this time, we also are making investments in our platform. In addition, the impact of fed actions the government's SBH support the macro retail trend from the physical to virtual and financial services and the removal of the BSA order restricting the banks activities have all provided additional tailwinds to our business.
Yes.
Moreover, our traditionally lower risk business size of continue to grow and gain momentum. This is apparent in our as block by block loans, which grew 11% quarter over quarter and 50% year over year as our digital to layer origination platform has enabled our clients more quickly access to liquidity from investment insurance assets.
Our payments business also continues to experience GDV growth significantly above the historical trend through increases in both existing and new programs across the payment spectrum.
Our pipeline of new products and programs continues to be extremely robust compared to historical norms.
Lastly, we are closely monitoring the fast developing situation relative to covert 19, we are emphasizing safety and implementing guidelines consistent with governmental agencies to reduce exposure and protect our staff. We're currently at approximately 25% staff levels in the office with our remaining staff lean.
Gauged in a work from home model.
We are putting employee concerns first in determining when returning to our office locations as appropriate.
I'd now turn the call over to Paul Frankel, our CFO will detail more about the second quarter.
Thank you Damian.
Return on assets and equity for the quarter, where respectively, 1.3% and 15.6%, which exceed both first quarter 2020, and second quarter 2019 increases were driven by 15.7 million dollar increase in net interest income and the $2.8 million.
Increase in prepaid and debit card fee income.
These revenue increases were partially offset by approximately $1 million in unrealized losses on commercial loans originated for sale primarily on the small hotel in retail portfolio income in that portfolio.
The vast majority of that portfolio is comprised of multifamily loans with Q cumulative coated losses estimated by a nationally recognized analytics firm at 1.2%.
These loans generally are on our books at a $99 price net of fees and have a weighted average floor, 4.8%. Please see the new tables for CRT loans in the press release, which provide a breakdown by loan type and other characteristics. If not sold these loans will be retained his interest earning assets.
Commercial real estate loans originated for sale total 1.6 billion and represent the largest portfolio with the aforementioned 4.8% weighted average rate floor. The next largest portfolio is the combined $1.3 billion as block and I black portfolio yields for which is estimated at two point.
5%.
We generated $208 million of DPP loans with approximately $5.5 million to be earned as fees, which is being recognized over 11 months beginning in April 2020, the actual rack recognition period may be less depending on the completion of applications for forgiveness and the timing of the SBA.
Loan reimbursements.
Including those short term PPP loans small business loans substantially all sta.
Totaled $809 million and have an estimated yield of 5%.
Leasing balances declined slightly to $422 million with an estimated yield of 5.8%.
The decrease reflected the cobot impact of reduced new vehicle availability is vehicle production continues to be inconsistent.
The $15.7 million increase in net interest income reflected increases in average quarterly CRT loans to $1.5 billion why related interest income increased $11.3 million interest on SBK loans increased $2.2 million, including $1.2 million of raw.
Recognized PPP fees.
While combined S. block and I backed loans increased 54% over these periods related interest income decreased $1.6 million, reflecting the impact is 75 basis points of better reserve interest rate reductions in 2019.
And additional historic Riddick reductions of 1.5% in Q1 2020.
As black loans are secured by marketable securities and I block, our secured by the cash value life insurance and credit losses have not been incurred.
Interest expense was $7.9 million lower and the cost of funds was 12 basis points for the quarter, reflecting the impact of the federal reserve interest rate reductions. The vast majority of our deposit interest expense is contractual and tied to market interest rates.
The provision for credit losses was approximately $1 million compared to $3.6 million in Q1, 2020, which was elevated as a result of leasing losses, because as block and I've locked loans are respectively collateralized by marketable securities and the cash value life insurance and have not incurred.
Losses management includes.
Excludes those loans from the ratio of the allowance to total loans and its internal analysis accordingly, the adjusted ratio is 1.4%.
Prepaid accounts, our largest funding source are also the primary driver of non interest income these and related income on prepaid cards were up 18% to 18.7 million in Q2 2020 compared to 15.8 million in Q1 2019.
Card payment and AC age processing fees include rapid funds revenue and decreased 814000.
To eight 1.8 million, reflecting the exit of non strategic higher risk AC age customers.
Non interest expense for Q2, 2020 was $42.6 million were 8% higher than the prior year, the increase reflected higher salary legal and FDIC expense salary expense reflected higher incentive compensation expense and higher business development comply.
Since risk management and expense primarily related to the payments business.
Year to date non interest expense was $81 million, so still in the $40 million average quarterly range.
Book value per share increased to $9 in 28 cents compared to 8007 cents at June Thirtyth 2019, reflecting earnings per share and the increased value the investment portfolio in the current rate environment.
The Q2 2020 consolidated leverage ratio, which is based upon average quarterly assets was approximately 8.5% and risk base ratios approximated 15%.
In closing there are certain characteristics of our loan portfolios as shown in new tables in the press release, which I would like to highlight.
As previously mentioned the vast majority of our $1.6 billion of commercial loans held for sale, our multifamily loans for which a nationally recognized analytics firm has estimated a cumulative loss of 1% 1.2% in their coded projections, our next largest $1.3 billion loan port.
Folio consists of vast block and I block loans, which have not incurred losses notwithstanding than recent historic declines in equity markets.
Approximately half of the SBA loan portfolio is U.S. government guaranteed and US government is paying principal and interest on those loans for a six month period.
The majority of the other SBK loans consist of commercial mortgages with 50% to 60% origination dade loan to value.
For leases, which experience credit issues, we have recourse to the leased vehicles.
While there is uncertainty related to the future. We believe these are positive characteristics of our portfolio, which demonstrate lower risk than other forms of lending.
Thank you Paul.
Operator can you open the lines for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound cake. Please stand by what we compile the culinary roster.
Our first question comes on the line of Frank Schiraldi from Piper Sandler Your line is now open.
Morning, guys.
Hi, good morning, Frank.
Just on me.
First on the NIM, obviously always thank you guys is asset sensitive and.
Rich came down, but the NIM bounced up linked quarter. So.
Paul could you talk about the sustainability there and.
Some of the the expectation going forward.
Yes. So so the primary reason for that Frank is actually what we highlighted.
In the last call and in the first quarter Q, which is that.
Our.
CRD portfolio has interest rate floors, while they are rate sensitive you're right like the vast majority of our balance sheet as rate sensitive.
That particular portfolio has floors of 4.8% that was.
Also highlighted in a table that obviously that floors is still in place so that speaks for stability within and maintenance of relatively of a NIM. That's that's comparable to the one we have now.
On the other side of the coin we have.
The.
The EPS block and I black portfolios.
They are at 2.5% so to the extent that portfolio grows faster than the higher yielding SDMA and leasing that could have a slight.
Decrease that could result in a slight decrease but.
Overall I believe the NIM is relatively stable because of those floors.
Okay, and then when you sort of you ask box.
2.5% as that were.
Thats, where they are today is that fully captured in the average yields for the second quarter.
Yes.
Yes, all the yields if you recall dropped.
In March the fed lowered to everything went down per there based on prime so.
So prime went down in March so it was in fact, a full quarter.
Yes, we're now.
Let Frank we're not so we've kind of held the line too. So we're not we're not expecting for any business reasons for that to go lower.
In fact, the insurance fact lines of credit.
Really originate more at the 3% levels, so and there are being disproportionately originated so you might actually see the yield on that portfolio ticked up a touch overtime.
Okay and then.
If you could just in broad strokes.
I know you don't give detail on the breakout of these things, but in terms of the 40% plus.
GDV growth year over year.
Could you maybe just kind of talk about the main drivers of that.
Well the main as a macro driver definitely so you saw Amazon's earnings last night. There is just a across retail obviously because the pandemic. There's just more use of non cash payment types.
Up not only through fintech companies, but across the board so you're seeing elevated.
Rates of adaption and that's really driving it it's not only of the fin Tech space. It's it's across our programs the leading is definitely fintech.
And this does this quarter it doesn't really even account for some of the new products and programs such as so fiber, it's really hasn't been implemented yet fully here at the bank course so.
There is there is just a rapid adoption in fact ill give you a little teaser we're actually seeing that climb so our first indication.
For July is that it's above.
The second quarter rate and it's more in the low 50% of GDV growth. So.
It's going to be sustained the everything we see our pipeline everything says this is Steve. This is sustained this is going to last awhile.
And it's it's.
You know, it's a generational shift and the use of.
Of these type of products.
Great.
And then and then just finally you mentioned so far.
Obviously they.
Announced this last quarter, there again pursuing a.
I guess pursuing a commercial bank charter this turnaround but.
What are your thoughts just overall on the challenger bank space on on.
This that Avenue and then how do you protect yourself in terms of A. I know, it's a pretty long tail to get one of these forget a bank charter.
Probably talking two years, plus maybe three years.
Years, plus but in terms of potential hold down the road is it just not a concern given some of the other.
Business gained you're seeing in some of the other relationships in terms of the growth you're seeing there.
Yes, it's a very few programs and mostly these are remember we're in healthcare and were in government gift card and court did incentive card. None of those are going to get a license thats number one you're right about it takes a while.
We support all our programs, we're trying to build a scalable leverageable low cost.
And best in class consumer compliance MBS, a platform period, and we think that will at the end of the day ENTYCE, even if people think due to license it may be a lower cost option, even if they do get the license and they use it for something like lending and they don't use it necessarily.
For the payments or deposit side of the business. So.
We're we don't think it's going to meaningfully impact us we.
Somebody believes that we're not picking winners or losers, we think if somebody wants to do that they should go ahead thats, a very difficult tracks to go down and.
I think valuations are very different in the fintech market than they are in the banking market. So.
You know all those things have to be considered in getting a license, but borrow was one of our theres still in the process of finalizing.
Their license and everything and.
Hi, good great partner and doesn't mean, we can't do something else with them in the future, but there's so many opportunities that are created in this marketplace today virtual credit cards credit sponsorship.
Other types of processing or expansion of our via say activities.
For nonpartisan non current partners that Theres theres plenty of opportunities out there if one or two programs in the future, which don't have impact today on our volume.
So if I really hasn't taken off yet and implemented limitation at the bank. So we wish everybody lock and we want to give them flexibility to file their own strategy, but also recognize that we're trying to build the best scalable.
Best.
Scale.
And scope because of our capabilities and technology be as say in compliance to provide an incentive to stay with the bank core as your as you are been sponsor as your financial sponsor.
Alright, great essentially all the color and I'll hop back out.
Thank you. Our next question comes from the line I William Wallace from Raymond James Your line is now open.
Thanks morning, guys.
No.
On the bus maybe start on the expense side.
There were some some.
Commentary in the prepared remarks about.
Some.
Incented higher incentive comp and then some higher expenses on the payments business.
Are those expenses that you anticipate come back out so that $40 million run rate continues in the back half or are these.
Expenses, especially on the payment side here today.
Well some of that more onetime expenses to legal.
So it should be when you look at the year will be close I think.
To the 40 run rate, maybe a little bit totally depends a little bit on revenue of course. So we're just seeing this this unbelievable revenue trend. So we need to make sure that weve and volume trends. So we've got to make sure we strengthen our platform, but also compensate people.
In the third quarter of last year, I remembered 40, youre going to see a.
Single digit growth rate, because we had I think 3% in the first quarter, 8% in the second quarter. This year and last year, we had about a 42 plus million expense rate in the third quarter of last year, we should be at that level are lower in the third quarter of this year, so you're going to see a maybe.
The 5% range or so.
An expense and you'll see that obviously the substantial revenue growth on our core revenue.
Does that help.
Yes.
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In this in the CMBS portfolio that that Youve.
So you put on balance sheet.
There was commentary about if they don't sell as is there still.
Some expectation that you could package and sell those.
Yes, but we're not the thing we want to run it.
We really it by we're looking at it from all sides. There's really only two is decisions either we stay in the business. We sell most of the portfolio and then we continue the business or we keep the portfolio and the reason as we don't want to be happen and a half out and retain half the loans and then still being the business. So it's either stay with.
The loans or or sell the sell the vast majority are loans and continue the business now.
The the issue right now is we don't believe we could get again.
On the sale. So we do have indication right now that we might be able to to get the par from third parties. If we sold.
Hey, sizable proportion of the loans and we just don't think Thats economic.
We think those loans are absolutely worth bar if not more.
Like Paul's comments that portfolio is booked at 99, so we do have.
Coverage compared to national recognized.
Credit estimators in a loss estimate or so we think were.
We want to make an informed decision based on we had an exaggerated shock it may change the market like we when we exited CMBS.
We we originally.
Originate those loans to hold if that became necessary into cases, one is there was a exaggerated shock which.
Matt we have to hold the loans are number two we lost the.
The game because without the gain incented very anemic economic to do adverse holding the assets. So.
Weve worked really hard over the last three years to put our selves in this position. Originally we started securitization because we had the community bank portfolio and Thats pretty much gone. So we're very.
Comfortable holding the credit risk if we decide to.
Okay and is that to say then that you are no longer originating loans tied to that.
Yes at present with these loans as long as these loans are on balance sheet.
Correct and we won't.
We're not going to sell half the loans. So it's either we keep the whole portfolio or by the way we have a moratorium until the end of this year. So there won't be any.
CRH securitization loans done until they under this year, we do have a window in the first quarter of next year, we could distribute the loans. So thats, where we are right now so, but we're not going to be distributing the loans without what we think our gains. So it just changes the whole economics of the business. If you are not.
Getting those tend to 15 million gains on these portfolios. It may obviously, if you're not getting $25 million year in gains that in the spread revenue is much more attractive.
Yes, okay.
And then and then as you.
Close the books each quarter, how are you determining the market value is it one external third party or do you have.
We have two or three parties that are.
Valuing these four you Jeff I'll, let me handle it.
Yeah, we use we use a number of resources.
But.
We're relying on the 1.2% estimate for the vast majority of the portfolio for several of the for the small retail hotel, we take some of those and we and we have one third party that does those.
And of course, we internally, we look at those loans ourselves in the event there any issues.
Clearly that there was some if you recall in the in the first quarter. We took more marks in this quarter, we took another million part of that.
The majority of all those marks is market base based on interest rates, there was a little bit of credit in there but.
Really not significant you'll read about that and Q.
And we'll continue to do that so so I think we're doing everything we possibly can to properly value those loans.
Okay, alright. Thanks, So right now, there's there's really not much credit in that 1%.
Discount correct, yes, that's correct. If you if you look tricia side, it's not being impacted at least now except for some hotels.
It's not being impacted with deferrals or anything we're seeing very strong.
You know very strong sponsors that are and remember these are interesting properties because they are new money. In these are repositioning properties, where people are doing some theres future funding pieces to it and.
Real estate developers hate to walk away from when they just put money and so they are they these are fairly large sponsors. So they may have had multiple multifamily properties and other properties that they are have already.
Refinanced three times. So you know this that those are the type of.
Of sponsors were dealing with a number two is the markets that we've been in tend to be.
Away from some of the dislocations that are happening around the country. So they tend to be in the.
Southern.
Portion.
Mid portion of the country Thats, where you can look at the disclosures where they are.
You know near Army bases, and big auto plants, and where there has been historically, 96%.
Of occupancy rates. So it's we think the portfolio I've I've I've said on the credit Committee I've approved every deal and that entire portfolio I sign and read every credit memorandum myself with my Chief Credit Officer.
And we are voting members of that so we feel very comfortable with the portfolio. We have saying, we don't feel like we should give it away.
Give it away I think it's there, especially because if we went back in the market today, we wouldn't get that much but look better than what we have so we would trade assets for deals that are really that much better so but that once again decisions haven't been made we have a moratorium on origination we may we start the business depending on the.
What happens in the marketplace.
But holding the portfolio is definitely an option.
Okay, Alright, thank you for all that color.
On the S block and I block business is the demand is it a market share gain or are you. Just do you think that theres just a lot more demand for that product in general.
It's definitely both because well, obviously, if you're growing 11% quarter over quarter, and 50% kefir, there's probably some market share gain though I haven't done the math theres only a few providers and.
You know like Tristate and Goldman.
I think theres a lot of.
If you have the right mix.
Order to provide the product seamlessly to the client and now we do with delay a platform. We talked about this years ago that we were developing this platform and that it would revolutionized the way, we do business and it seems to be corrected as because it just so as much simpler to get people that money.
The fact that with the tax changes in the second mortgages are no longer tax efficient.
And it's easy to get this money in a couple of days. It just seems to be supporting the market is massive so you know it's the penetration is still percentages.
In a single digits under 5%. So there's a massive market to use these type of securities or investment assets as liquidity. So I just think theres a long future ahead with this platform to be continue to.
I have rapid growth our pipeline by the way is stronger than it's ever been so it's not only that we've seen this growth is kind of like the GDV growth, we're getting and we have more partners than we ever have before plus several providers of this product some of them captive come to us and say they want to actually rent our platform. So I think that business, particularly.
As a lot of growth potential.
Over the next couple of years.
Okay, and just so just to be clear so you're not winning the business by by undercutting on price, it's really it's really a function of.
The ease of of getting through the process for for your product versus the competitors.
We are absolutely not cutting price, we've set up an economic floor, we're at and we're not going below that so theres a couple of situations, where because the revenue share of we have just small revenue shares with some of our clients on certain deals that we might have.
On a few basis points lower but no. It's if anything you're going to see like I said before a tick up.
Of that portfolio over the next three to six months, probably not a tick down we're absolutely holding line we walk away.
And I look at all or things feel too and to be honest on the credit committee for them to I look at every larger deal and I've said noted deals that were lower than its up frustrated my team, but we're not we're not eroding the price.
Okay alright, thank you.
One last question Damian Toms question that I've never asked before but now that the order has been lifted I guess it can be irrelevant question Youve always spoken about trying to identify.
Low risk businesses that that Bancorp, Ken Ken.
Be in that would help deploy your deposits that with good risk adjusted returns now that the order is list is lifted does M&A come into the equation are there are their businesses out there that could be of of interests.
That Bancorp my.
Consider buying.
Well again or things of the organic.
Of course hedging, but we just talk a little bit types business lines might yes, there are always going to be the philosophy, we have but you know things change, but is to add we don't add core capabilities. We build them. So there we bought leasing portfolios, a new technology that might enhance our payments right.
We're expanding our payments platform is there a potential too.
Expand with somebody who's already into credit sponsorship an area that we're moving into yes. So we look at our map of where our products services are and where are our core capabilities are.
And Thats the way, we attacked the M&A thinking about M&A weed out by a company an unrelated company to fill our balance sheet, we don't try to buy a core capability that.
That we don't know how to manage as well as our other parts in our relying on other people. So that's our mentality, but absolutely we are creating a lot of capital.
We want to continue to.
Build our capital base, and we want to expand our map so absolutely.
That's always in the equation, but now obviously with lifting of orders with.
Healthy.
Capital ratios, that's always part of the discussion on.
And should be part of discussion of any board and any management team. So we're we're in it obviously, what's coming out of this is going to be opportunities because not everybody was as well capitalized and people have add dislocation. So you just don't you never know, but we don't we do not want to do a dilutive acquisition thats not strategic.
Totally aligned with what our strategy is today.
Okay. Thank you for that color appreciate I'll I'll.
You can tell all my questions. Thanks.
Hey, Thanks, a lot Wallace.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Damian Kozlowski for closing remark.
Thank you for joining us today really appreciate all the questions and we will talk soon at the end of the third quarter operator.
Rosenbaum gentlemen.
Ladies and gentlemen, this concludes todays conference call. Thanks for participating you may now disconnect.
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