Q3 2020 Bancorp Inc Earnings Call
Welcome to the quarter suite Twentytwenty the Bancorp incorporated.
Earnings Conference call at this time, all participants are in a sense only mode. Later, we'll conduct a question and I'd say session and instructions will follow at that time if anyone.
Anyone should require assistance during the conference East Press Star Zero as a reminder, this conference call is being recorded on a like to turn the conference over to your host Mr. Andres Viroslav you may begin.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's third quarter 2020 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frenkiel, 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 call beginning at approximately 12 pm.
Eastern time today, the dial in for the replay is 8558592 056, a confirmation code of 568 to 938 before I turn the call over to Damian I would like to remind everyone that when used in this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements within the meaning of.
The private Securities Litigation Reform Act as much as 95, such statements are subject to risk and uncertainties, which could cause actual results performance or achievements to differ materially from those anticipated or suggested by such statements for further discussion of these risks and uncertainties. Please see the bancorp's filings with the FCC listen.
Listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of 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 now I would like to turn the call over to the Bancorps Chief Executive Officer.
Damian Kozlowski Damian.
Thank you Andrea good morning, everyone the bank or in 40 cents a share on revenue of 74 in expenses of 42 million revenue climbed 20% driven by a 33% year over year increase in net interest income.
And fee growth of 19% after removing our third quarter 2019 securitization game. The fee growth was supported by 20% growth year over year and card fees cost of funds was down 77% year over year illustrating the benefits of our payments funding model expenses were flat year over year and cost control and efficiency continues to be a main focus.
Management net income from continue operations grew 13% testing 2019 third quarter, even without securitization game revenue loan deferrals for our total loan portfolio dropped to 1.2% from 7.5% driven by our leasing business that saw a drop to 1% of the portfolio from.
90% at the end of the second quarter.
In the third quarter, we saw continued business momentum led by gross dollar volume GDV and our cards business of 39%. We also add assets led by 58% year over year growth in our securities insurance, an adviser financing lending platforms. Additionally, our commercial business has renewed momentum with SP, a leasing respectively, growing five and 2% quarter over.
Our quarter and this quarter, we raised the bar approximately 98 million net of fees and new senior secured debt at the holding company to support the continued growth of our company. This debt can be applied to the bank as equity to support regulatory ratios. We can ensure we continue to add new card programs into our payments ecosystem in the third quarter as well as adding several new direct rep.
But funds partners. These new relationships will be announced its products and services on to the marketplace. Our pipelines continue to be very robust and significantly above historic norms, suggesting continued growth in transaction volumes.
In the third quarter, we made a strategic determination as to our securitization business as discussed in previous calls we have been evaluating our securitization platform and its loan portfolio. After assessing its current profitability market conditions and credit risk, we have decided to discontinue feature securitization activity. The loan portfolio comprised almost entirely of multifamily loans that have experienced.
Unified sales and delinquencies will amortize over next three to five years and be replaced by loans originated in other areas. We expect income from the portfolio to be stable over the first two years a portion of the portfolio may be sold as whole loans as space is needed our balance sheet, probably lending activities, our real estate team and our commercial Sta business will continue to originate.
Transactions Lastly, we now believe we have enough information to issue preliminary guidance for 2021.
We expect to earn between 165 and 170 a share.
170, a share or approximately 100 million and net income is currently our company budget for 2021.
I now turn over the call to Paul Frankel, our CFO to give you more color on the third quarter.
Thank you Damian.
Return on assets and equity for the quarter were respectively, 1.5% in 17%, which represented increases from second quarter asset and equity returns of 1.3% and 16%.
Increases were driven by a $12.4 million increase in net interest income and a $3.3 million increase in prepaid and debit card fee income was Damian noted we are retaining the commercial real estate loans. We previously had been securitizing those loans will continue to be fair valued.
The vast majority of that portfolio is comprised of multifamily loans with cumulative covered losses estimated by a nationally recognized analytics firm at 1.2%.
As long as generally are on our books at a $99 price or lower and have a weighted average rate for 4.8%. Please see the new tables in the press release for CRB and other loans with a breakdown by loan type and other characteristics commercial real estate loans, which were originally originated for sale in which now.
It will be held on the balance sheet totaled $1.6 billion and represent the largest loan portfolio with the aforementioned 4.8% weighted average rate floor.
The next largest portfolio is the combined $1.5 billion S block by block and advisor financing portfolio the yield for which is approximately 2.5%.
We generated $208 million of PPP loans.
Turning approximately $5.5 million of fees, which is being recognized over 11 months beginning in April 2020, the actual recognition period may be less depending on the completion of applications for forgiveness and the timing of the SB eight loan reimbursements, which have now commenced.
Including those short term PPP loans small business loans substantially all SP, a total $841 million, excluding and excluding PPP loans have an estimated yield of 4.9%.
New vehicle production ramped up in the third quarter, and we were able to increase leasing balances to $430 million from $422 million at the prior quarter and leases have an estimated yield in the 6% range.
The $12.4 million increase in net interest income reflect an increase it increases in average quarterly CRB loans to $1.6 billion why related interest income increased $7.8 million interest on SP, a loans increased $2.1 million, including approximately one point.
$5 million of recognized TPP fees.
Well combined EPS block and I block loans increased 55% over these periods related interest income decreased $1 million, reflecting the impact of 75 basis points of federal reserve interest rate reductions in 2019, and additional historic reductions of 1.5% in Q1.
2020 as.
Spock loans are secured by marketable securities and I block are secured by the cash value of life insurance and credit losses have not been incurred.
Interest expense was $8.3 million lower and the cost of funds was 18 basis points for the quarter, reflecting the impact of the federal reserve interest rate reductions the vast majority of our deposit interest expenses contractual and tied to market interest rates.
The net interest margin in Q3 was 3.37 down from 3.53 in Q2 as securities with rates tied to LIBOR or experienced a full quarter of lower LIBOR rates. Additionally, prepayments of higher yielding securities increased.
The provision for credit losses was 1.3 million and resulted primarily from ESB loans.
Because S block and I black loans, respectively, collateralized by marketable securities and the cash value of life insurance and have not incurred credit losses management expenses those loans from the ratio of the allowance to total loans in its internal analysis accordingly, the adjusted ratio is 1.4%.
Prepaid accounts, our largest funding source are also the primary driver of noninterest income fees and related income on prepaid cards were up 20% to 19.4 million in Q3 compared to 16.1 million in the prior year quarter.
Card payment in AC age processing fees exclude include.
Rapid funds revenue and decreased $830000 to 1.8 million.
Reflecting the exit of non strategic higher risk AC age customers non interest expense for Q3, 2020 was $42 million, which was comparable to the same period in 2019, which also included a $1.4 million settlement.
Moving that settlement non interest expense increased 3.4% compared to Q3 2019.
Book value per share increased to 9.71 $9.71 compared.
Compared to 8052 cents EPS is at September Thirtyth, 2019, reflecting earnings per share and the increased value of the investment portfolio and the current rate environment. The Q3, 2020 consolidated leverage ratio, which is based upon.
Average quarterly assets was approximately 8.6% and risk based ratios approximated 14%.
In closing there are certain characteristics of our loan portfolios as shown in the new tables in the press release, which I would like to highlight as previously mentioned the vast majority of our one of our largest $1.6 billion.
Commercial loans held for sale, our multifamily loans for which a nationally recognized analytics firm has estimated the cumulative loss of 1.2% in their code projections. These loans are already on our books at levels, reflecting that discount.
Our next largest $1.5 billion loan portfolio consists of EPS block and I block loans, which have not incurred losses, notwithstanding the recent historic declines in equity markets.
Absolutely, 65% of the $836 million small business loan portfolio, including PPP loans is U.S. government guaranteed the majority of the other remaining loans consist of commercial mortgages with 50% to 60% origination date loan to value.
For leases, which which experienced credit issues, we have recourse to the leased vehicles. While there is uncertainty uncertainty related to the future. We believe these are positive characteristics of our loan portfolios, which demonstrate lower risk than other forms of lending I will now turn the call back to Damon.
Okay. Thanks, a lot Paul we're going to go operator, we're going to open the line for questions.
Ladies and gentlemen, if we have a question at this time piece brass the bar than in number one key on your Touchtone telephone you for your question has been answered but at least you moved your SaaS from the key piece for us to Penske again, ladies and gentlemen, if you have a question at this time piece Press Star and then a number one.
Key on your Touchtone telephone.
Your first question comes from the line of Frank Schiraldi from My first Sandler you May ask your question.
Thank you good morning.
And Frank just starting out with the David I Wonder if you could put any sort.
Sort of a.
Parameters around you gave your preliminary expectation for 2021 bps than any parameters around how you get there in terms of what the growth outlook is for things like the EPS block business and GDP.
Okay. So we put a new investor presentation on our site last night, So we updated all the prospective.
Analysis and everything so you may want to refer to that if you haven't seen it.
And you know we we I think we've got what we do when we do budgeting as we look at a bunch of different scenarios and think through what are the likely cases on each business line.
And the under driving macroeconomic indicators like interest rates.
And we we run these scenarios and like I did when we maintained our guidance at the beginning of the year. We were fairly confident that we would get to that 125 number and obviously now with 40 cents this quarter that looks like a like.
Likely at this point.
So we do the same thing here and and we're looking for continued robust growth on the EPS block business.
And you know the mid teens on things like SP and leasing.
And our GDV growth as it had a bump in July but it's settled into the 30.
5% or so range and we expect that kind of growth to continue.
Next year with 15% to 20% fee growth. So when you put that together with the fact that we are controlling expenses, it's very easy to come to that 170 figure considering we just price.
Printed 40 cents a share.
In the third quarter, which is usually our weaker quarter.
Okay.
And then.
Yes, I did not see the investor presentation. So I'm just curious do you guys provide or sorry, I know you've talked in the past about perhaps trying to provide some more detail around that.
The make up of.
The current growth and or the size of your largest relationships I realize there's competitive reasons and partner reasons that you can't go too far into it but is there any more detail on that or can you share any any further color there.
Yes, so usual I'm going to say is because we don't want to disclose what our partners wanting to own they want to own their information around the growth of their business is that everything we let them do that but we're saying once again, it's a macro we're seeing growth across the entire spectrum of use cases and payments.
Period so.
The devices that we use the payment devices and the different types of relationships, whether their government gift card.
Corporate incentive healthcare like I say accounts and Fintech debit cards are all growing.
Third disproportionate in the Fintech area, but they're not the only place that it's growing that's why if you look at our competitor set and you you understand the makeup of the type of programs. We have you see that we're growing disproportionately to the market by using something like the Nielsen ratings, which is the market standard for reporting these.
Competitive data.
And it's really being driven by the fact that there was this macro trend, but also because weve built what we think is the best in class compliance BSA infrastructure.
That overlooks all the different used cases and payments so people feel increasingly comfortable to come to the bank core and know that they are going to have the platform that they need to do business and not have to worry about any regulatory concerns.
Okay, just a quick follow up on that front.
Would you be able to say or you know just given that your point on how diverse the growth is and I know you've added a lot of new new partners.
Can you say when I think about the largest partnerships you have the largest relationships you have are those becoming less concentrated in terms of total percentage pie of you know what total percentage of revenue pie or or deposit pie or those becoming less concentrated those largest relationships or more.
That's true.
It just goes back and forth depending on.
We've had a lot of dislocations. This year, so you've had things go up and down so there.
I think over time, it will actually become because we know we have we do have visibility on the programs we're adding.
Overtime it will be we're very diversified now so we're extremely diversified across the products and use cases now, but even if you look in the fintech area with the larger programs that we've added some weve added recently, which we haven't announced its likely to become less concentrated even in.
That space.
Sure. Okay, and then just lastly on the direct.
Rapid funds.
Business is anything baked into a meaningful baked into 2021 is that still more of out along the rise in terms of revenue growth.
Well that's we've.
We've definitely investigated and signed.
Partners. That's also in the Investor deck, so you'll see some new partners in that Investor deck. There is a page dedicated to that.
So it's expanding so there's a couple of million in there.
When we look at fees.
Two two and a half or so million.
So it's and that's the that's the direct not the indirect which is the venmo type of stuff. So we're still expecting them to grow that business it could be much larger than that but.
We're very conservative when we put estimates and for for that product set.
Got it okay. Thank you.
Your next question comes from the line of Protium Wallace from Raymond James Your line is open.
Thanks, Good morning, guys.
David maybe staying with rapid funds is should we think about the new customers and that just like we would any other program, where there's a ramp period, its et cetera or are.
Or there is the rabbits funds products really more of a kind of instantaneous boost to revenue as the as the customers are.
Turned onto the product.
Okay, So you're going to hate this answer it's both so.
Yes.
In the past that was more of a ramp we're looking at several large partnerships now that would be more instantaneous, resulting in significant fees immediately so the.
There are theres kind of two direct types of partnerships what are more corporate some more our system wide.
Either tech or network platform. So we have both those discussions.
No, we haven't announced yet, but they're both there could be substantial revenue immediately and that theres ones that are more corporate.
Focus that are have little bit higher of a longer ramp time.
Okay, Okay fair enough.
And then on the on the loan portfolio.
Experiencing very significant growth in the EPS block line of business and you had mentioned that remaining robust and then mid teens I believe you said NSPI leasing and that would get the run off of the.
Securitize multifamily portfolio.
Can you talk a little bit about.
Maybe maybe we'll see kind of three years down the road when when the multifamily loans are mostly conduits.
Mix of your loan portfolio that you would target.
And then what are the.
Margin implications in a zero interest rate environment.
Oh, well the loan portfolio first of all with the.
Securitization multi it's very it should be very stable, we still have future funding to do in the portfolio. So you're going to get consistent income for at least two years, if not more they they could potentially.
Turn into longer term fixed rate loans. So what happens is those loans will seek permanent financing after a stabilization.
Program. So we may continue to hold a set of those loans into the future. So we have we are developing a credit roadmap around.
We're going to be invested in three years from now to that very question, we're going to be expanding two sets one into our AR.
Our EPS block by block.
Our.
[noise] advisor loans, all those were building out the product set on the institutional business were also.
Establishing a much broader commercial business.
Where we do business in SP and leasing so there is a lot of opportunities. There. So we don't remember three years, we don't want to balloon the balance sheet, probably beyond at eight and eight eight and a half a percent level and we have some I think very good ideas of when those loans do roll off.
How to put that capital work and increasing other parts of the business, but it will be more it will be an EPS block it'll be in institutional it also be in our commercial businesses and remember as are we probably will continue to hold in some form.
200% to 300% of some type of real estate going into the future.
Whether they are fixed rate loans or other type of exposure within our commercial business.
So we haven't decided what that's going to be but we feel very confident that we'll be able to replace.
Those loans as they roll off with good lending opportunities.
And I am I hearing that you're you could be replacing them with another business line is that is that reading, yes, we have that maybe we haven't so we're expanding our product we haven't finalized what we're going to do and we're creating a three year credit roadmap and we are very.
Rigorous about it so.
There is a bunch of product that we're going to.
Create that are in the market today that we're going to participate in as extensions on our current platforms. So we're kind of devising of how thats all going to dovetail if.
If we need the space sooner because of the lending initiatives that we're creating we can always sell a portion of the multifamily loans.
In the marketplace those are extremely.
They are not hard to sell even in this environment we've had.
People, who would want to buy substantial parts of our multifamily portfolio at par so.
We're not worried about replacing that lending right.
Revenue and if it's something that multiple years down the road. So we still have $2 billion of room, and we still have a billion five of securities and stuff. So we've got plenty of room to expand our current platforms into the next three years and that as they as those loans roll off.
On the CR resizable decide at that time, whether or not there is you know.
We should keep that type of exposure and turn it into fixed rate longer term exposure or we need that room in order to build the other businesses.
Okay and so.
And then just sort of stepping back to the EPS block I mean that that the growth in the EPS block loan portfolio is twice or more or any other items. So is there a limit as to what portion or mix of the loan portfolio. You would you would have what the with the EPS block or would you just let that go however, it's going to go in.
Fine well to the recently.
So that we think of that as a platform. So we're not only we're raising.
In a very difficult time, I block is a 3% loan overfunding EPS blocks more like two and a half and then our a financing can be six or 7% over funding. So we're slowly lose.
We're slowly raising the total effective yield on the institutional business and the new lending businesses that we do our products and services, we sell like banking as a service to other companies who want to that EPS block capability will raise the effective yield on that platform over time over the next three years. So.
The we see.
The EPS block, we could easily double the size of the business to $3 billion over next couple of years and have enough room, that's what I mean.
We would want to put that on and the reason is even though it would lower our effective.
Margin on our lending portfolio, we are growing fees very aggressively across the entire business. So it's very profitable at zero risk basically and.
For the EPS block business. So if you can get you know at an effective yield of above 250, and three on I blocked and raise that overtime to say, 3% on a whole portfolio over funding costs.
You would double the size that business without even thinking about it because it just doesn't have a lot of credit risk and you might not do that if you were a different business in newer branch funded but because our payments business is driving such large fee growth. The overall enterprise is obviously going to return.
Ill continue to increase its return on equity during that time. So we just don't think of it as one business and we have a unique business model. So we can actually engage in a larger business and a non risky lending line and still have you know increases in margins.
Over the entire enterprise, even though we might lose some a NIM.
Okay. All right. Thanks, and my last question is just thinking about the expense base and growth I know you've got your.
Your job was targets, there and Theres a lot going on in the business. So.
Help me help us think about kind of a reasonable growth expectation in the expense line as you as you.
You know unlock some of the leverage in the business, but make decisions to reinvest where platforms.
This is going to be easy one were looking at between 300.
And five and 3% of revenue right now for next year.
And we're going to have a 100 million of net income. So as you know we're very rigorous about delivering.
What we say so you know its a.
Depends and we have variable cost involved in compensation and stuff. So if we do a little bit better next year and say, we have 315 or 20. Some of that will go into net income some probably will go right into reinvestment in the business around building the platforms that we want to build and if we don't meet that revenue number.
You know we.
We're more like 300, we will make sure that we.
Our very rigorous about meeting Oh.
Our earnings per share target so as much as you can obviously, we don't we don't control everything, but we were very rigorous about matching revenue and expenses and keeping that draws relationship constant and Luckily we have sizable amount of compensation and discretion here that we can.
We can make sure that we can manage the entire cost base, depending on what the revenue environment as.
Okay. Thanks, Thank you Damian I'll step out let somebody else ask questions appreciate it.
Your next question comes from the line of Bradley Nets. Some cars capital you May ask your question.
Hello, guys. Thanks for the question.
[music].
So how do buybacks fit into the equation as I look out into the next 12 months or so.
Okay. So in previous earnings calls I said that.
During the Covance situation that we weren't contemplating at that time, the last couple of quarters, saying that.
Because of the dislocation and we want to have very good visibility on what was happening in the overall economy, we would not we.
We would wait to do that we don't with the raising of $100 million of capital at the holding company and holding 113 million in cash and with our performance on deferrals and across the credit back from on our portfolio, we no longer have that reservation about.
Doing something on the return of capital to shareholders.
Shareholders.
That's.
Any comment.
Yeah.
Okay. Thanks.
Regarding you getting out in the multifamily securitization business did that have any one time costs associated with it that was in the third quarter and.
And yes, I'll just start with that.
Okay. So the we did take marks on some of those.
Hoteling, it's a small fraction of the portfolio, but there were some fair value marks that were taken in the first quarter the.
The the total that I will turn it over to Paul on this too but there.
There is not a significant amount to get out.
That we don't have an offset for there is a cost savings though.
Where we've trimmed the team down too.
About 30.
30% of what it was to manage the book.
And we no longer have obviously.
The cost of the people, but also the cost of origination fees, we were paying based on origination and then securitization of the assets and the gain so there'll be a cost impact around $10 million probably.
Over a full year.
In 2021, so you have to think about a run rate we didnt.
Have all those costs and 2020, but we did in 2019 would you like to add anything Paul.
Only that.
You won't see a big material charge in this quarter or the next.
Related to the.
Discontinuance of that business and as Damian noted there will be some cost reductions in 2021.
Okay, Great last question here.
Seems like you guys have a lot of momentum on the call.
[noise] side and the gross dollar volume.
Side is sounds like it should be optimal 10% to 20% range, but it looks like you are kind of flattish for the quarter versus the second quarter curious.
Put some color on that.
Yes. So there was a big the reason it's flattish is because of the whole stimulus. There was a huge wave that came in through the stimulus to us and our if you saw our deposits substantially gapped up and we it's hard to understand exactly what's going on but it happened over.
A couple of programs and you saw another that's when we closed the economy and everything went virtual we saw this big.
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Bump due to the stimulus, but also unemployment.
And then we saw another even increase bump in July and that was due it looked like to the economy opening up again.
The tax.
Fact that taxes were delayed.
At the end of the stimulus.
Funds that were in our major programs that settled down again, and so you are comparing two quarters, where there was this huge governmental and very extraordinary situation to this quarter and the third quarter is usually our weakest quarter and the reason is is because that Pryor, we have two strong quarters.
We have.
The fourth quarter, which is really driven by gift cards and stuff.
And in some healthcare and corporate incentive and then you have the first quarter, which is driven by tax season. So third quarter is usually light.
Quarter over quarter second to third quarter. This year it wasn't as light because you had to bump the double bump and so youd like comparison is a little difficult to make but what we're seeing now is continued year over year growth in the mid Thirtys. If we do get another stimulus. The same thing will happen, it's art client account.
Are really where stimulus payments go so you will see another bump like that so it will be hard to really decipher.
But it will be over our current growth rate, which is in the thirtys already so it would be up.
You know its significant impact, we're assuming though that that's not built into any of our forecast at this point, we just don't know what's going to happen, but we're saying we can look at the base programs that everything and know our pipeline there is sustainable.
20% to 30% GDV growth.
At the minimum in that portfolio going into the next we think a couple of years, we think it's going to be high growth for us for a while.
Great. Thanks, guys I'll, let someone else asked the question.
I am showing no further questions at this time I wouldn't like to turn the conference back to see our team in goods can ski Sir.
Okay. Thank you everyone.
Have a great day and thanks for joining the call today and I'll talk to you soon.
Thank you operator.
You're welcome ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
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