Q1 2021 Bancorp Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Q1 2021 the Bancorp Inc. Earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if any on once you require assist.
During the conference. Please press Star then zero on your Touchtone telephone as a reminder of this conference call is being recorded I would now like to turn the conference over to your host Mr. Andreas fear of slot.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's first quarter 2021 financial results conference call on the call with me today.
Okay.
Officer and Paul Frank.
All of our Chief Financial Officer.
One of his call is being webcast on our website at www Dot com.
On the call beginning at approximately 12 P M. Eastern time today, the dialing for replay of 5859.
With the confirmation code of 579.
The four four before I turn the call over to Damian.
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 of 1995, such statements are subject to risks 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.
The bank of course filed with the SEC listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date here of the Bancorp undertakes no obligation to publicly release the results of many of our 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.
I'd like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The Bancorp earned <unk> 44 cents a share on revenue of $7 million to $8 million and expenses of $42 million. We continue to have momentum across our business lines and the combination of opening of the economy stimulus and virtualization should give us continued tailwind in 2021.
Excluding gains and losses on commercial loans revenue climbed 17% driven by 25% increase of net interest income and prepay feed growth of 4% cost of funds was down 63% year over year illustrating the benefits of our payments funding model expenses rose, 9% year over year cost control and efficiency continues to be of focus.
Of the management net income from continuing operations grew 98% versus first quarter 2020, adjusted pre tax effect the negative fair value adjustment in 2000 due to COVID-19 net income grew 53% year over year in the first quarter. We saw continued business momentum led by gross dollar volume in our cards business, which increased 23%.
Prepaid fees grew 4% due to the mix of program growth and the impact of stimulus payments.
In our payments business. We saw continued strong growth across most verticals with only COVID-19 impacted products such as commuter cards showing of year over year decrease these verticals should also show year over year increases of the economy opens.
Balances across our lending businesses continued to grow quarter over quarter with SBA leasing and our institutional product set that includes S block IV block on our RIAA financing all growing approximately 5% quarter over quarter pipelines in all areas continue to remain strong and suggest continued year over year and quarter over quarter growth of.
Our business plan for 2021 is in full implementation. The focus continues to be product and platform expansion with a rigorous focus on building the best payments ecosystem in the financial services industry.
Our plan includes a comprehensive and integrated analysis of the market and competitors and the needed investments to build towards the future and create scalable core competencies that our partners can use to innovate and grow. We also continue to invest heavily in anti money laundering and compliance to have best in class capabilities to meet regulatory guidance and.
Patients.
We are currently on track to meet or exceed our financial targets for 2021, we continue to closely watch the impact of the full reopening of the U S economy. The fed policy government stimulus interest rates and the virtualization of consumer spending to understand the likely impacts on the bancorp.
Those impacts are mostly positive for our business model and should drive continued growth in business volumes and profitability profitability into 2022.
Lastly, our guidance targets for 2021 continues to be $1 70 of share or approximately 100 million of net income the earnings per share estimates do not include share repurchases that have been previously announced I'll now turn the call over to Paul frankly of our CFO to give more color on the first quarter.
Thank you Damian return on assets and equity for the quarter were respectively, one, 6% and 18% compared to fourth quarter returns of one 6% and 17% in Q1 2020 returns of <unk>.
<unk>, 9% and 10% the higher returns, we're different primarily by $11 million year over year and $2 million quarter over quarter increases in net interest income.
The increases in net interest income reflected the lower cost of funds growth in higher yielding SBA and leasing loans and the retention of the commercial real estate portfolio, we had been securitizing price.
Here to 2020, it also reflected $1 $4 million of fees related to our line of credit to another institution to fund PPP loan originations, which are not expected to recur.
The vast majority of the retail CRE portfolio is comprised of multifamily loans with cumulative.
Over the losses estimated by of nationally recognized analytics firm at one 2% the one five.
CRE portfolio is recorded at a $99 price or lower and has a weighted average rate floor of four 8%.
S block and I back loans total $1 6 billion and while their yield is estimated at two of two 5% those portfolios have not experienced credit losses due to the nature of the collateral. Our next largest portfolio is is our 882 million small business loans, which includes 190 million.
The P. P P loans $95 million of which were made in first quarter 2021 the.
The 2021 P. P. P loans generated fees of approximately $3 4 million, which are being recognized through full year 2021, you estimated period of repayment by the U S government.
SBA commercial mortgage loans have origination date loan to values of 50% to 60% SBA seven loans are generally 75% guaranteed by the U S. Government. In addition to the six months of government payments on seven day loans authorized by the cares Act, which mostly ended in the fourth quarter additional payments.
Are being made in 2021 U S government passed legislation in December 2020, which authorized at least two payments and up to five months of additional payments for business is more impacted by COVID-19, including hotels and restaurants. These payments began in February 2021.
Unlike the six months of cares Act payments. These additional payments are capped at $9000 per month the <unk>.
The business portfolio has an estimated yield in the 5% range. In addition to 16% year over year SBA loan growth, we increased leasing balances to $484 million from $462 million in the prior quarter and leases have an estimated yield in the 6% range.
We emphasized diversification in our small business and leasing portfolios, which is detailed in the press release tables, which segment loan portfolios by loan type collateral and geography deferrals at quarter end decreased to approximately 1% of loans after excluding government guaranteed balances decreases compared to prior.
Periods reflected the newly authorized government payments on seven day loans in the December legislation and other reductions the.
The $11 million increase in net interest income over Q1, 2020 reflected increases in average quarterly CRE loans to $1 5 billion, while related interest income increased $3 9 million interest on small business loans, primarily SBA increased $3 8 million, including.
The approximate $1 $4 million of fees related to the line of credit to fund the PPP loan generation mentioned earlier, which is not expected to recur.
And $2 $4 million of PPP loan fees and interest.
While combined S block on Eyeblack loan balances increased 40% over these periods related interest income was approximately equal reflecting the impact of historic Federal reserve rate reductions of one 5% in March 2020 as blocks <unk> block loans are secured by marketable securities and <unk>.
The block loans are secured by the cash value of life insurance and credit losses have not been incurred.
Interest expense was $5 $4 million lower compared to first quarter 2020, and the cost of funds was 21 basis points, reflecting the impact of the federal reserve interest rate reductions most of our deposit interest expense is contractually tied to market interest rates.
The net interest margin in Q1 was $3 three 4% for both the current and prior year first quarter and down from $3 five 8% in Q4 current quarter, earning assets reflected $550 million of increased balances at the federal reserve compared to Q4, resulting primarily from stimulus.
Payments made in March 2021, and federal reserve balances earn nominal rates of interest they reduced the net interest margin the.
The net interest margin benefited from the $1 4 million of fees earned on the short term line of credit to another institution to fund PPP loans.
Which is not significantly increased.
Average, earning assets.
The provision for credit losses was approximately $820000 and reflected growth in small business lending balances, while net charge offs for the quarter were nominal.
The as black on Eyeblack loans are respectively collateralized by marketable securities in the cash value of life insurance and have not incurred credit losses management excludes those loans from the ratio of the allowance to total loans in its internal analysis. The adjusted ratio is approximately one 3%.
Prepaid accounts, our largest funding source are also of the primary driver of noninterest income fees and related income on prepaid cards were up 4% to $19 2 million in Q1 2021 compared to $18 5 million in Q1 2020.
Non interest expense for Q1, 2021 was $41 9 million or an increase of 9% the increase reflected higher salary and legal expense increased salary expense reflected higher incentive compensation, especially equity compensation expense increased legal expense reflected the matters.
<unk> noted in the legal note in the financial statements in our form 10-K for 2020.
We continue to focus on expense management, especially in relation to revenue growth.
In December 2020, the FDIC issued regulations, which should result in the reclassification of a portion of the bank's deposits as non brokered.
So thats Reclassifications could result in the future reduction of FDIC expense, but various analyses must be performed <unk> applications filed with the FDIC.
Applications are required they will not be acted on until the fourth quarter of 2021, accordingly, the timing and extent of savings if any is uncertain.
Book value per share increased 20% to $10 42, compared to $8 69, a year earlier, reflecting earnings per share the increased value of the investment portfolio in the current rate environment and the impact of stock repurchases. The Q1 2021 bank leverage ratio, which is based upon.
Quarter on average quarterly assets, approximately approximated eight 7% and risk based ratios approximated, 14% a reduction on the leverage ratio from year end.
Reflected significant deposit inflows in March 2021, which resulted primarily from stimulus payments from the December 2020 legislation mentioned previously and.
In closing there are certain characteristics of our loan portfolios, which I would like to highlight the.
The vast majority of our $1 5 billion of our CRE loans at fair value of our apartment buildings for which a nationally recognized analytics firm has estimated cumulative loss of one 2% in their COVID-19 projections. These loans are already on our books at levels, reflecting that discount the combined S block and I block portfolios of.
<unk> approximate $1 6 billion and have not incurred credit losses, notwithstanding historic equity market declines in 2020.
The majority of the $882 million small business loan portfolio, including PPP loans is U S government guaranteed the majority of the other small small business 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 law.
Used vehicles, while the.
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 I will now turn the call back to Damian.
Thanks, Paul Operator could you open up the lines for questions.
Yes, Sir at this time, if you have a question. Please press Star then the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
And your first question comes from Frank Schiraldi with Piper Sandler.
Good morning.
Good morning, Frank how are you.
Hope you guys are well.
I just wanted to start with the.
The prepaid card fee line.
And on the path of the way I kind of tried the model is looking at.
Your growth in GDP and take some sort of margin off of those of the gross dollar.
All of our volume number, but it seems like year over year of the margin continues to shrink. So maybe that's not the best way to approach. It and then just wondering.
Your thoughts on that line item moving forward.
You can continue to get sort of similar GDP growth, what sort of growth rate, we could see on a year over year basis on a linked quarter basis whatever on.
On the prepaid card fee line.
See the last two quarters have been well the whole last year has been an anomaly, but the last two quarters had very similar characteristics and disproportionate growth.
Due to what's happening with COVID-19 and the stimulus so in the fourth quarter, we had this weird.
November where spending dropped across the economy of the same thing happened in February and the first quarter and then we were impacted in March greatly by substantial.
Substantial increases due to opening of the economy, but then the stimulus so it kind of throws everything off some of the stimulus came against programs that are more mature and so you didn't get the same.
Fees associated with because as we've discussed before they're laggard.
And we don't put on a lot of incremental cost as the program growth and it's true to its maturity. So of drops as you can see our our expense growth was in high end attributed mostly the salary on legal expense so the.
The answer is we have to see over the next couple of quarters. What we're seeing in April is kind of a more return to historic trend, we still have fairly robust growth, but we're getting the growth more evenly. So we should know more after the end of the second quarter, but I still think you'll see.
With if you see double digit fee growth of <unk>.
25%, we should be able to retain even if we have these breaks of programs because we do have new programs coming on we should have at least half of that and fee growth. So I don't think its the <unk>.
Right now I don't think its the new trend I, just think I'd say, an anomaly based on the last two quarters of how.
How the different programs that participated in the COVID-19 economy.
Okay.
Is it still reasonable to look year over year and think okay. GDP grows 20% year over year in a given quarter.
Then the.
You just you would assume the prepaid card fee line growth, 10%. That's what you are.
Flying I guess.
But even if that's what you're saying.
Remember it bumps around what I am saying is that we should retain at least that much so it could be.
One month of it could be 15, another month of it could be eight it really depends.
When we get the full opening of the economy, I mean, New York, just announced and that kind of fully open until July. So I think youre going to have this quarter of next quarter, you're still going to be normalizing and then we're going to have outsized people are predicting 10% growth.
And the second and third quarter so.
It's really.
It's really hard to predict right now, but as you can see that I think there is enough drivers and tailwind within our broad participation as the banking financial services on our low credit risk that we should be.
On the top line revenue should be continue to be supported and as I've said last quarter all of the tailwind point too.
The potential over performance on our guidance, we will have to see and of course thats.
Looking at the whole macro situation I could be wrong, but it does seem like were pointed in the right direction.
Okay and then.
Just wondering you know as you had that obviously tremendous balance sheet growth and tremendous loan growth.
Driven by the by the deposit growth and part of guests.
Just wondering of the leverage ratio has moved lower your thoughts on continuing to implement the buyback program you know as.
As you guys.
Send it up I mean, obviously in the first quarter you did basically exactly what you.
What you said youre going to do in terms of the $10 million Yeah. No no no. We're going to continue to do that we should expand another $30 million. If you look at the corporate level, that's where we're paying the buyback from remember we raised $100 million of debt up there. So we don't really have any issues and our balance.
She'd should normalize as payments.
Why maybe there is some support in the second quarter from continued stimulus payments, though I don't know that but we should add on the on.
Offset of course of the opening of the economy. So when those do run out we should have more throughput for the GDP growth. So.
There is no we have no issues whatsoever buying back.
Okay.
Then just finally for me Paul I Wonder if you could the.
I think I'm going to Miss some of the numbers in terms of just the.
What flowed through NII this quarter versus last quarter from E. On.
Triple P standpoint.
So this quarter.
We had two combined $2 4 million.
Of the old Pp and new P. P that includes the fees and interest <unk>.
Last quarter.
It would only have been the old P. P. So that would be like one.
One point.
For $4 million or so.
Okay. So thats the $1 million pick up in terms of the fee income through NII and then you also mentioned the $1 $4 million on fees related to the the.
On the line, which is also related to triple piece of that I think you noted also would be.
It's something that you should consider nonrecurring, yes, except for the 2021, PPP, where we collected the $3 4 million.
We took.
No.
Most of that most of one quarter in this quarter and we will have the rest of that over the rest of the year.
Okay.
And should it be kind of.
In terms of how you amortize the should be fairly steady through.
Through the rest of the year and so.
Those fees were on all it depends on the repayment like it took the government of.
Much longer than anticipated and we kind of anticipated that would take longer we didn't think it would take over a year, but it actually.
Took slightly over a year or so.
We're being conservative and we're assuming debt that we won't get repaid until.
Fully until year end, but the way the accounting works if the government Repays earlier, then you take the income earlier.
Right, but you are still assuming I guess I'm just.
I sort of look, but I think you assume.
On the fees over a shorter amortization period than the five years of the loan. So you assume it's going to get forgiven earlier than that then you try and take those fees over those time that time period that shortened yes. It was basically 11 months for the first PPP and it's 11 months for this one.
Gotcha perfect. Thanks.
And again for any questions. Please press Star then the number one and.
And your next question comes from William Wallace with Raymond James.
Yeah. Thanks, good morning, guys.
Good morning.
Circling back to the buyback just real quick.
At current levels in the 22 range I mean would you anticipate that you would continue to buy at that $10 million per quarter.
Yes, so we've raised debt.
Our internal target, we should have plenty of room to continue our buyback. We took another look at where we think we're going to be over the next couple of years. We still think the stock is accretive the purchase for shareholders and we're going to continue to do that the share. So we expect to.
Buyback $30 million of more of stock.
$10 million of quarter.
Great.
Lou.
Looking at the balance sheet you you, obviously had the billion or so deposits that came on I believe you're saying those are related to the stimulus checks.
Is the expectation that those.
Will be spent relatively quickly if not.
We are.
At close to $8 billion in assets do you need to start thinking about ways to manage balance sheet size.
No not at all I mean, we're doing we've said before we're doing this project called credit roadmap, where we are.
The mattikalli looking at different ways, the balance sheet could grow and get a very good idea, but we have plenty of room and plenty of liquidity.
To make sure for the next three to five years, we have no issues there.
That $500 million, we don't know if its going to be spent or not but we have mechanisms now two if we don't need the deposits we can offload those deposits.
Okay, Okay, alright, and so those are already in place.
Yes, we've been developing tools for the last couple of years. So we don't anticipate.
I can say definitively we don't at this current time anticipate any issues with balance sheet size.
For the for the foreseeable future.
Okay.
Yes.
And then on the income statement, you've got that gain on sale of loans line. It's been a couple of million Bucks for the last two quarters is that.
Is that related to the to the commercial loans that you've kept on balance sheet.
The pay off net do you can you just accelerate the mark back through that line.
Correct and so that so we're going to on the real estate side, we like the asset class This new money in.
We've talked about the red purple state, mostly or if not all multifamily. So we're going to keep our exposure at the current level, but if we do any of additional loans.
First of all we're not going to do securitization, but if we do additional loans will put them through the reserve there won't be held for sale, Okay and every time one of these rolls off.
They have at least been marked at 99, so you get 1% and many are have prepayment of 50 basis point prepayments, but that of roll off at the end of the year. So you have an embedded this $1 5 billion, you've got $15 million embedded in either to put in the reserves. If you do new loans are will roll.
Off into the into revenue.
Okay, Alright, that's helpful.
And then just for my last question Damian Tom during your prepared.
Remarks, you made a comment about <unk>.
Investing in the franchise for the future and I just would love to know your updated thoughts on.
Whether or not youre looking at new business lines or are you needing to continue to invest in the back office to make sure that you can.
Keep up with and the rise in demand on the payments side, just maybe some thoughts bigger picture as to.
Where are you thinking for the future of new Okay. So that's.
The answer to that is yes to everything so in each and each product area and Thats part of the credit roadmap, but also.
We have the implementation of what we call payments ecosystem to pointed out we're investing across that whole every almost every part of the business. If you look at what we did over the last three to five years. Since we started kind of repositioning the business. We got out of the lot of things that we Didnt think were core and we're really now.
And core platforms that we're trying to build enhanced capabilities products and services. So each one of these areas has through our through what we call our strategic agenda, which is the highest priority.
Of the strategic items that we're focused on including with an integrated business plan. We've identified for example of putting a new technology and operations of infrastructure enhancing.
<unk> compliance through using machine learning and AI or at our institutions.
<unk> business, which we've expanded from just S block the <unk> block on RIAA financing. So each one of these areas has.
Map and what we need to do over the next three to five years to get to where we want to be both on financial targets on profitability infrastructure product sets, but also the culture of our firm and things like Arg and diversity inclusion. So it's a very comprehensive very rigorous approach.
The allocating resources and getting Investor returns.
On creating a better company.
Thank you Damian I appreciate it.
Thank you Paul.
At this time there are no further questions I will now hand, the call back to Damian Kozlowski for closing remarks.
Thank you everyone for attending today's earnings call and we will talk soon.
Operator, you may disconnect.
That concludes today's conference. Thank you for your participation you may now disconnect.
Okay.
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[music].
[music].
Good morning, ladies and gentlemen, and welcome to the Q1 2021 the Bancorp Inc. Earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct day question and answer session and instructions will follow at that time, if any of once you require assistance during the conference. Please press star two.
Zero on your Touchtone telephone as a reminder of this conference call is being recorded I would now like turn the conference over to your host Mr. Andreas fear of slot.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's first quarter 2021 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel of our Chief Financial Officer. This mornings call is being webcast on our website at www dot the Bancorp dotcom there'll be a replay of the call beginning at approximately 12 P M Eastern time today.
Of the island for the replay is 85585920 of five six with the confirmation code of $5 seven of nine two to four four before I turn the call over to Damian I would like to remind everyone that when using this conference call of 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 of 1995.
The statements are subject to risks 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 filing 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 Bancorp undertakes no obligation to publicly release the result.
And many of our 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'd like to turn the call over to the Bancorp Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The Bancorp earned <unk> 44, a share on revenue of $7 million to $8 million on expenses of $42 million. We continue to have momentum across our business lines and the combination of opening of the economy stimulus and virtualization should give us continued tailwind in 2021 exclude.
Excluding gains and losses on commercial loans revenue climbed 17% driven by 25% increase of net interest income and prepaid fee growth of 4% cost of funds was down 63% year over year illustrating the benefits of our payments funding model expenses rose, 9% year over year cost control and efficiency continues to be of folk.
Cost of management net income from continuing operations grew 98% versus first quarter 2020, adjusted pre tax effect the negative fair value adjustment in 2000 due to COVID-19 net income grew 53% year over year in the first quarter. We saw continued business momentum led by gross dollar volume in our cards business, which increased 23%.
Prepaid fees grew 4% due to the mix of program growth and the impact of stimulus payments and our payments business. We saw continued strong growth across most verticals with the only COVID-19 impacted products such as commuter card showing a year over year decrease these verticals should also show year over year increases as the economy opens back.
Ounces across our lending businesses continued to grow quarter over quarter with SBA leasing and our institutional product set that includes S block I blocked on our RIAA financing all growing approximately 5% quarter over quarter pipelines in all areas continue to remain strong and suggest continued year over year and quarter over quarter growth our business plan.
For 2021 is in full implementation the focus continues to be product and platform expansion with a rigorous focus on building the best payments ecosystem in the financial services industry.
Our plan includes a comprehensive and integrated analysis of the market and competitors and the needed investments to build towards the future and create scalable core competencies that our partners can use to innovate and grow. We also continue to invest heavily in anti money laundering and compliance to have best in class capabilities to meet regulatory guidance and expect.
Patients. We are currently on track to meet or exceed our financial targets for 2021, we continue to closely watch the impact of the full reopening of the U S economy. The fed policy government stimulus interest rates and the virtualization of consumer spending to understand the likely impacts on the bancorp.
Currently those impacts are mostly positive for our business model and should drive continued growth in business volumes and profitability profitability into 2022.
Lastly, our guidance targets for 2021.
Continues to be $1 70 of share or approximately 100 million of net income the earnings per share estimates do not include share repurchases that have been previously announced I'll now turn the call over to Paul Frank our CFO to give more color on the first quarter.
Thank you Damian return on assets and equity for the quarter were respectively, one, 6% and 18% compared to fourth quarter returns of one 6% and 17% in Q1 2020 returns of 0.9% and 10% the higher returns we're different.
Maryland by $11 million year over year, and $2 million quarter over quarter increases in net interest income.
The increases in net interest income reflected the lower cost of funds growth in higher yielding SBA and leasing loans and the retention of the commercial real estate portfolio. We had been securitizing. Prior to 2020. It also reflected $1 $4 million of fees related to our line of credit.
To another institution to fund PPP loan originations, which are not expected to recur.
The vast majority of the retail CRE portfolio is comprised of multifamily loans with cumulative.
COVID-19 losses estimated by of nationally recognized analytics firm at one 2% the <unk>.
1.5 billion CRE portfolio is recorded at a $99 price or lower and has a weighted average rate floor of four 8%.
S block and I back loans total $1 6 billion and while their yield is estimated at two of them, 2.5% those portfolios have not experienced credit losses due to the nature of the collateral. Our next largest portfolio is is our 882 million small business loans, which includes a $119 million of.
P. P. P loans 95 million of which were made in first quarter 2021 the.
2021 P. P. P loans generated fees of approximately $3 4 million, which are being recognized through full year 2021, the estimated period of repayment by the U S government.
While the SBA commercial mortgage loans have origination date loan to values of 50% to 60% SBA seven loans are generally 75% guaranteed by the U S. Government. In addition to the six months of government payments on seven day loans authorized by the cares Act, which mostly ended in the fourth quarter additional pay.
<unk> are being made in 2021 U S government passed legislation in December 2020, which authorized at least two payments and up to five months of additional payments for business is more impacted by COVID-19, including hotels and restaurants. These payments began in February of 2021.
Unlike the six months of cares Act payments. These additional payments are capped at $9000 per month the.
The small business portfolio has an estimated yield in the 5% range. In addition to 16% year over year SBA loan growth, we increased leasing balances to $484 million from 462 million in the prior quarter and leases have an estimated yield in the 6% range.
Emphasize diversification in our small business and leasing portfolios, which is detailed in the press release tables, which segment loan portfolios by loan type collateral and geography deferrals at quarter end decreased to approximately 1% of loans after excluding government guaranteed balances decreases compared to prior period.
It's reflective of the newly authorized government payments on seven day loans in the December legislation and other reductions.
The $11 million increase in net interest income over Q1, 2020 reflected increases in average quarterly CRE loans to 1.5 billion while related interest income increased $3 9 million interest on small business loans, primarily SBA increased $3 8 million, including.
The approximate $1 $4 million of fees related to the line of credit to fund PPP loan generation mentioned earlier, which is not expected to recur and $2 $4 million of PPP loan fees and interest.
While the combined S block and I block loan balances increased 40% over these periods.
Net interest income was approximately equal reflecting the impact of historic Federal reserve rate reductions of one 5% in March 2020.
<unk> blocks S block loans are secured by marketable securities and I block loans are secured by the cash value of life insurance and credit losses have not been incurred.
Interest expense was $5 $4 million lower compared to first quarter 2020, and the cost of funds was 21 basis points, reflecting the impact of the federal reserve interest rate reductions most of our deposit interest expense is contractually tied to market interest rates.
The net interest margin in Q1 was $3 three 4% for both the current and prior year first quarter and down from $3 five 8% in Q4 current quarter, earning assets reflected $550 million of increased balances at the batteries are of compared to Q4, resulting primarily from stimulus.
Payments made in March 2021 instead.
Since the federal reserve balances earn nominal rates of interest they reduced the net interest margin.
The net interest margin benefited from the $1 4 million of fees earned on the short term line of credit to another institution to fund the PPP loans.
Which did not significantly increase in average earning assets.
The provision for credit losses was approximately $820000 and reflected growth in small business lending balances, while net charge offs for the quarter were nominal.
Because of Aflac and I block loans are respectively of collateralized by marketable securities in the cash value of life insurance and have not incurred credit losses management excludes those loans from the ratio of the allowance to total loans in its internal analysis. The adjusted ratio is approximately one 3%.
Prepaid accounts, our largest funding source are also the primary driver of noninterest income fees and related income on prepaid cards were up 4% to $19 2 million in Q1 2021 compared to $18 5 million in Q1 2020 non interest expense for Q1 2021 was <unk> 40.
$1 9 million or an increase of 9% the increase reflected higher salary and legal expense increased salary expense reflected higher incentive compensation, especially equity compensation expense increased legal expense reflected the matters noted in the legal note in the financial statements in our form 10.
10-K for 2020.
We continue to focus on expense management, especially in relation to revenue growth.
In December 2020, the FDIC issued regulations, which should result in the reclassification of a portion of the bank's deposits as non brokered.
So thats Reclassifications could result in a future reduction of FDIC expense, but various analyses must be performed Andrew of applications filed with the FDIC.
Applications are required they will not be acted on until the fourth quarter of 2021.
Accordingly, the timing and extent of savings if any is uncertain.
Book value per share increased 20% to $10 42, compared to $8 69, a year earlier, reflecting earnings per share the increased value of the investment portfolio in the current rate environment and the impact of stock repurchases. The Q1 2021 bank leverage ratio, which is based upon.
Quarter on average quarterly assets, approximately approximated eight 7% and risk based ratios approximated, 14% a reduction on the leverage ratio from year end.
Reflected significant deposit inflows in March 2021, which resulted primarily from stimulus payments from the December 2020 legislation mentioned previously and.
In closing there are certain characteristics of our loan portfolios, which I would like to highlight.
The vast majority of our $1 5 billion of our CRE loans at fair value of our apartment buildings for which a nationally recognized the analytics firm has estimated acumen of loss of one 2% in their COVID-19 projections. These loans are already on our books at levels, reflecting that discount the combined S block and Eyeblack portfolios of.
Approximate $1 6 billion and have not incurred credit losses, notwithstanding historic equity market declines in 2020.
The majority of the $882 million small business loan portfolio, including P. P. P loans is the U S government guaranteed the majority of the other small small business 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.
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 I will now turn the call back to Damian.
Thanks, Paul Operator could you open up the lines for questions.
Yes, Sir at this time, if you have a question. Please press Star then the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.
And your first question comes from Frank Schiraldi with Piper Sandler.
Good morning.
Frank how are you.
Hope you guys are well.
I just wanted to start with the.
The prepaid the card fee line.
And you know on the past the way of kind of tried the model is looking at.
Your growth in G. D V and then take some sort of margin off of those of that.
Dollar volume number, but you know it seems like year over year of the margin continues to shrink. So maybe that's not the best way to approach. It and then just wondering.
Your thoughts on that line item moving forward.
You need to get sort of similar GDP growth, what sort of growth rate, we could see on a year over year basis, or a linked quarter basis whatever on.
The prepaid card fee line.
Yes.
The last two quarters have been.
Well the whole last year has been an anomaly, but the last two quarters had very similar characteristics and disproportionate growth.
Due to what's happening with COVID-19 and stimulus so in the fourth quarter. We had this weird November where the spending dropped across the economy of the same thing happened in February and the first quarter and then we were impacted in March greatly by the.
Substantial increases due to opening of the economy, but then the stimulus so it kind of throws everything off some of the stimulus came against programs that are more mature and so you didn't get the same.
Fees associated with because as we've discussed before the ladder.
And we don't put on a lot of incremental cost as the program grows and it's true to its maturity. So it drops as you can see our our expense growth was in high end attributed mostly the salary on legal expense so the.
The answer is we have to see over the next couple of quarters. What we're seeing in April is kind of a rate of more return to historic trend, we still have a fairly robust growth, but we're getting the growth more evenly. So we should know more after the end of the second quarter, but I still think you'll see.
With if you seen double digit fee growth of 20.
25%, we should be able to retain even if we have these breaks of programs because we do have new programs coming on we should have at least half of that and fee growth. So I don't think its the <unk>.
Now I don't think it is the new trend I, just think I'd say, an anomaly based on the last two quarters of how.
How the different programs that participated in the COVID-19.
On may.
Okay.
Is it still reasonable to look year over year and think okay. You know GDP grows 20% year over year in a given quarter then.
You just you would assume the prepaid card fee line growth, 10%, that's what you're implying I guess towards the.
They're not even the block that's what you should.
Remember it bumps around what I am saying is that we should retain at least that much so it could be.
One month of it could be 15, another month of it could be a it really depends.
When we get the full opening of the economy, I mean, New York, just announced and that kind of fully open until July. So I think youre going to have this quarter and next quarter is still going to be normalizing and then we're going to have outsized people are predicting 10% growth.
And the second and third quarter so.
It's really.
It's really hard to predict right now, but as you can see that I think there is enough drivers and tailwind within our broad participation as a bank and the financial services on our low credit risk that we should be.
On the top line revenue should be continue to be supported and as I've said last quarter all of the tailwind point too.
The potential over performance on our guidance, we will have to say and of course thats.
Looking at the whole macro situation I could be wrong, but it does seem like were pointed in the right direction.
Okay and then.
Just wondering you know as you'll have the obviously tremendous balance sheet growth of tremendous loan growth.
Driven by the by the deposit growth and part of guests.
Just wondering of the leverage ratio has moved lower your thoughts on continuing to implement the buyback program.
As you guys.
Send it up I mean, obviously in the first quarter your debt basically exactly what you.
What you said youre going to do in terms of the $10 million yeah.
No no we're going to continue to do that we should expand another $30 million. If you look at the corporate level, that's where we're paying the buyback from remember we raised $100 million of debt up there. So we don't really have any issues and our balance sheet should normalize as payments.
Why maybe there is some support in the second quarter from continued stimulus payments, though I don't know that but we should add on the <unk>.
Offset of course of the opening of the economy. So when those do run out we should have more throughput for the GDP growth. So I don't there's no we have no issues whatsoever buying back.
Okay.
Just finally for me Paul I Wonder if you could the I think I might have missed some of the numbers in terms of just the.
What flowed through NII this quarter versus last quarter from a triple P standpoint.
So this quarter.
We had a combined $2 4 million.
Of the old P P and new P. P that includes the fees and interest.
Last quarter. It would only have been the old P. P. So that would be like one.
One point.
Four 4 million or so.
Okay. So that's the 1 million pick up in terms of the fee income through NII and then you also mentioned the $1 $4 million on fees related to the the.
The line, which is also related to triple piece of that I think you noted also would be.
It's something that you should consider nonrecurring, yes, except for the 2021, PPP, where we collected the the $3 4 million we took.
Most of that most of one quarter in this quarter and we will have the rest of that over the rest of the year.
Okay.
And should it be kind of no.
In terms of how you amortize that should be fairly steady.
Through the rest of the year until it.
Those fees were on all it depends on the repayment like it took the government of much longer than anticipated and we kind of anticipated that would take longer we didn't think it would take over a year, but it actually.
Took slightly over a year or so.
We're being conservative and we're assuming debt that we won't get repaid until.
Fully until year end, but the way the accounting works if the government Repays earlier, then you take the income earlier.
Right, but you are still assuming I guess I'm just.
I show the look, but I think you assume.
On the fees over a shorter amortization period than the five years of the loan. So you assume it's going to get forgiven earlier than that then you try and take those fees over those time that time here that shortened yes. It was basically 11 months for the first PPP and it's 11 months for this one.
Gotcha perfect. Thanks.
And again for any questions. Please press Star then the number one and.
And your next question comes from William Wallace with Raymond James.
Yeah. Thanks, good morning, guys.
Good morning.
Circling back to the buyback just real quick.
How are you.
At current levels in the 22 range I mean would you anticipate that you would continue to buy at that $10 million per quarter.
Yes, so we've raised debt.
Our internal target, we should have plenty of room to continue our buyback. We took another look at where we think we're going to be over the next couple of years. We still think the stock is accretive the purchase for shareholders and we're going to continue to do that the share. So we expect to.
Buyback $30 million of more of stock.
$10 million of quarter.
Great.
Looking at the balance sheet you you, obviously had the billion or so deposits that came on I believe you're saying those are related to the stimulus checks.
Is the expectation that the dose.
Will be spent relatively quickly and if not.
Where.
At close to $8 billion in assets do you need to start thinking about ways to manage balance sheet size.
No not at all I mean, we're doing we've said before we're doing this project called credit roadmap.
Thematic Lee looking at different ways, the balance sheet could grow and get a very good idea, but we have plenty of room and plenty of liquidity.
To make sure for the next three to five years, we have no issues there.
That $500 million, we don't know if its going to be spent or not but we have mechanisms now two if we don't need the deposits we can offload those deposits.
Okay, Okay, alright, and so those are already in place.
Yes, we've been developing tools for the last couple of years. So we don't anticipate.
I can say definitively we don't at this current time anticipate any issues with balance sheet size.
For the for the foreseeable future.
Okay.
And then on the income statement, you've got that gain on sale of loans line. It's been a couple of million Bucks for the last two quarters is that.
Is that related to the to the commercial loans that you've kept on balance sheet.
The pay offs than do you can you just accelerate the marked back through that line.
Correct and so that so we're going to on the real estate side, we like the asset class This new money in.
We've talked about the red purple stay mostly if not all of multifamily. So we're going to keep our exposure at the current level, but if we do any of additional loans.
First of all we're not going to do securitization, but if we do additional loans will put them through the reserve they won't be held for sale, Okay and every time one of these rolls off.
They have at least been marked at 99%. So you get 1% and many are have prepayment 50 basis point prepayments, but that will roll off at the end of the year. So you have an embedded this $1 5 billion, you've got $15 million embedded in either to put in the reserves. If you do new loans or will roll.
Off into the into revenue.
Okay, Alright, that's helpful.
And then just for my last question Damian Tom during your prepared.
Remarks, you made a comment about <unk>.
Investing in the franchise for the future and I just would love to know your updated thoughts on.
Whether or not you are looking at new business lines or are you needing to continue to invest in the back office to make sure that you can.
Keep up with and the the ryzen demand on the payment side, just maybe some thoughts bigger picture as to.
Where are you thinking for the future of new Okay.
Okay. So that's the answer to that is yes to everything so in each and each product area and thats part of the credit roadmap, but also.
We have the implementation of what we call payments ecosystem to pointed out we're investing across that whole every almost every part of the business. If you look at what we did over the last three to five years. Since we started the kind of repositioning the business. We got out of the lot of things that we Didnt think were core and we're really now.
And core platforms that we're trying to build enhanced capabilities products and services. So each one of these areas has through our through what we call our strategic agenda, which is the highest priority.
The strategic items that we're focused on including with an integrated business plan. We've identified for example of putting a new technology and operations of the structure enhancing.
<unk> and compliance through using machine learning and AI or at our institutional business, which we've expanded from just S block the <unk> block on RIAA financing. So each one of these areas has.
GAAP and what we need to do over the next three to five years to get to where we want to be both on financial targets and profitability infrastructure product sets, but also the culture of our firm and things like Arg and diversity inclusion. So it's a very comprehensive very rigorous approach.
The allocating resources and getting Investor returns Inc.
Creating a better company.
Thank you Damian I appreciate it.
Thank you Paul.
Yeah.
At this time there are no further questions I will now hand, the call back to Damian Kozlowski for closing remarks.
Thank you everyone for attending today's earnings call and we will talk soon.
Operator, you may disconnect.
That concludes today's conference. Thank you for your participation you may now disconnect.