Q2 2021 Bancorp Inc Earnings Call
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Yeah.
Good morning, ladies and gentlemen, and welcome to the second quarter the Bancorp.
[music] incorporated earnings conference call at this time, all participants like you know listen only mode. Later, we will conduct question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
This conference call is being recorded I would now like to turn the conference over to your host Mr and dress, they're a sloth. Please go ahead.
Thank you Joelle good morning, and thank you for joining us today for the Bancorp second quarter 2021 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer and.
Michel our Chief Financial Officer. This mornings call is being webcast on our website at www Dot the bank corporate dotcom there'll be a replay of the call beginning at approximately 12 P. M. Eastern time today. The dialing for replay is 8558592056 with a confirmation code of 286885 too before I.
Paul for over to Damian I would like to remind everyone that when using this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements 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.
Turning to cover their discussion of these risks and uncertainties. Please see the bancorp's 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.
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.
For now 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 $29 million and net income for 50 cents a share from 13% year over year revenue growth and 3% expense growth.
Interest income increased 10% year over.
Over year total loan balances grew 12% year over year loan balance growth was led by institutional banking, which includes S block IV block in RA financing with a 30% 38% increase in balances quarter over quarter institutional grew 7% SBA excluding pp.
And a related.
Our recurring line of credit 2.5 per cent and leasing 5% gross dollar volume from our cards business grew 15% year over year with fee growth of 5.
Total noninterest income grew 27% year over year.
Our Fintech solutions group previously named payment solutions and payments acceptance continues to have a robust business development implement.
Patient pipeline, we announced the addition of current in the quarter as another major partner in our ecosystem. The newly named Fintech Solutions Group was created to enhance solutions integration to our expanding partner base. This group not only enables a challenger bank market, but also now includes all our verticals and corporate gift healthcare.
Care and government with an expanding set of card virtual card debit prepaid and other payment capabilities such as push to card rapid funds. In addition, we also announced creation of our new fin Tech hub in downtown Sioux Falls des named Bancorp building will create an integrated innovation environment for our team members and.
<unk>, we expect to fully occupy that new facility in 2023.
We launched a new expanded website this quarter reflect our progress as a company on the site you can find useful information about the company, including our new investor presentation, and educational and industry insights from our team who are always focused on helping to build success.
For our partners.
And the new Investor presentation, we are introducing a vision 500, a 4 year plan to achieve $500 million in revenue with a sustainable 22% Roe or better by 2025.
Also in the second quarter, we were honored to be selected to be included in the S&P 6.
<unk> hundred Smallcap Index. This index is a set of representative public small cap companies and key industries that power. Our economy. This index is also part of the broad S&P 500 index and it also includes large and mid cap companies.
Lastly, based on our year to day performance of <unk> 94, a share in our 2021outlook we are increasing.
Our 2021 guidance to $1.78 from $1.70, we continue to see tailwind that should drive continued growth in 2021 earnings and beyond we will give preliminary per share guidance for 2022 with the third quarter earnings release current trends would suggest income growth for 2022 of 20.
Or more over our revised 2021 guidance I'll now turn over the call to our CFO, Paul frankly to give more details about the second quarter.
Thank you Damian.
Return on assets and equity for the second quarter were respectively, 1.7% and 19%.
<unk> compared to 1.3% and 16% in Q2.2020, the increased returns reflected a $4 million year over year increase in net interest income a negative provision for credit losses increases in non interest income and a lower tax rate.
The increase in net into.
Per Sam reflected loan growth and $3 million of fees related to our line of credit to another institution to fund PPP loan originations, which are not expected to recur.
S block IV block and advisor financing interest increased $3.4 million, while leasing and SBA each increased approximately.
Just and $1 million, the SBA increase excludes PPP and the $3 million of nonrecurring fees.
While interest on CRE loans at fair value decreased slightly noninterest income reflected $2.6 million and net realized gains on commercial loans.
Merrily.
1 salting from exit and prepayment fees on loan pay offs, we have begun generating new CRE loans with the first closings occurring in July.
Total interest income reflected a reduction of $3 million in securities interest, reflecting lower securities balances prepayments.
<unk>, yielding securities and lower reinvestment rates.
Our average loans for the quarter of $4.6 billion.
Represents growth of 16% over Q2.2020, we believe our loan portfolios generally are lower risk than other forms of lending as a result of their charge.
So pop history, which reflects the nature of related collateral.
Our non SBA $1.5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings, while R. S block and <unk> Securities are respectively collateralized by marketable securities for the cash value.
Life insurance, our small business loan portfolio is comprised primarily of SBA loans, which are either 75% government guaranteed where have 50% to 60% origination date loan to values.
For our leasing portfolio, we have recourse to underlying vehicles and a prolonged history of pricing.
Charge offs is to minimize losses.
Tables contained in the earnings press release.
Detailed diversification of our loan portfolios.
Loan deferrals, which had been encouraged by Covid legislation substantially all expired as of July 5th which was the due date for the vast majority of.
<unk> lead business loan payments of the $48 million of deferrals at March 31, 2021, small business loans within on guaranteed principal balance of only $2.6 million had not made their July payment and only 968000 of all loans remained in deferral.
The $1.3 million increase in interest expense compared to Q2.2020 resulted primarily from the senior debt issuance in Q3.2020, while Q2.2021 cost of funds was 18 basis points most of our deposit interest expense is contractually.
Small tied to market interest rates.
The net interest margin was $3, 1.9% compared to 353% in Q2.2020.
The reduction reflected the impact for 2021 stimulus payments, which were which temporarily increased average balances.
Actually for reserve, earning nominal rates as funds were spent these balances were reduced and by June 32021, total assets decreased to $6.5 billion compared to an average of $7 billion for the quarter.
The net interest margin benefited from the aforementioned $3 million of non.
The factoring credit line fees, which served to offset the impact.
Of reductions in loan and securities yields.
The provision for credit losses was a negative $951000, which reflected the reversal of certain pandemic related economic risk factors in the <unk> model.
Paul and the recovery of an allowance on a loan payoff because S block and <unk> loans are respectively collateralized by marketable securities and the cash value of life insurance and have incurred only nominal credit losses management excludes those loans from the ratio of the allowance to total loans and its internal.
The analysis the adjusted ratio is approximately 1.2%.
Prepaid debit and other payment related accounts for our largest funding source and the primary driver of noninterest income total fees and related payments income.
Was up 5% to $21.4 million in Q2.2.
<unk> thousand 21, compared to $20.4 million in Q2, 2020 leasing income increased $1.3 million.
Reflecting the impact of the reopening of vehicle auctions after pandemic shutdowns and higher vehicle market prices due to vehicle shortages.
Non.
Interest expense for Q2, 2021 was $43.9 million for an increase of 3% the increase reflected higher salary expense, including incentive compensation and equity compensation expense. We continue to focus on expense management, especially in relation to revenue growth.
Second.
Non <unk> results also reflected the impact of an approximate 21% tax rate versus high rates in recent years. The reduction resulted from excess tax deductions related to stock based compensation, the large deductions and tax benefit resulted from the increase in the companys stock price as compared to the original.
Original grant date.
Book value per share increased 16% to $10.77 compared to $9.28.
Year earlier, reflecting earnings per share and the impact of stock repurchases capital ratios continue at satisfactory levels, primarily as a result of retained earnings now.
Second standing in the second quarter impact of stimulus payments, which temporarily increased average assets I will now turn the call back to Damian.
Thank you Paul.
Operator could you open it up for questions.
Ladies and gentlemen, if you have a question at this time Inc. Please.
Please press the star for the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key your first question comes from Frank Schiraldi with Piper Sandler.
Line is open.
Now with morning.
Good morning, Frank.
2 questions I wonder.
If you could talk about.
And I know youre going to give preliminary guidance on 'twenty 'twenty 2 next quarter.
I'm sure you'll have more detail to offer but.
Is there any more color you.
You can give in terms of the drivers.
To get to the 20% plus and I guess more.
So I'm just.
Kind of curious about.
The growth rates you anticipate.
Getting in the <unk>.
<unk>.
Payments fee income.
Yes, we still think.
With our pipeline.
The payment side is that we will get the.
GDP, it's been very bumpy for the last couple of years obviously.
Real extremes over particular months because of stimulus, but also because of consumer buying behavior, but with the pipeline. We have we still think we can sustain.
20% GDP growth over the next couple of years as there is a transition in the economy.
So thats from the payment side from the lending side its still.
Between 10, and 15% on the commercial side.
And the S block side IRI.
<unk> net and <unk> block side, we've been growing disproportionately so 20% to 30% growth there.
As we have been demonstrating and on the real estate side, we've already have a we.
Or did that business in the multifamily we already have a very robust pipeline.
We already closed.
Lowe's or about to close $25 million in deals and we have another 125.
Million.
And the pipeline to close so.
We're experiencing.
Not a lot of weakness across the board, we've got a lot of strength in <unk>.
And I think that will give a lot more color when we give per share guidance.
And you can look at our new Investor presentation, which we issued yesterday, which has.
A lot of.
Additional facts about where we are today and where we think we can go as a company.
Okay and.
On the <unk> side generally we've been seeing.
If I just look at my model, we've been seeing margins come down I know I know a lot of that is related to volume discounts with big partners.
It did at least in this quarter it looked like the margin and stabilized. So when you think about 20% GDP growth are you still thinking.
Half half of that in terms of fee income growth or.
If margin stabilized do you kind of get 1 for 1.
I still think.
Half.
Because we have such we have a lot of new partners current being a real high.
And then a final 1 that just joined our ecosystem, but we have.
Partners like Sofia, which just started last year, which is still ramping up so but we have the big obviously the dominant players in the industry to like Paypal in China. So.
Still think its half maybe a little bit more than that.
But it will be.
High protein chunky again for.
For the rest of this year, we have for the third quarter of a year over year with the stimulus comparison and then in the fourth quarter. We had a really bad November last year, which we should excel. This this year. So there'll be bumping is this share will maintain the we'll still maintain GDP and fee growth.
I think youre going to see more stability next year.
And what you see for.
The growth in GDP and the fee growth.
Okay, and then you mentioned a couple of partners there so on the current front.
Usually you know excuse me for Kay as the first.
Well.
Seems like the first bank partner and in the primary bank partner and there are no current.
Or other or has had in the past couple other banking partners. So I wonder if there's anything I apologize if it was more detail after I missed but.
Anything you can say about your relationship with current is it new business is it taking over.
Over.
Some of the old business.
How does that work versus some of their other partnerships that were in place.
So.
Part of the appeal.
Of TB BK has been our investment in both our technology and product capabilities, but also our compliance.
TSA.
Envelope of price.
Processes and procedures, so we're attracting a lot of more mature programs.
That had been with other partners, but.
View, those 2 things as a real benefit to being with them with.
Our company so you know that.
There is a.
It's a good thing not necessarily a bad thing for.
<unk>, a fintech company to have 1 or more partners.
In order to ensure that they have a.
Processing base.
<unk> banking relationship.
That's diversified however, there tends to be like in many other parts of banking our lead bank relationship and.
More and more we're establishing sometimes we establish at first but with our partnerships we tend to even if it's not upfront to become the dominant.
Net player within the ecosystem for the partner and we build that relationship over time.
And many of our partners.
Current per.
Has.
Their own strategy and plans, so I don't want to speak or speak for them, but.
That's how we run.
Or a business is to be.
Valuable partner across the spectrum of activities for each 1 of our.
Partners within the ecosystem and we build that advantage over time.
Okay.
And then just lastly for me you also mentioned so fine.
But that business is still ramping up obviously.
John after their own bank charter and I know you can have relationships with the with the partners. Even after that certainly you know like borrow.
Just wondering if you could talk a little bit more about.
That so is that.
Business still.
When you said ramping ramping up I guess youre, saying that business is still ramping up and revenues are still ramping up for P. B BK and then I just wondered if you could touch on Galileo and how that fits into all of this do they become in some ways.
Or can they be coming from.
Hi, Peter.
Or how to think about <unk> as a net of Doe Galileo.
As you know was acquired by sulphide Galileo's.
The capability is processing, we're not a processor there are occasions, where a processor can also be.
A program manager. So if you think of the 3 parties involved there is the bank. There is a processor and then Theres. The program manager those are the 3 bank partners.
Theyre not a competitor to the bank.
They can be a competitor depending on.
If they're capped.
With other program managers, if you have a process, Sir and program manager together.
But theyre not a competitor of ours generally.
Okay. Okay. I was just wondering if they were expanding at all.
Well take care.
I don't anticipate.
Dissipate I think we're going to have a long term relationship with Sofia regardless.
There that's always up to them of course, but I think the envelope of activities. We can provide sofia over long periods of time.
We'll we'll be able to be a value of companies like that regardless, if they get a charter.
And there is we're not competing with.
Galileo Theyre part, we're not competing with the program manager if you think about it and that sometimes you get the competition between the different parties you can be.
Bank, but it also could be a program manager too.
And we don't do that so.
Of the 3 roles, we say we do this 1 role we're not a program manager we're not a processor. So that we can work with anybody within the ecosystem and not worry about being a competitive threat.
Sure I was just thinking with Galileo being owned by itself is probably getting a bank charter.
Now they have.
Now they are bank as well.
But it doesn't sound like you believe that they are looking to push into that side of the business.
Well they day.
I'm not going to speak for Tso 5 but.
I think that we have the scale and sophistication and the understanding of the whole envelope of activities, including.
The scope across so many different large partners that there's real value.
2.
Partners in our ecosystem to using our platform.
They're going to decide long term, whether they do that or not but I think we can make that case too just as as we've added current too.
Through our platform just recently, we see a lot of the opportunities out there and more and more we're seeing.
For those partners at our other institutions.
Contacting us or at least having a discussion about what the differences are and whether or not they would be better using our capabilities.
Got you okay. Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press the star and good day number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key your next question.
Question comes from William Wallace with Raymond James Your line is open.
Thank you good morning, guys.
Good morning, Wally Oh excuse me so.
Damian you mentioned restarting the multifamily lending business with.
Thank you said $125 million.
Close to another $125 million in pipeline is this quote.
We've closed or soon to close $25 million and then we have another $25 million that we should close within the next 60 to 90 days.
Okay. Thank you.
Is this meant to be a securitization business for our balance sheet business.
This is all bad these are all the new deals. This is replacing the securitization business. So if you think on the spectrum between community banking all the way to the securities Shouldnt activity, which was more.
Conduit business, which was investment banking. This is really mainline commercial banking and what asset class which is.
Coding way loading rate multifamily properties, which have very low loss rates, that's where most of our securitization loans were created but it takes away the securitization element, but it's not really a community banking local business either international business.
Or are the deals.
Deals that you closed in the deals in the pipeline are these coming out of that debt.
Debt portfolio, that's already on the balance sheet from the broken securitization are these all new.
These are all new loans, but with.
A part of that team that was retained after we shut that business down.
No.
These are people that.
This flaring with this type of asset class with our with our broker and other direct contacts within the national framework of doing these loans. So we were able to restart the business very quickly we really initiated this.
In the beginning of May and we rapidly got a.
Very good pipeline going so if you think about 18 months back old portfolio is going to roll off remember, we have a 1% fee that will that will be realized at that time, maybe some exit fees too and then we will put on this new portfolio.
<unk>.
These floating rate loans at about 300.
Per cent of capital so as the company's capital base grows we will hold that portfolio. It's an extremely good asset class to have but also very flexible they are fast amortizing loans and there are also other distribution channels and sale and sale opportunities. So we can sell it to insurance companies or other types of people who may want.
To put these loans into conduits. So this is a very flexible so if we need to reduce because of the growth of other businesses reduce debt portfolio. It is very easy to do it.
Okay.
And.
So you you mentioned in your prepared remarks.
The I can't remember you, calling it the 5.
We have a plan to get to 20% ROE for year plan, It's called vision 500, and it appears in our Investor presentation that has just been released.
Okay. So so this this.
1 point now $7 billion portfolio of multifamily loans is.
Yes.
Yielding well above market rates correct due to the timing of when these loans were underwritten with floors.
Correct are you get for approximately a $4.8 but the portfolio is a little smaller than 1.7 but youre in the ballpark, but there are $4.8 loans have floors. So they are they're very.
Accretive, but we are originating in the low for US now there is not a big difference about 60 basis points difference between where we're originating loans as replacements and where they were before but we'll make up for that by holding the portfolio I think we're at about 265% of capital, but will Max out at 300%.
Net of capital so and we will continue to originate loans. So if we have excess origination will sell those loans for a 1% fee right. So we can originate more so we will be able to cover the interest income that is coming off those loans with both the transitional fees and then also excess loans if we originate.
If we need to originate excess lines in order to make up any difference between the roll off.
Okay. So so so you will you will need this line of business then.
To hit that that return on equity target then presumably just given.
You need yield rate.
You've kind of managed your business to a much lower risk asset generators.
Excluding now this product is that correct rate when we did the credit roadmap, which is part of vision 500 part. So there are 3 elements Youll see envision 500, there is the <unk>.
<unk> system of payments there is the credit.
Roadmap and then there is the strategy around return of capital and buybacks right. So all of those things are embedded in the main tenets of vision 500.
Through the credit roadmap process, which is an ongoing process, we looked at the balance sheet over the next 4 years and said what are the asset classes, we're going to hold and scenario planning exercise that looked at.
Our payments heavy business and then our commercial heavy business to really understand how the balance sheet should grow and the good news was whether it's commercial heavy or payments heavy or somewhere in between we're still able to maintain this very high returns on equity over a long period of time I mean, the real key to this at the end of the day.
Growing revenue faster than growing expenses and we've been able to maintain this positive jaws are the difference between revenue and expense now sustainably for the next the last for years and believe that we can continue that into the future and that will drive obviously.
Income per share, but also return on equity.
Okay. Thank you you did mention the buybacks.
And I'm just going to see another excuse me over 400000 bought back.
In the quarter.
Is it is it safe to assume that.
1 that those buybacks will continue that you'll exhaust the existing buyback.
But too.
I noticed that even with those buybacks for the period end share count went up.
I believe that usually the first half for the years when a lot of the stock grants et cetera. Our book So would we see more.
Favorable impact for the share count in the back half for the year should the buyback.
At roughly that $10 million per quarter range that you had mentioned before.
Okay, we will give that to Paul.
Yes.
Youre, absolutely right Wally that the first half of the year represents more grants the vesting of more grants there typically.
You are but there are there will be some in the last half of the year, but over time, we're planning we've announced the buyback it's going to continue at $10 million a year Theres No reason to think that we wouldnt continue that.
Or something similar in 2022, and so yes over.
And you should see a reduction.
No.
We're rigorous with the board around buybacks and we're at 40% that was the target of $40 million. This year the industry is between 40% and 50%.
Returning capital through dividends or buybacks and we will continue on.
Time quarterly and yearly basis, making sure that were consistent with the market, but also choosing the right mix between buybacks and dividends.
Spending on where our stock prices.
Okay. Okay. Thank you.
And I mistakenly asked this question on the wrong call earlier. This week, so I'm going to ask you on the right call at this time.
Earlier. This week there was some noise around the Senate banking chair, sending a letter to the CFP CFPB to investigate the time account closures has been a been a large amount of complaints supposedly and I'm just.
I'm curious to what extent you can comment on.
Oh account closer decisions are made I think I think you mentioned it in 1 of your answers to Warner for any questions about the policies and procedures that you guys have around.
Rules and regulations and making sure that everybody is compliant so any comment that you could make around and it doesn't.
To be specific time, but maybe just generically around how how you might help a partner.
Make decisions on on account closures at etc.
Yes so.
First of all we take our responsibilities extremely regulatory responsibilities extremely sick.
Seriously and has been covered in the press the U S. Government was defrauded on both the state and federal level literally billions of dollar and we were able to recover almost $1 billion for state and federal governments.
We're very proud of that we follow the rules.
I can't really comment any specific case.
Case, but we are part of that decision making process.
And we are obviously, because we have a.
Platform that not overlooked at 1 program, but across all of our programs, we see things that maybe other institutions don't and we are required to do certain activities in a certain way reported.
Port things.
When they are reportable and we filed.
We try to follow the letter of the.
Law, but also to do it in a.
Practical way we net.
That knee jerk or anything when we when we go through a process to identify for.
<unk> accounts.
And.
They can have effect on.
Across our clients. So you can have activity in 1 partner and you can have in accounts and another.
Our program and we will see that that individual may be doing multiple activities across our ecosystem. So I can't.
Comment on that other than we're part.
The process, we take it really really seriously we're required to do it by law.
And we and we and we do it when it's necessary.
Thank you Damian it's very helpful.
That's my last question and I'll step out I appreciate it.
Yeah.
I'm showing no further question at this time I would now like to turn the conference back to Damian Kozlowski.
Thank you operator, thank you everyone for joining us I think were on there we continue to see a lot of growth and profitability over the next few.
So we're going to continue to working working hard for everyone in our community. Thank you for joining us today.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
Few years.
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Good morning, ladies and gentlemen, and welcome to the second quarter. The Bancorp incorporated earnings Conference call. At this time all participants are in a listen only mode. Later will conduct question and answer session and instructions will follow at that time, if anyone should require assistance.
And during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your house, Mr and dress. There are slava. Please go ahead.
Thank you for al Good morning, and thank you for joining us today for the Bancorp second quarter 2000.
<unk> financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This mornings call is being webcast on our website at www Dot the bank corporate dotcom there'll be a replay of the call beginning at approximately 12 P. M. Eastern time today the dialing for replay is 8558592.
$25.6 with a confirmation code of 286885 too before I turn the call over to Damian I would like to remind everyone that when using this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such statements are subject to risks and uncertainties, which could.
<unk> 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 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 results of any revisions to forward looking statements.
Cause that'd be made to reflect events or circumstances. After the date hereof or to reflect the occurrence of unanticipated events.
Like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The Bancorp earned 29 million of net income or 50 cents a share from 13% year.
Year over year revenue growth and 3% expense growth.
Interest income increased 10% year over year total loan balances grew 12% year over year loan balance growth was led by institutional banking, which includes S block I block in RA financing with a 30%, 38% increase in balances quarter over quarter.
Which may 2 channel grew 7% SBA excluding P P.
And a related non recurring line of credit to 5 per cent and leasing 5% gross dollar volume from our cards business grew 15% year over year with fee growth of 5.
Total noninterest income grew 27% year over year are for.
Fintech solutions group previously named payment solutions and payments acceptance continues to have a robust business development implementation pipeline, we announced the addition of current in the quarter as another major partner in our ecosystem. The newly named Fintech Solutions Group was created to enhance solutions integration to our expanding partner base.
And this group not only enables a challenger bank market, but also now includes all our verticals and corporate guests health care and government with an expanding set of card virtual card debit prepaid and other payment capabilities set.
Chaz push to card rapid funds. In addition, we also announced creation of our new fin Tech hub in downtown Sioux.
Sue falls the named Bancorp building will create an integrated innovation environment for our team members and partners, we expect to fully occupy that new facility in 2023.
We launched a new expanded website this quarter reflect our progress as a company on the site you can find useful information about the company, including our new Investor presentation.
And educational and industry insights from our team who are always focused on helping to build success for our partners.
And the new Investor presentation, we are introducing vision 500, a 4 year plan to achieve $500 million in revenue with a sustainable 22% Roe or better.
<unk> by 2025.
Also in the second quarter, we were honored to be selected to be included in the S&P 600 small cap index. This index is a set of representative public small cap companies and key industries that power. Our economy. This index is also part of the broad S&P 500 index and it also includes large and mid cap companies.
Lastly, based on our year to date performance of <unk> 94, a share in our 2021outlook, we are increasing our 2021 guidance to $1.78 from $1.70, we continue to see tailwind that should drive continued growth in 2021 earnings and beyond we will give preliminary per share guidance for 2022 with the third quarter.
Earnings release current trends would suggest income growth for 2022 of 20% or more over our revised 2021 guidance I'll now turn over the call towards CFO, Paul Franco to give more details about the second quarter.
Damian.
Return.
So that's an equity for the second quarter were respectively, 1, 7% and 19% compared to 1.3% and 16% in Q2.2020, the increased returns reflected a $4 million year over year increase in net interest income a negative provision for credit losses.
<unk> increases in non interest income and a lower tax rate.
The increase in net interest income reflected loan growth and $3 million of fees related to our line of credit to another institution to fund PPP loan originations, which are not expected to recur.
S block IV block and advisor financing interest.
Interest increased $3.4 million, while leasing and SBA each increased approximately $1 million the SBA increase excludes PPP and the $3 million of nonrecurring fees.
While interest on CRE loans at fair value decreased slightly noninterest income reflected 2.
$6 million and net realized gains on commercial loans.
Primarily resulting from exit and prepayment fees on loan pay offs, we have begun generating new CRE loans with the first closings occurring in July.
Total interest income reflected a reduction.
<unk> million dollars in securities interest, reflecting lower securities balances prepayments of higher yielding securities and lower reinvestment rates.
Our average loans for the quarter of $4.6 billion.
Represents growth of 16% over Q2.2020.
We believe our loan portfolios generally are lower risk than other forms of lending as a result of their charge off history, which reflects the nature of related collateral.
Our non SBA $1.5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings while R. S.
<unk> of <unk> Securities are respectively, collateralized by marketable securities for the cash value of life insurance, our small business loan portfolio is comprised primarily of SBA loans, which are either 75% government guaranteed where have 50% to 60% origination date loan to values.
For our leasing.
Block portfolio, we have recourse to underlying vehicles and a prolonged history of pricing leases to minimize losses.
Tables contained in the earnings press release.
Detailed diversification of our loan portfolios.
Loan deferrals, which had been encouraged by Covid legislation.
<unk> substantially all expired as of July 5th which was the due date for the vast majority of small business loan payments of the $48 million of deferrals at March 31, 2021, small business loans with an on guaranteed principal balance of only $2.6 million.
Not made their July payment.
<unk> and only 968000 of all loans remained in deferral.
The $1.3 million increase in interest expense compared to Q2.2020 resulted primarily from the senior debt issuance in Q3.2020, while Q2.2021.
Cost of funds was 18 basis points most of our deposit interest expense is contractually tied to market interest rates.
The net interest margin was $3, 1.9% compared to $3.5 3% in Q2.2020.
The reduction reflected the impact.
<unk> 2021 stimulus payments, which were which temporarily increased average balances at the federal reserve, earning nominal rates as funds were spent these balances were reduced in by June 32021, total assets decreased to $6.5 billion compared to an average of <unk> 7.
<unk> billion for the quarter the net.
Net interest margin benefited from the aforementioned $3 million of non recurring credit line fees, which served to offset the impact.
Of reductions in loan and securities yields.
The provision for credit losses was negative $951000, which.
Reversal of certain pandemic related economic risk factors in the <unk> model and the recovery of an allowance on loan payoff because S block and I backed loans are respectively collateralized by marketable securities and the cash value of life insurance and have incurred only nominal credit losses.
<unk> management excludes those loans from the ratio of the allowance to total loans in its internal analysis. The adjusted ratio is approximately 1.2%.
Prepaid debit and other payment related accounts for our largest funding source and the primary driver of noninterest income total fees and related payments.
<unk> income.
<unk> was up 5% to $21.4 million in Q2, 2021 compared to $24 million in Q2, 2020 leasing income increased $1.3 million.
Selecting the impact of the reopening of vehicle auctions after pandemic.
<unk> shutdowns and higher vehicle market prices due to vehicle shortages.
Non interest expense for Q2, 2021 was $43.9 million for an increase of 3% the increase reflected higher salary expense, including incentive compensation and equity compensation expense.
Continue to focus on expense management, especially in relation to revenue growth.
Second quarter results also reflected the impact of an approximate 21% tax rate versus higher rates in recent years. The reduction resulted from excess tax deductions related to stock based compensation for large.
Deductions and tax benefit resulted from the increase in the Companys stock price as compared to the original grant date.
Book value per share increased 16% to $10.77.
Compared to $9.28, a year earlier, reflecting earnings per share and the impact of stock repurchases capital.
<unk> ratios continue at satisfactory levels, primarily as a result of retained earnings notwithstanding in the second quarter impact of stimulus payments, which temporarily increased average assets I will now turn the call back to Damian.
Thank you Paul.
Operator could you open it up for questions.
Yes.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key your first question comes from Frank.
The royalty.
Piper Sandler.
Your line is open.
Good morning.
Good morning, Frank.
For your questions I Wonder.
If you could talk about.
And I know youre going to give preliminary guidance on slide 22 next quarter, which I'm sure you'll you'll.
I'll have more detail to offer but.
Is there any more color you can give in terms of the drivers.
To get to the 20% plus.
I guess more.
So I'm just.
Curious about.
The growth rates you anticipate.
Getting in the.
The payments payments.
Payments fee income.
Yes, we still think.
With our pipeline on the payment side is that we'll get the.
J D day, it's been very bumpy for the last couple of years obviously.
It's real extremes over particular months because of.
But also because of consumer buying behavior, but with the pipeline. We have we still think we can sustain that 20% GDP growth over the next couple of years has there is a transition in the economy.
That's from the payment side from the lending side its still.
Between 10 and 15% on the commercial.
Commercial side.
And the S block side.
<unk> and <unk> side, we've been growing disproportionately so 20% to 30% growth there.
As we have been demonstrating and on the real estate side, we've already have a we restarted that business in the multifamily.
<unk>, we already have a very robust pipeline.
We already closed or about to close $25 million in deals and we have another 125.
Million.
The pipeline to close so.
<unk>.
We're experiencing.
Not a lot of weakness across the board, we've got a lot of strength in tailwind.
And I think that will give a lot more color when we give per share guidance.
And you can look at our new Investor presentation, which we issued yesterday, which has.
A lot of.
Additional facts about.
We are today and where we think we can go as a company.
Okay.
And then on the GDP side generally we have been seeing.
If I just look at my model, we've been seeing margins come down I know I know a lot of that is related to volume discounts with big partners.
It did at least in this quarter it looked.
Like the margin and stabilized so when do you think about 20% GDP growth are you still thinking.
Half half of that in terms of fee income growth or.
If margins stabilized do you kind of get 1 for 1.
I still think.
Half.
Because we have such we have a lot of new partners current being a real.
High profile, 1 that just joined our ecosystem, but we have.
Partners like Sofia, which just started last year, which is still ramping up so but we have the big obviously the dominant players in the industry to like Paypal in China. So.
I still think it's half maybe a little bit more than that.
But it'll be it'll be chunky again for.
For the rest of this year, we have for the third quarter you have a year over year with the stimulus comparison and then in the fourth quarter. We had a really bad November last year, which we should excel. This this year so.
Bumping is this share will maintain the we'll still maintain GDP and fee growth and I think youre going to see more stability next year.
And what you see.
From the growth in GDP and the fee growth.
Okay, and then you mentioned a couple of partners there so.
The current front.
Usually tubing became the first.
Seems like the first bank partner and in the primary bank partner and there are no current has a couple of other or has had in the past couple other banking partner. So I wonder if there's anything I apologize if it was more detail after I admit but.
Anything.
You know the day about your relationship with current is it new business is it taking over.
Some of the old business.
How does that work versus some of their other partnerships that were in place.
So.
Part of the appeal.
Of TB BK has been our.
You can see in both our technology and product capabilities, but also our compliance and BSA.
Envelope of.
Process and procedures, so we're attracting a lot of more mature programs.
That had been with other partners, but.
Best view, those 2 things as a real benefit to being with them with.
Our company so that there.
There is a.
It's a good thing not necessarily a bad thing for.
<unk>, a fintech company to have 1 or more partners.
But in order to ensure that they have a.
Our processing base or a banking relationship.
That's diversified however, there tends to be like in many other parts of banking our lead bank relationship and.
More and more we're establishing sometimes we establish at first but with our.
Our partnerships, we tend to even if it's not upfront to become the dominant player within the ecosystem for the partner and we build that relationship over time.
And many of our partners.
Current has.
Their own strategy.
<unk> implants, I don't want to speak or speak for them, but.
It's how we run our business is to be.
Valuable partner across the spectrum of activities for each 1 of our <unk>.
Partners within the ecosystem and we build that advantage over time.
Okay.
And then just lastly for me you also mentioned so far.
But that business is still ramping up.
Obviously they've got.
After their own bank charter and I know you can have relationships with.
Partners, even after that certainly.
Borrow.
I just wondered if you could talk a little bit more about that.
So is that business still.
When you said ramping ramping up against Youre, saying that business is still ramping up and revenues are still ramping up for P. B BK and then I'm just wondering if you could touch on Galileo and how that fits into all of them.
Do they become in some ways or.
Or can they become in some ways.
Sure.
<unk>.
Or how to think about Ohio is a net of Doe Galileo.
<unk> was acquired by sulphide Galileo's.
<unk> capability is processing.
We're not a processor there are occasions, where a processor can also be a program manager. So if you think of the 3 parties involved there is the bank. There is a processor and then Theres. The program manager those are the 3 bank partners.
Theyre not a competitor to the the bank.
They can be a competitor depending on.
If they're captive with other program managers, if you have a process.
<unk> program manager together.
But theyre not a competitor of ours generally.
Okay. Okay. I was just wondering if they were.
Ending at all.
Well they don't.
I don't anticipate I think we're going to have a long term relationship with Sofia regardless.
There that's always up to them of course, but I think the envelope of activities. We can provide sofia over long periods of time.
We'll we'll be able to be of value.
<unk> of companies like that regardless, if they get a charter or not and there is we're not competing with.
Galileo Theyre part, we're not competing with the program manager if you think about it and that sometimes you get the competition between the different parties.
You can be a bank.
But it also could be a program manager too.
And we don't do that so of the 3 roles. We say we do this 1 role we're not a program manager we're not a processor. So that we can work with anybody within the ecosystem and not worry about being a competitive threat.
Sure I was just thinking with Galileo.
It will be owned by itself I don't probably getting a bank charter.
Now they have now they are bank as well, but.
But it doesn't sound like you believe that they are looking to push into that side of the business.
Well they day.
I'm not going to speak for Tso, 5, but I think that we have the scale and sophistication and the.
Understanding of the whole envelope of activities, including the scope across so many different large partners that there's real value.
2 parter.
Partners in our ecosystem to using our platform.
We're going to decide long term, whether they do that or not but I think we can make.
Case too just as we've added current to our platform. Just recently, we see a lot of the opportunities out there and more and more we're seeing.
For those partners at our other institutions.
Contacting us or at least having a discussion about what the.
Differences are and whether or not they would be better using our capabilities.
Got you okay. Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press the star and good day number 1 key on your Touchtone telephone. If your question has been answered.
That for you wish to remove yourself from the queue. Please press the pound key. Your next question comes from William Wallace with Raymond James Your line is open.
Thank you good morning, guys.
Good morning Wally.
Excuse me so.
Damian you mentioned restarting the multifamily.
Family lending business with thank.
Thank you said $125 million, just closed and another $125 million in pipeline is this 25, we've closed no clue.
Closed or soon to close $25 million and then we have another $25 million that we should close within the next 60 to 90 days.
Okay. Thank you.
Or.
Is this meant to be a securitization business for balance sheet business.
This is all bad these are all the new deals. This is replacing the securitization business. So if you think on the spectrum between community banking all the way to the securities Shouldnt activity, which was more conduit business, which was investment bank.
Banking this is really mainline commercial banking and what asset class, which is this floating way floating rate multifamily properties, which have very low loss rates, that's where most of our securitization loans were created but it takes away the securitization element, but it's not really a community banking local business.
It's a national business.
R. R are the deals that you closed in the deals in the pipeline are these coming out of that debt.
Portfolio, that's already on the balance sheet from the broken securitization or are these all new.
These are all new loans, but it's with.
A part of that team that was retail.
Either after we shut that business down.
So.
These are people that are experienced with this type of asset class with our with our broker and other direct contacts within the national framework of doing these loans. So we were able to restart the business very quickly.
Really initiated this.
In the beginning of May and we rapidly got a very good pipeline going. So if you think about 18 months back old portfolio is going to roll off remember, we have a 1% fee that will that will be realized at that time, maybe some exit fees too and then we will put on this new ports.
Portfolio of.
These floating rate loans at about 300% of capital so as the company's capital base grows we will hold that portfolio. It's an extremely good asset class to have but also very flexible there fast amortizing loans and there are also other distribution channels and sale and sale opportunities.
We can sell it to insurance companies or other types of people, who may want to put these loans into conduits.
This is a very flexible so if we need to reduce because of the growth of other businesses reduce debt portfolio, it's very easy to do it.
Okay.
Yes.
So you you mentioned.
In your prepared remarks.
The I can't remember you, calling it the 5 year plan to get to 20% ROE for year plan called vision 500, and it appears in our Investor presentation that has just been released.
Okay. So so this this.
1 point now 7.
$7 billion portfolio of multifamily loans is.
Yielding well above market rates correct due to the timing of when these loans were underwritten with floors.
Correct are you got to approximately a 4.8 but the portfolio is a little smaller than 1.7.
But youre in the ballpark.
But there are $4.8 loans and they have floors, so they're very accretive.
Accretive, but we are originating in the low for US now theres not a big difference about 60 basis points difference between where we're originating loans as replacements and where they were before but we'll make up for that by holding the.
We're about 265% of capital, but will Max out at 300% of capital So.
And we will continue to originate.
So if we have excess origination will sell those loans for a 1% fee.
So we can originate more so we will be able to cover the interest income that's coming off those loans with.
Paul I think the transitional fees and then also excess loans, if we originate if we need to originate excess loans in order to make up any difference between the roll off.
Okay. So so so you will you will need this line of business then.
To hit that that return on equity.
Book and presumably just given.
The yield rate I mean, you've kind of manage your business to a much lower risk asset generators.
Excluding prana.
Product is that correct rate when we did the credit roadmap, which is part of vision 500 part. So there are 3 elements.
Youll see envision 500, there is the <unk>.
<unk> system of payments there is the credit roadmap and then there is the strategy around return of capital and buybacks right. So all of those things are embedded in the main tenant for vision 500, and through the credit roadmap process, which is an ongoing process. We looked at the balance sheet over the next 4 years and said.
Turning to the asset classes, we're going to hold and scenario planning exercise that looked at our payments heavy business and then our commercial heavy business to really understand how the balance sheet should grow and the good news was whether it's commercial heavy or payments heavy or somewhere in between we're still able to maintain this very high returns on equity.
Equity over a long period of time I mean, the real key to this at the end of the day is growing revenue faster than growing expenses and we've been able to maintain this positive jaws are the difference between revenue and expense now sustainably for the next the last for years and believe that we can continue that into the future and that will drive.
I've obviously.
Income per share, but also return on equity.
Okay. Thank you you did mention the buybacks.
And I'm just going to see another.
Excuse me over 400000 bought back.
In the quarter.
Is it is at stake.
Assume that.
1 that does buybacks will continue that you'll exhaust the existing buyback book, but too.
I noticed that even with those buybacks for the period end share count went up.
I believe that usually the first half for the years when a lot of the stock grants et cetera are our book so.
We see more favorable impact for the share count in the back half of the year should the buyback continue at roughly that $10 million per quarter range that you'd mentioned before.
We didn't give that to Paul.
Yes.
Youre, absolutely right Wally that the first half of the year.
<unk> represents more grants the vesting of more grant there are typically fewer but there are there will be some in the last half of the year, but over time, we're planning we've announced the buyback it's going to continue at $10 million a year. There's no reason to think that we wouldnt continue.
Or something similar in 2022, and so yes over time, you should see a reduction.
Now we were rigorous with the board around buybacks and we're at 40% that was the target of $40 million. This year the industry is between 40% and 50%.
You that.
Returning capital through dividends or buybacks and we will.
We continue on a quarterly and yearly basis, making sure that were consistent with the market, but also choosing the right mix between buybacks and dividends, depending on where our stock prices.
Okay. Okay. Thank you.
<unk>.
I mistakenly asked this question on the wrong call earlier this week, so I'm going to ask you on the right Paul at this time.
Earlier. This week there was some noise around the Senate banking chair, sending a letter to the CSP CFPB to investigate the chime account closures has been a been a large amount of complaint.
And supposedly and I'm just.
Curious to what extent you can comment on how account closer decisions are made I think I think you mentioned in 1 of your answers to 1 of Frank questions about the policies and procedures that you guys have around.
Rules and regulations and making sure that everybody is compliant so any comment that you could make around and it doesn't have to be specific time, but maybe just generically around how how you might help a partner.
Make decisions on on account closures at etc.
Yes so.
We first of all we take our responsibilities extremely regulatory responsibilities extremely seriously and that's been covered in the press. The U S. Government was defrauded on both the state and federal level literally billions of dollars and we were able to recover almost $1 billion for state and federal governments and.
And we're very proud of that we follow the rules.
I can't really comment any specific case, but we are part of that decision making process.
And we are obviously because we have.
A platform that not overlooked at 1 program, but across all our programs, we see things that maybe other institutions.
And we are required to.
To do certain activities in a certain way report things.
When they are reportable and we filed.
We tried to follow the letter of the.
Law, but also to do it in a practical way.
It's not knee jerk or anything when we.
<unk> when we go through a process to identify.
<unk> accounts.
And they can have effect on across our clients. So you can have activity in 1 partner and you can open an account and another.
Our program and we will see that that individual may be doing multiple.
<unk> activities across our ecosystem so.
I can't comment.
Comment on that other than we're part of the process. We take it really really seriously we're required to do it by law.
And we and we and we do it when it's necessary.
Thank you Daniel that's very helpful.
<unk>.
That's my last question and I'll step out I appreciate it.
I'm showing no further question at this time I would now like to turn the conference back to Damian Kozlowski.
Thank you operator, thank you everyone for joining us.
I think were on there we continue to see a lot of growth and profitability over the next few years and we're going to continue to working working hard for everyone in our community. Thank you for joining us today.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation.
And have a wonderful day you may all disconnect.