Q3 2021 Bancorp Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021, The Bancorp Inc Earnings Conference call.
At this time all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I'd like to hand, the conference over to your speaker today Andrew.
Thank you. Please go ahead Sir.
Thank you Lisa good morning, and thank you for joining us today for the Bancorp's third quarter 2021 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 Corp, Dotcom there'll be a replay of the call beginning at approximately 12 P M. Eastern.
Today, the dialing for replay is 8558592056 with a confirmation code of 90 57937 before I turn the call over to Damian I would like to remind everyone that when used in this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements within the meaning of the prime.
But 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 see the bancorp's filings with the SEC.
Centers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward looking statements, which may be made to reflect events or circumstances. After the date hereof or to reflect the occurrence of unanticipated events now I'd like to turn the call over to the Bancorp's Chief Executive Officer, David <unk>.
Laski Damian.
Thank you Andres good morning, everyone. The Bancorp earned $28 3 million of net income or <unk> 48 per share from 4% year over year revenue growth with a 6% expense decrease.
Interest income increased 2%, while net interest income increased 9% year over year loan balances grew 26% year over year, and 8% quarter over quarter balance growth year over year was led by institutional banking, which includes as black I blocked in R. R. I, a financing with a 32% increase in balances all business is continuing.
To grow quarter over quarter with institutional growing six SBA, three and leasing to gross dollar volume from our cards business grew 2% year over year, while payments related fee income decreased slightly both GDP and fee income were impacted by the loss of Aro volume. This quarter also at a year over year impact of 2020 stimulus that contributed to the slower growth.
Our relaunched commercial real estate business exceeded our expectations and has already closed approximately $200 million of our new flow floating rate loans with at least another $300 million set to close in the fourth quarter. Our current estimate is approximately $550 million for.
For the full year 2021, new CRE loans. These loans like our previous securitization business credits, which were mark to market, our reserved against and will not be securitized.
May be sold to institutions. Our current target is approximately 300% of capital for CRE floating rate exposure in aggregate.
Due to changes in FDIC guidance regarding the definition of broker deposits FDIC insurance costs have been meaningfully reduced from 16 to 10 basis points. This may reduce total expense by approximately $4 million year over a million a quarter. The majority of our deposits are no longer classified as brokered and our insurance costs for the quarter were very close to them.
<unk> cost of nine basis points for one dollar of deposits.
We also announced the departure of our Chairman Daniel Cohen, who has been a member of the TPB community since its founding the board would like to thank Dave for all his contributions and wish him great success on as many ventures I would additionally, I'd like to thank Daniel personally for significant support during our company's transformation into a leader in the fintech industry and across our.
Thriving specialty lending businesses.
Board has selected board member J, Mac and cheese or third to succeed Daniel as Chairman effective November one. In addition, shell Crusoe has been appointed as a new director and John Chrystal has notified the board of his plans to resign effective February 28 2022.
Lastly, based on our year to.
Year to date performance of $1 42, a share and our 2021 outlook. We now believe that exceeding our 2021 guidance of $1 78 is likely however, we are not issuing new guidance, but note that the bias is toward over performance, we continue to see tailwind.
Head tailwind that should drive continued growth in 2020 early 2021 earnings and beyond we are Oh, so issuing preliminary guidance for 2022 of $2 15, a share. This 2022 guidance does not include stock buybacks. This is approximately 21% income growth over 2021.
Now turn our call over to CFO, Paul Franco to give more details about the second quarter Paul.
Thank you Damian.
Return on assets and equity for the third quarter were respectively, one, 8% and 18% compared to 1.5% and 17% in Q3 2020.
The increased returns reflected a $2 2 million dollar increase in noninterest income of $2 $6 million decrease in noninterest expense and a lower tax rate.
100000 dollar increase in net interest income reflected loan growth, but was significantly offset by the $1 9 million dollar impact of prepayments on commercial real estate loans.
However, net realized and unrealized gains on commercial loans increased $3 $6 million, which resulted primarily from fees related to those prepayments.
In the third quarter of 2021.
We recommenced the origination of such loans, which are intended to offset the impact of such prepayments and payoffs.
Interest income reflected a reduction of $1 million in security interest, reflecting lower securities balances prepayments of higher yielding securities and lower reinvestment rates.
Our average loans for the quarter of $4 6 billion grew 9% over Q3 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 clat collateral.
Non SBA, one $5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings, while R. S block and I block portfolios are respectively collateralized by marketable securities where the cash value of life insurance, our small business loan portfolio is comprised primarily of SBA loan.
Bonds, which are either 75% government guaranteed.
50% to 60% origination date loan to values for our leasing portfolio, we have recourse to underlying vehicles and a prolonged history of pricing leases to minimize losses.
Tables contained in the press in the earnings press release detailed the diversification of our loan portfolios.
Substantially all loans with Covid payment deferrals have recommenced payments and only $1 3 million of non U S. Government guaranteed principle remained in deferral at September 30th.
Interest expense was comparable to Q3 2020, while the Q3 2021 cost of funds was 18 basis points. Most of our deposit interest expense is contractually tied to a percentage of changes in market interest rates.
The net interest margin was 335% compared to $3 three 7% in Q3 2020, while yields on loans were lower at four 5% compared to $4 two 2%.
Comprised a greater proportion of interest earning assets in 2021, which contributed positively to the to the 2021 margin the COO.
Q2, 2023, NIM of $3, one 9% reflected the impact of 2021 stimulus payments, which temporarily increased balances at the federal reserve, earning nominal rates.
As recipients spent their stimulus average interest, earning assets were reduced from $6 8 billion last quarter to $6 1 billion this quarter.
The provision for credit losses increased to $1 6 million, which reflects which reflected the impact of the chart of the charge off of the non guaranteed portion of an SBA loan on the seesaw methodology as well as loan growth.
Because S block and I block 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 in its internal analysis. The adjusted ratio was approximately one 2%.
Prepaid debit and other payment related accounts, our largest funding source and the primary driver of noninterest income.
Total fees and related payments income decreased 5% to 21 $21 million in Q3 2021 compared to the prior year, reflecting the exit of the single relation ship Damien mentioned previously.
Noninterest expense for Q3, 2021 was $39 4 million, reflecting a decrease of $2 6 million or 6% from the prior year.
The decrease reflected a $1 $9 million decrease in FDIC insurance, which reflected the lower insurance rate noted earlier in the call while the future impact may be $1 million per quarter. The current quarter impact was higher due to the cumulative effect of the change.
Multiple factors are considered in the FDIC insurance assessments, which also may be modified by the FDIC in the future. We continue to focus on expense management, especially in relation to revenue growth.
Third quarter results also reflected the impact of an unimpressive, but 23% tax rate versus higher tax 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 has come.
Paired to the original grant date of the stock compensation book.
Book value per share increased 15% to $11 13.
Compared to $9 71.
A year earlier, reflecting earnings per share and the impact of stock repurchases I will now call I will now turn the call back to Damien.
Thank you very much Paul operator could you. Please open the line for questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Frank Schiraldi with Piper Sandler.
Good morning, Good morning, Craig Good morning.
Just on the.
The $2 15 next year the guidance.
Just wondered if you could share any drivers of that 20% EPS growth.
Such as.
Expectations on.
GDP or any ramp up in those.
Loan gain.
And on sale of loans.
Curious if you could drill down into any color there.
So the GDP is going to return to trend. So we had the stimulus made it very difficult to predict because of the lumpiness.
We had the loss of.
The one program that we mentioned which did impact.
The GDP growth in this quarter. So if you back those two out.
Total you would you would have a double digit GDP growth. So that is how big the impact was thats, our best estimate so that's going to return to trend.
You should see better growth in the fourth quarter and you should see a much better growth in 2022, we know what our pipeline is we've added some major programs.
So GDP growth should return more to the trend level. In addition.
We have a lot of initiatives going on in the credit area, that's linked to payments and so youll probably see increased.
Realization of fee growth. In addition to that so you know we've had a lower realization due to the.
The tiers in our pricing to large.
Program.
Pretty much maxed out now and so you are getting new programs, and then youre going to get fees through.
The credit area, so that should be very strong for 'twenty, two and then really build into 'twenty. Three so we're very confident that's going to support the earnings per share credit is.
Our programs.
Across the board will continue to grow double digit we've been in the mid <unk>.
For SBA leasing has a little bit of a headwind based on the availability of cars, but luckily.
We have a very good presence in the marketplace and be able to secure vehicles as that works out youll see increased growth in leasing also so youll be in that mid.
Maybe even four above trend for a little while as cars become available and.
Then the Big question is the whole CRE program, where we're realizing fees in the near term on the securitization portfolio, while replacing it with slightly lower spread loans that are these floating rate multi use excuse me multifamily properties and so that timing of that.
Through 2022 is a real real question.
Think we will be.
Able to generate the income necessary, because theres that offset for fees as they are paid back but additionally, the new portfolio of CRE has been.
Very very successful in the marketplace. So as I mentioned, we're already at about $5 50, we think at the end of the year and so we will be able to build out of that very quickly. In addition, if we need to we can over originate the loans and distribute those not through securitization, but through loan sales and realize those fees immediately so across the board we saw.
Strength in certain areas.
We're seeing pipeline.
We've never seen before especially in our institutional business, but also obviously in CRE and SBA. So we're very comfortable.
With the $2 15, a share the one thing I will note.
Very long winded answer is that there's probably a little bit more variability we could really.
<unk>.
Overproduce on the $2 15, but that would have to dovetail with the payoff of the loans and where we start the year based on how many loans pay off in the fourth quarter. So we're watching that very closely and adjust.
But we think.
$2 15, a share is a good estimate right now.
Okay.
Thanks for all the color and then in terms of G. D V going back to run rate in the past.
A good rule of thumb as you'll have these volume discounts as that.
Card fees will grow maybe half of GDP growth.
Is that kind of leveling out now that you are adding these new programs that could we see more sort of similar similar to GDP growth in terms of card fee growth going forward.
Yes, I don't know it's also a mixed during this time of volatility where some of the.
Some of the cards Werent really use like commuter cards and there's a lot that goes into the calculation, but it's two sources. One is new programs and then second is credit initiatives that are linked to our major programs, where we started.
Developing with our major partners, our ability to use our balance sheet and a very low risk way. So that doesn't those arent GDP dependent initiatives. So from those two areas new programs and fees from.
The sponsorship of credit instead of payments bank sponsorship should drive that proportion higher over the next 18 months I'm not sure exactly when and where but definitely as we worked through the year 2022, we should see a higher realization rate.
I mean, when you say credit sponsorship you talked mostly originate and sell or could you hold some of this on balance sheet.
It's a combination of those things early.
We're not going to securitize, so it will be utilizing our balance sheet with major partners.
Providing.
In many cases, the loans may actually be booked on our will be the true lender. So these are very advantageous to us we've got a lot of liquidity and I think.
We'll add a lot to the fee base.
That were generating in that area.
Okay, and then you mentioned the $2 15 doesn't include stock buybacks, you guys have been pretty religious about.
Completing your quarterly authorization here in 2021.
Given where the stock is now do you see.
The same sort of game plan for 2022.
Yes. So this is all based on rigorous understanding of P/e market to book multiples. When you hit the exemplar range, which we are on row, we're at 18% and we're going to above 20, you get about 5% of banks really do create.
Fantastic shareholder returns. So we think we should be at.
Right now we're about 18 trailing P. We think we should at the end of the day be at 20 and a forward look that's where we think our stock price should be so if we're at 20 times whatever our guidance is if our stock is not there will be buying back.
Gotcha, Okay, Great and then just one last one just you know people are starting to obviously you guys have given guide for 2022, but people are even starting to look beyond that.
If you think longer term.
That goal out there greater than I think $500 million in revenues by 2025.
So that would assume double digit revenue growth over a multiyear period.
And then the question is does the scale story continue through that point.
In your estimation, so that revenue growth will or could should continue to outpace expense growth and therefore, you can see.
This 20% EPS growth.
Could be reasonable to extrapolate forward.
Well.
We haven't given guidance, but.
In our Investor presentation, where we reissued.
Been very rigorous about those three tenants of our strategy one is the.
The whole payments to the Fintech solutions group, where we're trying to really look forward and turn ourselves into a bank with a technology company, but a technology company with a bank and so theres a whole envelope of middle office activities that we're investing in not only for our partners, but hopefully do Mont.
Ties out in the marketplace.
As we approach the end of that four year period. So we're very we're very optimistic of where we are right now.
We had this bumpy ride on GDP with stimulus.
Also.
You are an extremely low interest rate environment and have been able to adapt to it so in a more normalized environment and having just those supporting tailwind to virtualization of banking all those things plus our focus on not the use of the balance sheet, but the use of our our capabilities to produce fee income.
Should really have long term impact on our ability to generate above.
Market returns and also return significant amounts of capital to shareholders.
Okay, Alright, I appreciate all the color I'll, let someone else hop on thank you.
Youre welcome Thanks, Frank.
Once again, if he would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of William Wallace with Raymond James.
Hi, good morning, how are you.
Hey, Wally good hope everything is well.
Hey, guys. Thank you so.
I wanted to just dig into some balance sheet questions here.
Take $1 million to $300 million of.
Short term borrowings in the quarter.
I can respond to that.
It was.
Periodically to manage our federal reserve requirements and test our liquidity.
We test that.
That line from between like 100.
To 300 million.
We averaged on average we were a lot lower than it was a small fraction of that 300. It just happened on the last day that we had done that we werent really.
Planning to keep that that 300 million so on a daily basis, you might see.
A fraction of that 300 that we that I said as I said, we use to manage our reserve requirements.
Okay.
Okay. So it should.
Mostly we would anticipate most of that would be gone by the end of the year.
We have a lot of flexibility we are one of the few banks that over time.
That over time has actually exited deposit relationships. So we have a lot of flak city. So we can actually determine the size of our balance sheet the size of our deposits.
So that's really going to be what we determined it should be and as I said before there may be some borrowings it's really just to manage our daily cash we do have being a payments company.
And having a lot of inflows and outflows that have different timing elements to them you might see deposits and therefore cash fluctuate on a daily basis. So.
So the lines are helpful in managing cash on a daily basis.
Okay. Okay.
And.
Can't help but notice that you had your down deposits are down another 500.
$50 million plus this quarter, they're down.
About 1.8 million from the first quarter.
Does that have anything to do with this.
One program, but you lost.
Frankly, I'll, let Paul take it but a fraction of it does but that's mostly driven by our own actions too.
Lower the size of the balance sheet and the stimulus, but Paul why don't you take that yes.
Yes. It is basically those two factors the biggest fat and the biggest single factor was the stimulus that resulted.
And taking a.
From like a low $6 billion bank to a high.
Almost a $7 billion bank.
As the stimulus Scott spend throughout the year.
As I said in my comments in the third quarter things normalized and were closer to $6 billion bank, yet, but yes, obviously that that one relationship did have an impact and in addition to that we exited some other deposits.
We basically determined which wants to exit are based.
Based on cost.
So we've been calling actually for years.
The higher cost deposits.
And that's left us with a cost of funds of 18 bps, yes.
Yes, we just have a lot of flexibility on deposits. So we had no problem adjusting.
Even through the getting a lot of excess deposits. It did obviously hurt some of our ratios, but we managed through it very well.
Quickly and rightsize the bank, but.
With our partner base, it's very easy to get additional deposits, if we need them, but sometimes you don't you don't want to pay up for them. So we wanted to have the lowest cost.
Possible and that's why we use the lines and Thats why on a long term basis, we want to make sure that we're have the right partners and the right agreements in place, but we're very comfortable with the funding of the bank.
Yeah.
Okay.
And then.
I mean can you quantify how much of the deposits were related to the one program and then.
Excuse me was the one program was this a.
Was this a customer that.
That had higher cost deposits that you were less.
That were less profitable the relationship profitable or no.
The program, we mentioned before it's borrow remember they've got.
Okay. Thank license and so they are not the majority of those deposits there are less than.
30% of that excess deposit base.
Okay and the nature of these programs is such that.
Okay. They can't just.
So the contracts are in wait till the end of the contract again, and then walk away and take deposits with them is that correct or.
No theyre long or so so we always knew the IND.
Tensions of that program.
So that was a multi year transition plan, we were very aware of what was going to happen, but its depending on when a when something like that happens it depends when they re card.
<unk>.
So you have to redo everything that we've done so they wanted to do that in a more aggressive way and that's fine.
And so it did have an impact on 'twenty.
'twenty, one, but it will be that impact will be over obviously in the beginning of next year. So that's why we're very comfortable with returning to trend growth with new programs et cetera. So.
And.
It wasn't that big of a deposit.
Not going to say exactly what that was but it wasn't you.
You can make an estimate by simply getting the call report.
Which is publicly available and you can make that estimate of loan by backing out some perceived growth that maybe came through their own communications to the marketplace.
Yes, Okay. Thank you Damian and then.
On the GDP side, so if I look at GDP on a year over year basis in the third quarter. It was <unk>.
<unk> growth was about 2%. So so if we think about returning to trend for the next three quarters or so I should see theoretically or hopefully some year over year growth, but then returning to your prior guide of roughly 20% I believe is what.
You guys felt like you had visibility too.
Yes.
Well it really depends on the virtualization of the Theres a lot of factors that grow in there, but we.
That's our best estimate Youll see growth.
For various reasons in the fourth quarter, we're already seeing.
Good growth we had.
Really bad November remember with the election, you had you didnt have a great quarter last year in the fourth quarter, So youre going to see obviously.
Much higher growth than you did in the third quarter at least that's our estimate right now.
We obviously don't know what's going to happen with consumer spend there is a lot of ambiguity in the marketplace, but you should see much better growth in the fourth quarter, then you're still in the first quarter of next year you still have this other stimulus that came in in March so, though our balances at the our biggest programs in some of the newer.
Our programs are really starting to come online that's going to be we think we're going to see significant growth, but that's that's going to be the end of this.
Year over year impact from government intervention that will really be the last time that we see a big bulk stimulus payment, where you have to kind of.
Guesstimate what your program growth is because you really don't know how much was stimulus how much was spent et cetera et cetera.
Okay, Alright, and then.
Back to you.
One of <unk> questions talking about the GDP margin you started talking about other types of programs that are maybe more along the lines of credit sponsorship et cetera that sounds like it would be a new <unk>.
Line item business not necessarily.
GDP margin tight it wouldn't go into pre payments business.
Okay.
Maybe help me understand what you were it depends on how we at the end of the day it might it might not to your point.
The reality is is that it will add significantly to profitability. So we haven't decided the final structure of that program and how it's going to be booked but when we do we will announce it and it may not appear in that line that's correct.
Okay.
So.
Is it fair to then maybe.
So what we are hearing today, suggesting that we'll return to trend.
Growth on GDP, which I believe you had stated I think about maybe 20% ish type volume growth with about a 10% type revenue growth.
That now, perhaps there could be some tailwind to that 10% level.
Level due to some new.
Partnership opportunities and structures.
Well, yes, but I would.
Hard to say, how we book the business.
It's a purely credit line a different line item they should be aggregated I would say.
Suggests they should be aggregated together, because it's really part of the same relationships based off the.
That whole ecosystem so.
I think you can look at it anyway, you want but even if we don't book it on that line you should probably put it together and analyze it that way because it is very <unk>.
Synergistic.
Yes, okay.
Okay, Great and then last question on the FDIC line.
It said that it should the class.
The new classification of deposits should see about a $1 million a quarter. So that would suggest that the run rate expense is closer to like 1511 to one and a half not not where you were in the third quarter correct.
Yes, so so the easiest way to do that in your model is to look at the rates.
The rate for us will be approximately 10 10 bps. So just take that 10 bps times Youre average average liabilities for the.
For the quarter and that comes out as Damian mentioned to about $1 million a year.
I am sorry, a $1 million a quarter.
Okay.
Thank you guys very much appreciate the time.
Thanks Wally.
At this time there are no further questions I would now like to turn the call back over to Damian Kozlowski for closing remarks.
Thank you operator, thank you everyone.
We're making a lot of progress we're very optimistic on.
Our progress in 2021, it looks like.
Like a lot of tailwind for 2022 and beyond and we're going to just keep on working very hard to realize those opportunities in the marketplace. Thank you everyone. Operator, you can just you can disconnect the call.
This concludes today's conference you may now disconnect.
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Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021, The Bancorp Inc Earnings Conference call.
At this time all participant lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today, Andrew Berens cloth. Thank you. Please go ahead Sir.
Thank you Lisa good morning, and thank you for joining us today for the Bancorp's third quarter 2021 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 Bancorp 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 90 257937.
I turn the call over to Damian I would like to remind everyone that when used in this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements within the meaning of the private Securities Litigation Reform Act 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.
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, which may be made to reflect events or circumstances. After the date hereof or true.
The occurrence of unanticipated events 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 $28 3 million of net income or <unk> 48 per share from 4% year over year revenue growth with a 6% expense decrease.
Interest income increased 2%, while net interest income increased 9% year over year loan balances grew 26% year over year, and 8% quarter over quarter balance growth year over year was led by institutional banking, which includes as black <unk> block and our our financing with a 32% increase in balances all businesses continue to.
Quarter over quarter with institutional growing six SBA, three and leasing to gross dollar volume from our cards business grew 2% year over year, while payments related fee income decreased slightly both GDP and fee income were impacted by the loss of Aro volume. This quarter also at a year over year impact of 2020 stimulus that contributed to slower growth.
Our relaunched commercial real estate business exceeded our expectations and has already closed approximately $200 million of our new flow floating rate loans with at least another $300 million set to close in the fourth quarter. Our current estimate is approximately $550 million.
For the full year 2021, and new CRE loans. These loans like our previous securitization business credits, which were mark to market, our reserved against and we will not be securitized.
It may be sold to institutions. Our current target is approximately 300% of capital for CRE floating rate exposure in aggregate.
Due to changes in FDIC guidance regarding the definition of broker deposits FDIC insurance costs have been meaningfully reduced from 16 to 10 basis points. This may reduce total expense by approximately $4 million a year for a million a quarter. The majority of our deposits are no longer classified as brokered and our insurance costs for the quarter were very close to them.
Minimum cost of nine basis points for one dollar of deposits.
We also announced the departure of our Chairman Daniel Cohen, who has been a member of the TPB community since its founding the board would like to thanks, Daniel for all his contributions and wish him great success on as many ventures I would additionally, I'd like to thank Daniel personally for his significant support during our company's transformation into a leader in the fintech industry and across our.
It's thriving specialty lending businesses.
<unk> selected board member J Mac contains a third to succeed Daniel as Chairman effective November one. In addition, shell Crusoe has been appointed as a new director and John Chrystal has notified the board of his plans to resign effective February 28 2022.
Lastly, based on our year to.
Year to date performance of $1 42, a share and our 2021 outlook. We now believe that exceeding our 2021 guidance of $1 78 is likely however, we are not issuing new guidance, but note that the bias is toward over performance, we continue to see tailwind.
Head tailwind that should drive continued growth in 2020 early 2021 earnings and beyond we are all so issuing preliminary guidance for 2022 of $2 15, a share. This 2022 guidance does not include stock buybacks. This.
This is approximately 21% income growth over 2021.
Ill now turn our call over to CFO, Paul Franco to give more details about the second quarter Paul Thank you Damian.
Return on assets and equity for the third quarter were respectively, one, 8% and 18% compared to one 5% and 17% in Q3 2020.
The increased returns reflected a $2 2 million dollar increase in noninterest income of $2 $6 million decrease in noninterest expense and a lower tax rate a.
900000 dollar increase in net interest income reflected loan growth, but was significantly offset by the one 9 million dollar impact of prepayments on commercial real estate loans, However, net realized and unrealized gains on commercial loans increased $3 $6 million, which.
Resulted primarily from fees related to those prepayments in the third quarter of 2021.
We recommenced the origination of such loans, which are intended to offset the impact of such prepayments and payoffs.
Interest income reflected a reduction of $1 million in security interest, reflecting lower securities balances prepayments of higher yielding securities and lower reinvestment rates.
Our average loans for the quarter of $4 6 billion grew 9% over Q3 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 clat collateral.
Our non SBA $1 $5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings, while our S block and I block portfolios are respectively collateralized by marketable securities where the cash value of life insurance, our small business loan portfolio is comprised primarily of SBA.
Loans, which are either 75% government guaranteed or have 50% to 60% origination date loan to values for our leasing portfolio. We have request the underlying vehicles and a prolonged history of pricing leases to minimize losses.
Tables contained in the press in the earnings press release detailed the diversification of our loan portfolios.
Actually all loans with Covid payment deferrals have recommenced payments and only $1 3 million of non U S. Government guaranteed principle remained in deferral at September 30th.
Interest expense was comparable to Q3 2020, while the Q3 2021 cost of funds was 18 basis points. Most of our deposit interest expense is contractually tied to a percentage of changes in market interest rates.
The net interest margin was 335% compared to $3 three 7% in Q3 2020, while yields the yields on loans were lower at 4.05% compared to $4 two 2%. They comprised a greater proportion of interest earning assets in 2021, which contributed positive.
Late to the to the 2021 margin.
Q2, 2023, NIM of 3.19% reflected the impact of 2021 stimulus payments, which temporarily increased balances at the federal reserve, earning nominal rates.
As recipients spent their stimulus average interest earning assets were reduced from $6 8 billion last quarter to six 1 billion this quarter.
The provision for credit losses increased to $1 6 million, which reflects which reflected the impact of the chart of the charge off of the non guaranteed portion of an SBA loan on the seesaw methodology as well as loan growth.
Because S block and I black 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 in its internal analysis. The adjusted ratio was approximately one 2%.
Prepaid debit and other payment related accounts, our largest funding source and the primary driver of noninterest income.
Total fees and related payments income decreased 5% to 21 $21 million in Q3 2021 compared to the prior year, reflecting the exit of the single relation ship Damien mentioned previously.
Noninterest expense for Q3, 2021 was $39 4 million, reflecting a decrease of $2 6 million or 6% from the prior year.
The decrease reflected a $1 $9 million decrease in FDIC insurance, which reflected the lower insurance rate noted earlier in the call while the future impact may be $1 million per quarter. The current quarter impact was higher due to the cumulative effect of the change.
Multiple factors are considered in the FDIC insurance assessments, which also may be modified by the FDIC in the future. We continue to focus on expense management, especially in relation to revenue growth.
Third quarter results also reflected the impact of an unimpressive, but 23% tax rate versus higher tax rates in recent years. The reduction resulted from excess tax deductions related to stock based compensation the larger deductions and tax benefit resulted from the increase in the company's stock price as compared.
Paired to the original grant date of the stock compensation book.
Book value per share increased 15% to $11 13.
Compared to $9 71.
A year earlier, reflecting earnings per share and the impact of stock repurchases I will now call I will now turn the call back to Damien.
Thank you very much Paul operator could you. Please open the line for questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Frank Schiraldi with Piper Sandler.
Good morning, Good morning, Craig Good morning.
Just on the.
The $2 15 next year the guidance.
Just wondering if you could share any drivers of that 20% EPS growth.
Such as expectations on on.
GDP or any ramp up in those.
Loan gain.
And on sale of loans.
Curious if you could drill down into any color there.
So the GDP is going to their return to trend. So we had the stimulus made it very difficult to predict because of the lumpiness.
We had the loss of the one program that we mentioned which did impact.
The GDP growth in this quarter. So if you back those two out.
In total you would you would have a double digit GDP growth. So that's how big the impact was thats, our best estimate so that's going to return to trend.
You should see better growth in the fourth quarter and you should see a much better growth in 2022, we know what our pipeline is we've added some major programs.
So GDP growth should return more to the trend level. In addition.
We have a lot of initiatives going on in the credit area, that's linked to payments and so youll probably see increased.
Realization of fee growth. In addition to that so you know we've had a lower realization due to the.
The tiers in our pricing to large.
Programs.
Pretty much maxed out now and so youre getting new programs, and then youre going to get fees through.
The credit area, so that should be very strong for 'twenty, two and then really build into 'twenty. Three so we're very confident that's going to support the earnings per share credit is.
Our programs.
Across the board will continue to grow double digits, we've been in the mid <unk>.
For SBA leasing has a little bit of a headwind based on the availability of cars, but luckily.
We have a very good presence in the marketplace and be able to secure vehicles as that works out youll see increased growth in leasing also so youll be in that mid.
Maybe even four above trend for a little while as cars become available and.
Then the Big question is the whole CRE program, where we're realizing fees in the near term on the securitization portfolio, while we're replacing it with slightly lower spread loans that are these floating rate multi use excuse me multifamily properties and so that timing of that through 2020.
<unk> is a real real question I think we will be.
Able to generate the income necessary because there is that offset for fees as their payback, but additionally, we're the new portfolio of CRE has been.
Very very successful in the marketplace. So as I mentioned, we're already at about $5 50, we think at the end of the year and so we will be able to build out of that very quickly. In addition, if we need to we can over originate the loans and distribute those not through securitization, but through loan sales and realize those fees immediately so across the board we see.
Strength in certain areas.
We're seeing pipelines.
That we've never seen before especially in <unk>.
Our institutional business, but also obviously in CRE and SBA. So we're very comfortable with the $2 15, a share the one thing I will note.
Very long winded answer is that there is probably a little bit more variability we could really.
Yeah.
Overproduce on the $2 15, but that would have to dovetail with the payoff of the loans and where we start the year based on how many loans pay off in the fourth quarter. So we're watching that very closely and adjust.
We think.
$2 15, a share is a good estimate right now.
Okay.
Thanks for all the color and then in terms of G. D V gone back to a run rate in the past.
That's a good rule of thumb as you'll have these volume discounts as that.
Card fees will grow maybe half of GDP growth.
Is that kind of leveling out now that you are adding these new programs that could we see more sort of similar similar to GDP growth in terms of card fee growth going forward.
Yes, I don't know and its also a mix during this time of volatility where some of the.
The cards Werent really use like commuter cards and there's a lot that goes into the calculation, but it's two sources. One is new programs and then second is credit initiatives that are linked to our major programs, where we started.
Developing with our major partners, our ability to use our balance sheet and a very low risk way. So that doesn't those arent GDP dependent initiatives. So from those two areas new programs and fees from.
The sponsorship of credit instead of payments bank sponsorship should drive that proportion higher over the next 18 months not sure exactly when and where but definitely as we worked through the year 2022, we should see a higher realization rate.
I mean, when you say credit sponsorship you talked mostly originate and sell or could you hold some of this on our balance sheet.
It's a combination of those things and they're early.
We're not going to securitize, so it will be utilizing our balance sheet with major partners.
Providing.
In many cases, the loans may actually be booked on our will be the true lender. So these are very advantageous to us we've got a lot of liquidity and I think.
We'll add a lot to the fee base.
That were generating in that area.
Okay, and then you mentioned the $2 15 doesn't include stock buybacks, you guys have been pretty religious about <unk>.
Completing your quarterly authorization here in 2021.
Given where the stock is now do you see.
The same sort of game plan for 2022.
Yes. So this is all based on rigorous understanding of P/e market to book multiples. When you hit the exemplar range, which we are on row, we're at 18% and we're going to above 20, you get about 5% of banks really do create.
Fantastic shareholder returns. So we think we should be at.
Hi.
Right now we're about 18 trailing P. We think we should at the end of the day at <unk> and a forward look that's where we think our stock price should be so if we're at 20 times whatever our guidance is if our stock is not there will be buying back.
Gotcha, Okay, Great and then just one last one just you know people are starting to you know obviously you guys are giving guide for 2022, but people are even starting to look beyond that and if you think longer term you.
You you'll have that goal out there of greater than I think $500 million in revenues by 2025.
So that would assume double digit revenue growth over a multiyear period.
And then the question is does the scale story continue through that point.
In your estimation, so that revenue growth will or could should continue to outpace expense growth and therefore, you can see.
This 20% EPS growth.
Could be reasonable to extrapolate forward.
Well we.
We haven't given guidance, but.
In our Investor presentation, where we reissued.
Been very rigorous about those three tenants of our strategy one is the.
The whole payments to the Fintech solutions group, where we're trying to really look forward and turn ourselves into a bank with a technology company, but a technology company with a bank.
And so there is a whole envelope of middle office activities that we are investing in not only for our partners, but hopefully do monetize out in the marketplace.
As we approach the end of that four year period. So we're very we're very optimistic of where we are right now.
We had this bumpy ride on GDP with stimulus.
Also.
You are an extremely low interest rate environment, and we've been able to adapt to it so in a more normalized environment and having just those supporting tailwind to virtualization of banking all those things plus our focus on not the use of the balance sheet, but the use of our our capabilities to produce fee.
Should really have long term impact on our ability to generate above.
Market returns and also return significant amounts of capital to shareholders.
Okay, Alright, I appreciate all the color I'll, let someone else hop on thank you.
Youre welcome Thanks, Frank.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of William Wallace with Raymond James.
Hi, Good morning, Damian how are you.
Hey, Wally good hope everything is well.
Hey, guys. Thank you so.
I wanted to just dig into some balance sheet questions here.
Take on the $300 million of.
Short term borrowings in the quarter.
I can respond to that.
Periodically to manage our federal reserve requirements and test our liquidity.
We test that that.
That line from between like 100.
To $300 million and we average on average we were a lot lower than it was a small fraction of that 300 to just happened on the last day that we had done that we werent really.
Planning to keep that that 300 million so on a daily basis, you might see.
A fraction of that 300 that we that I said as I said, we use to manage our reserve requirements.
Okay.
Okay. So it should.
Mostly we would anticipate most of it be gone by the end of the year.
We have a lot of flexibility, we're one of the few banks that over time.
That over time has actually exited deposit relationships. So we have a lot of flak city. So we can actually determine the size of our balance sheet the size of our deposits.
So that's really going to be what we determined it should be and as I said before there may be some borrowings it's really just to manage our daily cash we do have being a payments company.
And having a lot of inflows and outflows that have different timing elements to them you might see deposits and therefore cash fluctuate on a daily basis. So.
So the lines are helpful in managing cash on a daily basis.
Okay. Okay.
And.
Can't help but notice that you had your down deposits are down another 500.
$15 million plus this quarter, they're down.
About 1.8 million from the first quarter does.
Does that have anything to do with this.
One program, but you lost.
Fractionally I'll, let Paul take it but a fraction of it does but thats, mostly driven by our own actions too.
Lower the size of the balance sheet and the stimulus, but Paul why don't you take that yes.
Yes. It is basically those two factors the biggest fat and the biggest single factor was the stimulus that resulted.
And taking a.
From like a low $6 billion bank to a high.
Almost a $7 billion bank.
As the stimulus Scott spend throughout the year as I said in my comments in the third quarter things normalized and we're closer to a $6 billion bank, yet, but yes, obviously that that one relationship did have an impact and in addition to that we exited some other dip.
Posits.
The way, we basically determine which wants to exit our based on cost.
So we've been <unk>.
<unk> actually for years.
The higher cost deposits.
And that's left us with a cost of funds of 18 bps, yes.
Yes, we just have a lot of flexibility on deposits. So we had no problem adjusting.
Even through the getting a lot of excess deposits. It did obviously hurt some of our ratios, but we managed through it very <unk>.
Quickly and rightsize the bank, but.
With our partner base, it's very easy to get additional deposits, if we need them, but sometimes you don't you don't want to pay up for them. So we wanted to have the lowest cost.
Possible and that's why we use the lines and Thats why on a long term basis, we wanted to make sure that we have the right partners and the right agreements in place, but we're very comfortable with the funding of the bank.
Yeah.
Okay.
And then.
I mean can you quantify how much of the deposits were related to the one programming.
Yes.
Excuse me was the one program was this a.
Customers that.
That had higher cost deposits that you were less.
That were less profitable with the relationship that profitable or the program. We mentioned before it's borrow remember they got to.
Okay. Thank license and so third not the majority of those deposits theyre less than <unk>.
30% of that excess deposit base.
Okay and the nature of these programs is such that.
Hey, Hey can't just.
Cancel the contracts are in wait till the end of the contract again, and then walk away and take deposits with them is that correct or.
They are long or so so we always knew the intentions of that program. So that was a multi year transition plan. We were very aware of what was going to happen, but its depending on when a when something like that happens it depends when they re card.
They basically have to redo everything that we've done so they wanted to do that in a more aggressive way and that's fine.
And so it did have an impact on 'twenty.
'twenty, one, but it will be that impact will be over obviously in the beginning of next year. So that's why we're very comfortable with returning to trend growth with new programs et cetera. So.
<unk>.
It wasn't that big of a deposit that we're not going to say exactly what that was but it wasn't you.
You can make an estimate by simply getting the call report.
Which is publicly available and you can make that estimate alone by backing out some perceived growth that maybe came through their own communications to the marketplace.
Yeah, Okay. Thank you Damian and then.
On the <unk> side, so if I look at GDP on a year over year basis in the third quarter. It was <unk>.
<unk> growth was about 2%. So so if we think about returning to trend for the next three quarters or so I should see theoretically or hopefully some year over year growth, but then returning to your prior guide of roughly 20% I believe is what.
You guys felt like you had visibility too.
Yes.
Yeah, well it really depends on the virtualization of the Theres a lot of factors that grow in there but.
That's our best estimate Youll see growth.
For various reasons in the fourth quarter, we're already seeing.
Good growth.
Really bad November remember with the election, you had you didnt have a great quarter last year in the fourth quarter, So youre going to see obviously.
Much higher growth than you did in the third quarter at least that's our estimate right now.
We obviously don't know what's going to happen with consumer spend there is a lot of ambiguity in the marketplace, but you should see much better growth in the fourth quarter, then you're still in the first quarter of next year you still have this other stimulus that came in in March so, though our balances at the our biggest programs in some of the newer.
Our programs are really starting to come online that is going to be we think we're going to see significant growth, but that's that's going to be the end of this.
Year over year impact from government intervention that will really be the last time that we see a big bulk stimulus payment, where you have to kind of.
Guesstimate what your program growth is because you really don't know how much was stimulus how much was spent et cetera et cetera.
Okay, Alright, and then.
Back to you.
One of <unk> questions talking about the GDP margin you started talking about other types of programs that are maybe more along the lines of credit sponsorship et cetera that sounds like it would be a new <unk>.
Your line item business not necessarily.
<unk> margin tight so I think it wouldn't go into pre payments business.
Okay.
Maybe help me understand what you were.
It depends on how we at the end of the day it might not to your point.
The reality is is that it will add significantly to profitability. So we haven't decided the final structure of that program and how it's going to be booked but when we do we will announce it and it may not appear in that line that's correct.
Okay. So so.
Is it fair to then maybe.
Defy what we're hearing today is suggesting that we will return to trend.
Growth on GDP, which I believe you had stated I think about maybe 20% ish type volume growth with about a 10% type revenue growth.
That now, perhaps there could be some tailwind to that 10% level.
Level due to some new.
Partnership opportunities and structures.
Well, yes, but I would.
Guard as to how we book the business.
It's a purely credit line a different line item they should be aggregated I would say.
Suggests they should be aggregated together, because it's really part of the same relationships based off the.
That whole ecosystem so.
I think you can look at it anyway, you want but even if we don't look at on that line you should probably put it together and analyze it that way because it is very <unk>.
Synergistic.
Yes, okay.
Okay, Great and then last question on the FDIC line.
It said that it should the class the new classification of deposits should save about $1 million a quarter. So that would suggest that the run rate expense is closer to like 1511 to one and a half not not where you were in the third quarter correct.
Yes, so so the easiest way to do that in your model is to look at the rates.
The rate for us will be approximately 10 10 bps. So just take that 10 bps times Youre average average liabilities for the for.
For the quarter and that comes out as Damian mentioned to about $1 million a year.
Sorry, $1 million a quarter.
Okay.
Thank you guys very much appreciate the time.
Thanks Rod.
At this time there are no further questions I would now like to turn the call back over to Damian Kozlowski for closing remarks.
Thank you operator, thank you everyone.
Making a lot of progress we're very optimistic.
On.
Our progress in 2021 it looks.
Like a lot of tailwind for 2022 and beyond and we're going to just keep on working very hard to realize those opportunities in a marketplace. Thank you everyone. Operator, you can disconnect the call.
This concludes today's conference you may now disconnect.