Q1 2022 Bancorp Inc Earnings Call
Good day and welcome to the first quarter 2022, the Bancorp Inc.
Earnings Conference call at this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session by Star then one on you touched on the telephone.
Any laws require assistance during the conference. Please press star zero to reach an operator as a reminder, this call is being recorded I would like to turn the call over to Andre to slab you may begin.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's first quarter 2022 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 dot com there'll be a replay of the call beginning at approximately <unk> PM Eastern time today.
The dial in for the replay is 855 890, <unk> T 056, with a confirmation code of 6896, seven 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 1095.
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.
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 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, Damian Kozlowski Damian.
Thank you Andres good morning, everyone.
In the first quarter, the Bancorp earned $29 million and net income or <unk> 50, a share from 5% year over year revenue growth excludes the impact of PPP related interest and fees with an 8% reduction in expense loan interest income excluding PPP and just can you discontinued loans increased 12%.
While noninterest income increased 4% year over year total loans, excluding loans at fair value and reclassified discontinued operations loans grew 45% year over year and 10% quarter over quarter.
<unk> growth year over year was led by institutional banking, which includes our securities backed lines of credit insurance backed line of credit and RIAA financing and real estate bridge lending real estate bridge lending has generated over $800 million in loans since inception, while institutional banking balances increased 32% year over year.
All businesses continue to grow quarter over quarter with real estate bridge lending growing 29% institutional 8% and.
And leasing in SBA, each growing 1%, excluding PPP loans gross dollar volume from our cards business grew 2% year over year, even with the impact of onetime stimulus and other government payments in 'twenty, one payments fees decreased 2%, reflecting the impact of borrow which exited the bank in the second quarter of <unk>.
91, GDP grew 15% over Q4 dollars 21, reflecting the impact of first quarter tax refund spending and other growth.
We continue to experience business momentum in 'twenty, two loan pipelines across our businesses remain robust and should offset any repayments in our loan book due to increasing interest rates are mostly floating rate real estate and institutional businesses grew significantly in the quarter.
Our commercial business, which includes SBA and fleet leasing was mostly flat during the quarter due to some maturities and repayments, but we should have growth in those portfolios for the balance of the year with the predicted rise in interest rates throughout 2022, our lending.
Portfolios, which are 70% floating.
Will increase net interest income after the impact of rate floors are exceeded our payments business showed resilience in the first quarter in 2021 significant government stimulus in the first quarter made the 2021 <unk> hard to beat however, due to the continued growth in our existing and new programs 22 first quarter was.
<unk> able to show a year over year increase of 2% in GDP, even without this stimulus and additionally, with our borrower volume that exited the bank in the second quarter, we continue to see significant opportunities to grow in 'twenty, two and beyond and should show increasing growth as year progresses.
Lastly, we have previously announced both are new Fintech up in Sioux Falls, and our proposed switch to licensing to an OCC regulated national Bank.
We believe these changes solidify our commitment to the economic development of Sioux Falls and more appropriately reflect our nationally based franchises and help align regulatory oversight with our primary competitor set we look forward to completing the construction and build out of our facilities in 'twenty three and our regulatory changes by the end of this year.
I'll now turn our call over to our CFO , Paul Frankel to give more details about the first quarter. Thank you Damian return on assets and equity for first quarter 2022 were respectively, one, 7% and 18% compared to one 6% and 18% in Q1 2021 loan.
Interest income in each quarter of 2021 was impacted by repayments of CRE bridge loans previously originated for securitization, but now held on the balance sheet. In Q3, 2021, we began originating new such loans under the real estate bridge lending caption Q1, 2022 was the first quarter in <unk>.
There was a net increase in related interest as the impact of new originations exceeded the decreases resulting from repayments.
These related to those repayments are recorded in net realized and unrealized gains on commercial loans.
<unk> increased $1 $4 million year over year, notwithstanding the impact of the CRE repayments loans and commercial loans at fair value at quarter end had increased 15% over the past year.
Interest income in Q1, 2022 reflected a reduction of $3 $9 million in securities interest compared to Q1, 2021, reflecting lower securities balances repayments of higher yielding securities and lower reinvestment rates.
Our interest expense was reduced from 21 basis points during Q1, 2021% to 19 basis points. During two during Q1 2022, most of our deposit interest expense is contractually tied to portion of changes in market interest rates.
The federal Reserve's March 2022 rate hike of 25 basis points is projected to be followed by additional increases throughout the year initial rate hikes are not projected to increase net interest income until the impact of rate floors has exceeded we estimate that rate hikes will have to approach, 2% before the impact will <unk>.
Kris net in net interest income.
Our net interest margin of 312% for Q1 2022 was down from 334% in Q <unk> Q1, 2021, the reduction reflected a lower yield on loan and securities portfolios as higher yielding loans and securities matured or repaid.
The provision for credit losses increased to $1 5 million in Q1 2022 from 822000 in Q1 2021.
The increase reflected the impact of loan growth and allocations on specific loans.
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 related collateral because S block and <unk> loans are respectively collateralized by marketable securities in the cash value of life insurance and have incurred only nominal credit losses management excludes those loans from the race.
So of the allowance to total loans in its internal analysis or.
Our non SBA CRE loans at fair value and within real estate bridge lending are comprised primarily of apartment buildings or 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 recourse to underlying vehicles and a prolonged history of pricing leases to minimize losses tables contained in the earnings press release detail.
<unk> vacations of our loan portfolios.
Prepaid debit and other payment related accounts, our largest funding source and the primary driver of noninterest income total fees and related payments income in Q1, 2022 decreased 2% compared to Q1 2021 as the impact of borrow offset growth in other relationships.
Noninterest expense for Q1, 2022 was $38 million, reflecting a decrease of 8% from Q1 2021, the decrease reflected lower incentive compensation and legal expenses and lower FDIC expense, resulting from the reclassification of certain deposits from broker to non brokered.
Q1, 2022 results also reflected the impact of a reduced tax rate of approximately 24% versus higher rates in other in other recent years. The reduction resulted from the impact of increases in the company's stock price on tax deductions related to stock compensation.
Book value per share at quarter end increased 10% to $11 41.
<unk> compared to $10 42, a year earlier, reflecting earnings per share and the net impact of stock repurchases I will now turn the call back to Damien. Thank you Paul Operator would you. Please open the line to questions.
Operator.
As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to move yourself in the queue.
Our first question comes from Michael Perito with <unk>. Your line is open.
Hey, good morning.
Good morning, Mike how are you.
Good how are you doing.
Good thank you.
Cool Thanks for taking my questions. This morning.
Things I wanted to hit on it was it was good to see.
The card fees come in pretty strong.
I guess kind of a two part question here number one whats the outlook on.
Some of your larger partners.
What's the volume you guys are seeing and then how do you how do we kind of marry that with the pipeline of new partner you guys are launching interest would love some color. There and then secondly, there were a couple of other items in the noninterest income that took a stepped Alex loan sales subleasing income just curious if you guys could provide any.
Any context around that and any near term outlook thoughts would be great.
The <unk> the GDP has been tough to predict the last two years because of the multiple stimulus and the lockdowns that have happened in the economy. So there was this tailwind to virtualization that occurred but there is lumpiness that occurred because of the stimulus. So if you think about the world of virtual card and the card world the virtual pay.
<unk> World.
I guess things got pushed forward. That's why you saw large increases in volume over the last two years, but that creates a year over year problem. Obviously last year in December January there was a massive stimulus of one seven trillion that the government and there was other programs two that went through the economy and much of it came to us.
And.
We really did not we thought the best case scenario for this quarter's GDP was going to be.
Down slightly in the single digits, we never thought we would actually be up 2%. We really did it we didn't think that was even possible. So we were very happy with the GDP number what's what's happened is youre just getting the continued growth across a broad growth across some of our big partners.
But some of the impacts that have happened to us like the lowering of the GT for say prepaid cards. The bulk of it is kind of already out of the numbers previously so as you go through the year, you're going to get more back to the trend growth that we experienced prior to the pandemic. So this double digit.
We're kind of it's hard to predict but if you look at our pipeline. It takes a while for many of the programs are very robust pipeline, new implementations product expansions, but it takes a while for the for the volume to build so we should be more to the trend.
As we move through the year by the end of the year, we should be more in that double digit trend, we were 15% to 20% GDP growth prior to the pandemic Thats, what where we think is going to happen on the fee side. The feeds are very bumpy right. So say leasing those are sales of used cars it totally depends when contracts expire.
And whether or not we take those car back and sell them.
For the real estate fees that has to do with the repayment early repayment of our portfolio Thats winding down from the securitization portfolio. Once again, we're going to realize all those fees, we still have about I think 800 million or so yes.
Yes that will go through the system over the next.
About eight months or so and you'll see those in the line, but we can't predict quarter to quarter of when those will happen.
Very good.
I don't know if it was just my line, but you broke out a smidge, they're in the middle so.
The GDP comments so.
Did I Miss I think was did you say at.
At this point you guys are budgeting a year on year still some conservatism next quarter, but then we expect to return to a more steady GDP growth rate in the back half of the year was I just want to make sure I didn't miss it.
The next quarter, it's not it's hard to predict as the first quarter was but there is still this overhang that happened between differentials on when taxes were due and the stimulus when the stimulus was spent so I can't really do you do I think we will have its not as much of it as a headwind as it was in the first quarter.
You might have slower growth in the second quarter, the third and fourth quarter should because you have borrow out you don't have stimulus impact anymore. There were some other programs that are much smaller than <unk>.
Inconsequential to the other two but it should all kind of be out of the numbers in the third and fourth quarter, the fourth quarter should be a nice.
This pure run rate.
Look the third probably will be two but by the end of this year all those noise will be out of the system.
Got it.
And then on the.
On the margin.
Paul a couple of things going on here I guess I guess the first question is just.
<unk>.
When can the liquidity that you've built up in the first quarter with the loan growth you have ipads should not long, but how long do you expect that to remain elevated and where to deploy that take the larger too.
I guess, let's start there that I have a follow up.
Okay. So a lot of that liquidity in the first quarter is temporary we have that every year.
Even without the stimulus, which we had last year.
We have the impact of tax refund.
Deposits in our accounts so that.
In place.
Temporarily deposits in the first quarter the money goes out fairly quickly, although there'll be some residual left in the second quarter. So there won't be a lot of excess by the end of the second quarter.
We have on the other hand, we have a history of strong deposit growth.
Which we expect to continue in our.
All of our programs.
And <unk>.
Liquidity was normalized does that get you back kind of right up towards it was in the fourth quarter or were there other element.
That that would've changed that materially there are other elements. If you look at securities income.
Q4 to Q1 securities balances were about the same but income was down about 900000, so to some degree while.
While we manage the balance sheet.
With considerable protection and down rates Thats, primarily the Florida, but also securities within our investment portfolio, we're not totally immune to two eventually having those.
Youre right Securities prepay and high rate loans prepay. The good news of course is that as interest the interest rate environment normalizes to someplace at least around the rate of inflation, which is two or 3% towards the end of the year.
We believe that <unk>.
Net interest income will benefit significantly as the fed finish.
Finishes its rate increases.
Got it and then just lastly, and then I'll, let someone else jump in but the.
So all the margin.
They're probably I think you said that you expect you need fed funds.
Go up 200 basis points before you guys start to see the benefit that is a static analysis correct meeting.
Most of the the higher floors, if I'm not mistaken.
Portfolio that you guys are selling is that worked down.
That lower that that number of years likely as you guys move forward, yes, yes. It does every quarter I get that threshold it will creep down from close.
Closer to 2% to lower than than that to closer to one 5%.
It's just as Damian indicated it's just difficult to know when loans when the higher rate loans prepay. So it's really impossible to predict the exact quarter and just recall when they repay we get the fees obviously about one.
One 5% generally from different sources, one is because we book the loans at 99, and we don't amortize, we amortize the fee at that point, so its a nice offset to the loss of the interest income in that quarter, but we are building that CRE.
Portfolio very quickly. So we already have $800 million replaced I mean that was if you think about that that 4% that would have been a $32 million hole. We had in interest income if we were sitting here.
This year looking back at last year, and not having created that new portfolio and we right now have about a $350 million pipeline of CRE transactions that will close in the next 60 to 70 days. So that'll be another 300 net of new loans that will come on that it'll be priced above four <unk>.
For the second quarter.
And do you have an estimate per hike.
Yes.
What your NII would benefit once two floors Paul by chance.
Yes, so we actually estimate that.
Right now in them.
Up 200 might be a five or 6% increase that's that's conservative that's based on.
On our model and.
Obviously, we will try to maximize that.
Remember, we're not we have not invested in securities for pretty much two years. So we took the decision that we could generate the loans and replace the loans through origination and we did not.
Go down the maturity scale are up to maturity scale in order to try to get yield in the investment portfolio so were down over 40%.
Investment related income because we just didn't think it was the right thing to do to generate.
Generate that type of income and a interest rate environment that would have been.
If you look at it through the cycle would have not been a positive for the bank. So we have a lot of.
Dry powder to reinvest in securities for liquidity reasons, but also for income reasons as interest rates rise.
Very good.
Hey, guys, sorry, what would it be thanks for taking all my questions appreciate it.
Thank you Mike.
Our next question comes from William Wallace with Raymond James Your line is open.
Good morning, how are you guys doing.
Good morning, Wally were good. Thank you hope everything is well.
Yes. Thanks.
Maybe just to put a put a bow on this last line of questioning so.
In the first 200 basis points NII, it doesn't benefit, but youre not liability sensitive right. This is just we should think about it as neutral the remaining loans in your portfolio are almost all floating so that will offset.
The increases in the deposit cost is that correct yes.
Yes, but.
We're being conservative we don't.
Youre in a trap with this you don't want to be we don't know exactly what's going to run off and what's going to be created.
Positive there's no there's no way to calculate it that it's not positive so when Paul Paul as being conservative it's reasonable, but it could be earlier in the interest rate cycles. So you could start seeing that benefit more like $125 150, and then have a very large impact that 200, regardless if they do raise the interest rates.
It's hard to see how that would be a negative for the bank.
Knowing the what are the floors are today.
Knowing that our portfolio is about 70%.
Variable. It also knowing that we can reinvest in longer term securities. All those things are very positive for <unk>.
Net interest income and margin.
Right right.
And as.
If the fed raises aggressively I guess theoretically we could get that 200.
The market tells us we're getting lift this year.
Does the does that.
A decision by the borrower.
Chip prepay changed in other words, there is no incentive once they come off the floor, they're going to they're going to re price at the same rate.
If they go somewhere else right. So does that slow the.
The transition out of the held for sale into the balance sheet portfolio.
Good.
And we've already seen our rates in the marketplace.
Start to climb so.
Yes.
But we have pretty high it's around the $4 70 level, where the rest of the portfolio floors are and so if the market is now more over for now for the.
Or anything but the larger deals so it could have an impact, but theres maturities coming anyway. So.
If you remember this portfolio kind of was frozen two years ago.
And there are three year loans with.
Potential to refi, but most of the people who have done their projects do not want a variable rate loan in this environment, they're going to want to fix their financing if they've done their project. So I think it's all going to repay I cant be sure nothing will be extended but I think there is in the environment. There is a huge incentive.
To lock in longer term financing if you can get your project done and Theres plenty of bank liquidity out there. So there are alternatives for these borrowers.
And presumably it doesn't really matter once they come off floors, you're happy to keep them anyway right. These are all good launch.
Hyatt perspective correct.
You remember during the pandemic, we have virtually no issues a few hotel issues that had we.
We really had amazing credit performance from that portfolio I think.
There was some worry.
Because we couldnt securitize it that there might been some credit issues in there, but the performance of it speaks for itself.
Right, Okay alright.
Moving on I wanted to address the expense part of the equation I wrote in my first looked at that.
Revenue was was below expectations, but your <unk>.
Expense.
Adjusted down and so my question is is this is this a function of variability in the expense base or.
What's the big decline in the salary and benefits where you're lapping.
Bonus accruals and so I'm going to just kind of just happened or are you really have that much variability.
And if so what drives that.
Two of the categories were.
We're easy there is about $2 $5 million of that was just reduced legal costs.
And that shows legal bills right and the other one the other one was FDIC insurance fees.
We're 80% broker to now 100% core so those two those two were significant reductions were not going up across the other expenses really because we've made so many investments and scalability.
The personnel costs, we tie.
We have plans compensation plans across our business based on performance at the senior level. Some of them are more formulaic at the sales force level and so they are performance based if exactly what everything we do is based on performance and growth and targets and so you'll have a lower accrual on those things when.
<unk> been as good as you.
As the models would predict so there isn't a definitely an offset in that area. So those things together lowered our expense base this quarter and but not.
Not the FDIC.
<unk>, that's based on deposits not the legal that's really.
Whatever legal issues and last year, we had we had already announced is there were some SEC things that they were looking at that we needed to respond to.
So there were higher costs and there was another employee to suit that was also high cost so.
Things come and go.
The comp will always be ratcheted up so if we over perform at the end of the year, which is.
With interest rates and everywhere, we're going yes, youll see an increase in that line.
Based on the metrics that we use in order to judge performance and then accrue bonus for us.
Okay. Thank you Damian I appreciate that I'll step out.
Fantastic question that easily.
And our next question comes from Frank Schiraldi with Piper Sandler Your line is open.
Yeah.
Good morning.
Good morning, Frank.
Just to follow up on.
The comp line.
So it's really just the <unk> was contemplated by.
Incentive comp it seems is there any sort of a direct tie between the gain on sale line. When you do realize these games and.
Some variable comp in the comp line or Montreal.
Okay, No that's again it might be and the most abstract way if.
Save for the leasing business, if they got really good gains and it might be a discretionary bonus difference, but there is no formulaic on the gains.
Okay.
And then in terms of the gain on sale I think you talked about maybe up to.
$12 million this year.
Just wondering if maybe you can.
Tell us what sort of level is in that.
Anticipated in your and your $2 15 guide for the year in terms of just the gain on sale here.
Well, we we.
Thought we were going to have four.
On the on the.
On the vehicle part, which gain on sale you've talked about the CRE or the vehicle gains that we get in the lease.
Yes, I was just talking about CRE, but okay, well that we think it's going to be about 400 at the end of the year right, but that can be zero or that could be 800. So what we did was we think it's going to be around 400. So it's easy to calculate the fees were about what are we at now exactly.
Yes, 800, so you'd think about 400 times one.
Times, one 5% that will give you the fees that will come into from those gain on sale for the rest of the year.
Alright, but it could be double that.
Right. So that's why we mean this has been very if you think about just generally.
If we were thinking about where we were from last year. Its actually been very good where we're positioned right now in this quarter, we had the PPP in there in the first quarter of last year right, there, they're spread and fees, we had the roll off.
And the build in the CRE portfolio. So you had a lot roll off and a lot come on right you had the stimulus in there for the <unk> and then you had the bond run off so you had a lot of.
Things that we needed to deal with but we dealt with pretty much all of those now and we're in a very good position, especially with the interest rates and buybacks.
We're in a very good position for to be able to perform as the year.
As we go through the year, So we think.
There's a lot of variability around it but we think we've got we're in.
We're very happy with this quarter and we're very happy where we are.
Great and then just on the.
Just back to the the rate picture for a second you mentioned the conservatism behind the 2% number that Paul gave.
I'm just wondering if there is any reason to be more conservative this quarter versus previous quarters. It seems like that numbers move higher and I'm just wondering if theres anything on the loan pricing side.
It will take a little bit longer to get that boost in NII or is it just more conservative.
Being more conservative this quarter.
It's just it Frank.
We know that generally as this plays out it's going to be a huge positive for the bank. So that by the time, we get to 'twenty three if all these things actually happen, it's going to be we're going to be in a very good position of the bank is however, we can't predict exactly how they will raise interest rates, which loans will.
Pay how we will originate new loans with what type of floors.
You have an IP block that has a floor of 3%, but you have S. Black that has no floor right you have a fixed rate IRI you have roll off of CRA, It's just too hard to predict and give anything other than a conservative guidance will there be and if we get $2 50.
Rate increases over the next two fed meetings will that kind of put us at the go start probably.
I mean, that's where the next increase will probably start significantly impacting the bank. We know that at 200, you now have a lot of room behind you of rate increases that we will have worked out any of the ambiguity. That's what we're kind of saying so so there is this.
125 to 200 range, where we can't really predict what ultimate impact they'll have on the performance.
Of revenue net income so we don't want to.
We can't really give guidance on that we just know by as the year works through it we're in a very positive situation because we dealt with those four things that I just described.
A few moments ago. Those four are kind of behind US now we're looking towards a much better.
Prospective.
<unk> performance.
Possibilities I guess or forecast than you would have had this time last year.
Okay.
And then just lastly, just.
<unk> question on the consumer side of things you've talked about.
Maybe some announcements on that side.
Just wondering if anything on the macro front is kind of change your calculus there.
Sure.
We should.
Still expect to see you enter that that side of things sometime soon I think youre talking about credit sponsorship correct, yes.
Yes sooner rather than later, we're moving ahead.
Very deliberately we're very excited but we cannot announce at this time.
We wait for our partners to take the lead on that but we continue to be very excited we think it'll be a big can't predict so I'm not giving you any guidance, but I think we're going to have something exciting sooner rather than later, but that's not that.
That in stone, so how things Theyre never instone until they are announced and stuff but.
We're excited about that opportunity and we think it'll be very accretive to the to the bank.
Okay, Alright, great. Thank you.
Youre welcome. Thank you.
This concludes the Q&A session I'd like to turn the call back over to Damian Kozlowski for any closing remarks.
Thank you for joining us today.
Really appreciate your interest in the bank and thank you operator, you can disconnect the call.
Youre welcome ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.
Yes.
Sure.
Yeah.
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