The Bancorp, Inc.
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

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, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Andres Viroslav. Please go ahead.

[Andres Viroslav:]

Thank you, Jorel. Good morning, and thank you for joining us today for The Bancorp's second quarter 2021 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer.

[Damian Kozlowski:]

Thank you, Andres. Good morning, everyone. The Bancorp earned $29 million in net income or $0.50 a share from 13% 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 SBLOC, IBLOC and RIA financing with a 38% increase in balances. Quarter-over-quarter institutional grew 7%; SBA excluding PPP and a related non-recurring line of credit 2.5%; and leasing 5%. Gross dollar volume from our cards business grew 15% year-over-year with fee growth of 5%. Total non-interest income grew 27% year-over-year. Our 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. This group not only enables to challenge our bank market, but also now includes all our verticals in corporate gift, healthcare and government with an expanding set of card, virtual card, debit prepaid and other payment capabilities such as push-to-card rapid funds.

[Paul Frenkiel:]

Thank you, Damian. Return on assets and 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, 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 a line of credit to another institution to fund PPP loan originations which are not expected to recur. SBLOC, IBLOC and adviser financing interest increased $3.4 million, while leasing and SBA each increased approximately $1 million. The SBA increase excludes PPP and the $3 million of non-recurring fees. While interest on CRE loans at fair value decreased slightly non-interest income reflected $2.6 million in net realized gains on commercial loans primarily resulting from exit and prepayment fees on loan payoffs. We have begun generating new CRE loans with the first closings occurring in July.

[Damian Kozlowski:]

Thank you Paul. Operator, could you open it up for questions?

[Operator:]

Your first question comes from Frank Schiraldi with Piper Sandler. Your line is open.

[Frank Schiraldi:]

Good morning.

[Damian Kozlowski:]

Good morning, Frank.

[Frank Schiraldi:]

Just got few questions. I wondered if you could talk about, and I know you're going to give preliminary guidance on 2022 next quarter, which I'm sure you'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? And I guess more so I'm just kind of curious about the growth rates you anticipate getting in the payments fee income.

[Damian Kozlowski:]

Yes, we still think with our pipeline on the payment side is that we'll get the GDV. It's been very bumpy the last couple of years obviously. It's 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 that 20% GDV growth over the next couple years as there's a transition in the economy. So that's from the payment side.

[Frank Schiraldi:]

Okay. And then on the GDV side, generally we’ve been seeing, if I just look at my model. we've been seeing margins come down. 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 has stabilized. So when you think about 20% GDV growth, are you still thinking half of that in terms of fee income growth, or if margins stabilize do you kind of get one-for-one?

[Damian Kozlowski:]

I still think half, because we have such -- we have a lot of new partners Current being a real high-profile one that just joined our ecosystem. But we have partners like SoFi, which just started last year, which is still ramping up. So we have to face obviously the dominant players in the industry too like PayPal and Chime. So I still think it's half maybe a little bit more than that. But it will be chunky again for the rest of this year. For the third quarter, we 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 year. So there'll be bumpiness this year. We'll still maintain GDV and fee growth. And I think you're going to see more stability next year in what you see from the growth in GDV and the fee growth.

[Frank Schiraldi:]

Okay. And then you mentioned a couple of partners there. So on the current front, usually TBBK is first -- it seems like the first bank partner and the primary bank partner. And I know Current has a couple of other or has had in the past couple of other banking partners. So I wonder if there is anything, I apologize if there was more detail out there I missed, but anything you can say 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?

[Damian Kozlowski:]

So part of the appeal of TBBK has been our investment in both our technology and product capabilities, but also our compliance in BSA envelope of processes and procedures. So we're attracting a lot of more mature programs that have been with other partners, but view those two things as a real benefit to being with our company. So there is a -- it's a good thing not necessarily a bad thing for a fintech company to have one or more partners in order to ensure that they have a processing base or a banking relationship that's diversified. However, there tends to be like in many other parts of banking a lead bank relationship. And more and more we're establishing. Sometimes we establish it first. But with 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 and plans. I don't want to speak for them, but that's how we run our business is to be a valuable partner across the spectrum of activities for each one of our partners within the ecosystem and we build that advantage over time.

[Frank Schiraldi:]

Okay. Then just lastly for me. You also mentioned SoFi that that business is still ramping up. Obviously, they've gone after their own bank charter. And I know you can have relationships with partners even after that certainly like Borrow. I just wondered if you could talk a little bit more about that. So is that business still -- when you said ramping up, I guess you're saying that business is still ramping up and revenues are still ramping up for TBBK. 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 become somewhat -- competitor or how to think about that?

[Damian Kozlowski:]

Galileo was a -- Galileo as you know was acquired by SoFi. Galileo's 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 three parties involved, there's the bank, there is the processor and then there's the program manager. Those are the three main partners. And they're not a competitor to the bank. They can be a competitor depending on if they're captive with other program managers, if you have a processor and program manager together, but they're not a competitor of ours generally.

[Frank Schiraldi:]

Okay. Okay. I just wondered if they were expanding at all.

[Damian Kozlowski:]

Well, I don't think -- I don't anticipate I think we're going to have a long-term relationship with SoFi regardless of that. That's always up to them of course. But I think the envelope activities we can provide SoFi over long periods of time will be able to be of value of companies like that regardless if they get a charter or not. And there is -- we're not competing with a Galileo. They are part -- we're not competing with the program manager. If you think about it in that sometimes you get the competition between the different parties. You can be a bank, but you also could be a program manager too. And we don't do that. So of the three roles we say we do this one 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.

[Frank Schiraldi:]

Sure. I was just thinking with Galileo being owned by SoFi, SoFi getting a bank charter now they are a bank as well. But it doesn't sound like you believe that they're looking to push into that side of the business.

[Damian Kozlowski:]

Well, I'm not going to speak for SoFi, 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 to partners in our ecosystem to using our platform. And they're going to decide long-term whether they do that or not, but I think we can make that 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 those partners that are at 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.

[Frank Schiraldi:]

Okay. Thank you.

[Operator:]

Your next question comes from William Wallace with Raymond James. Your line is open.

[William Wallace:]

Thank you. Good morning guys.

[Damian Kozlowski:]

Good morning, Wallace.

[William Wallace:]

Excuse me. So Damian, you mentioned restarting the multifamily lending business with I think you said $125 million just closed another $125 million in the pipeline. Is this 20…

[Damian Kozlowski:]

No, 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.

[William Wallace:]

Okay. Thank you. Is this meant to be a securitization business or a balance sheet business?

[Damian Kozlowski:]

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 securitization activity which was more conduit business which was investment banking. This is really mainline commercial banking in one asset class which is this 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 either. It's a national business.

[William Wallace:]

Are the deals that you closed and the deals in the pipeline are these coming out of that portfolio that's already on the balance sheet from the broken securitization or are these all new?

[Damian Kozlowski:]

These are all new loans, but it's with a part of that team that was retained after we shut that business down. So these are people that are experienced with this type of asset class, 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 that old portfolio is going to roll off. Remember, we have a 1% fee that will be realized at that time maybe some exit fees too. And then we will put on this new 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. They're fast amortizing loans. And there are also other distribution channels 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 very flexible. So if we need to reduce because of the growth of other businesses reduce that portfolio it's very easy to do it.

[William Wallace:]

Okay. And so, you mentioned in your prepared remarks, the – I can remember you called it the five-year plan to get to 20% ROE?

[Damian Kozlowski:]

The four-year plan, it is called Vision 500, and it appears in our Investor presentation, that's just been released.

[William Wallace:]

Okay. So this $1.7 billion portfolio of multifamily loans is yielding, well, above market rates, correct, due to the timing of when these loans were underwritten with floors?

[Damian Kozlowski:]

Correct. Yes. They're approximately at 4.8% but the portfolio is a little smaller than $1.7 billion, but you're in the ballpark. But they're 4.8% loans and they have floors, so they're very accretive. But we are originating in the low 4% now. There's 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 we'll max out at 300% of capital. And we'll continue to originate loans. So if we have excess origination, we'll sell those loans for a 1% fee, right, so we can originate more. So we'll be able to cover the interest income that's coming off those loans with both the transitional fees and then also excess loans, if we need to originate excess loans in order to make up any difference between the roll-off.

[William Wallace:]

Okay. So, you will need this line of business then to hit that return on equity target then presumably just given you need yield, right? I mean, you've kind of managed your business to a much lower risk asset generators, excluding now this product. Is that correct?

[Damian Kozlowski:]

When we did the credit roadmap, which is part of Vision 500 so there's three elements you'll see in Vision 500. There's the ecosystem of payments, there's the credit roadmap and then there's the strategy around return of capital and buybacks, right? So, all those things are embedded in the main tenets of Vision 500. And through the credit roadmap process, which is an ongoing process, we looked at the balance sheet over the next four years and said what are the asset classes we're going to hold and it's scenario planning exercise that looked at a payments-heavy business, and then a 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 is growing revenue faster than growing expenses, and we've been able to maintain this positive Jaws or the difference between revenue expense now sustainably for the last four years and believe that we can continue that into the future, and that will drive obviously income per share but also return on equity.

[William Wallace:]

Okay. You did mention the buybacks, and it was good to see another over 400,000 bought back in the quarter. Is it safe to assume that one that those buybacks will continue that you'll exhaust the existing buyback? But two, I noticed that, even with those buybacks the period-end share count went up. I believe that, usually the first half of the year is when a lot of the stock grants et cetera are booked. So would we see more favorable impact to the share count in the back half of the year should the buyback continue at roughly that $10 million per quarter range that you had mentioned before?

[Damian Kozlowski:]

I'm going to give that to Paul.

[Paul Frenkiel:]

You're absolutely right Wally that the first half of the year represents more grants divesting of more grants. There are typically fewer, but 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 wouldn't continue that or something similar in 2022. And so yes, over time you should see a reduction.

[Damian Kozlowski:]

Now we're rigorous with the Board around buybacks and we're at 40%. That was the target or $40 million this year. The industry is between 40% and 50% of returning capital through dividends and buybacks and we'll continue on a quarterly and yearly basis making sure that we're consistent with the market but also choosing the right mix between buybacks and dividends depending on where our stock price is.

[William Wallace:]

Okay. Thank you. And I mistakenly asked this question on the wrong call earlier this week, so I'm going to ask it on the right call this time. Earlier this week there was some noise around the Senate Banking, Chair sending a letter to the CFPB to investigate the Chime account closures. There's been a large amount of complaints supposedly. And I'm just curious to what extent you can comment on how account closure decisions are made. I think you mentioned it in one of your answers to one of Frank's 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 and it doesn't have to be specific to Chime, but maybe just generically around, how you might help a partner make decisions on account closures etcetera?

[Damian Kozlowski:]

So first of all, we take our regulatory responsibilities extremely seriously. And has been covered in the press the US 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 we're very proud of that. We follow the rules. I can't really comment on any specific case but we are part of that decision-making process. And obviously because we have a platform that not overlooks at one program but across all our programs, we see things that maybe other institutions don't. And we are required to do certain activities in a certain way report things when they are reportable. And we try to file the letter of the law but also to do it in a practical way. It's not knee-jerk or anything. We go through a process to identify fraudulent accounts and they can have effect across clients. So you can have activity in one partner and you can have an account in another 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 of the process. We take it really, really seriously. We're required to do it by law and we do it when it's necessary.

[William Wallace:]

Thank you. Damian. Very helpful. That’s my last question. I will step out. Appreciate it.

[Operator:]

I'm showing no further question at this time. I would now like to turn the conference back to Damian Kozlowski.

[Damian Kozlowski:]

Thank you, operator. Thank you everyone for joining us. I think we continue to see a lot of growth and profitability over the next few years and we're going to continue working hard for everyone in our community. Thank you for joining us today.

[Operator:]

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect