The Bancorp, inc (TBBK) Q2 2021 Earnings Call Transcript

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The Bancorp, inc (TBBK -3.72%)
Q2 2021 Earnings Call
Jul 30, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter, The Bancorp Inc. Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Andres Viroslav. Please go ahead.

Andres Viroslav -- Director, Investor Relations

Thank you, Joel. 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. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call, beginning at approximately 12:00 PM Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 2868852.

Before I turn the call over to Damian, I would like to remind everyone that when using this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could 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. 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 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?

Damian Kozlowski -- Chief Executive Officer and President

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 30% -- 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 or 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 the challenger 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.

In addition, we also announced creation of our new Fintech hub in Downtown, Sioux Falls. The named Bancorp building will create an integrated innovation environment for our team members and partners. We expect to fully occupy the new facility in 2023. We launched a new expanded website this quarter, reflect our progress as a company. On the site you can find useful information about the company, including our new Investor Presentation and educational and industry insights from our team who are always focused on helping to build success for our partners.

In the new Investor Presentation, we are introducing Vision 500, a four-year plan to achieve $500 million in revenue with a sustainable 22% ROE or better by 2025. Also in the second quarter, we are honored to be selected to be included in the S&P 600 Small Cap Index. This Index is a set of representative public small cap companies and key industries that power our economy. This Index is also part of the broad S&P 1500 Index and also includes large to mid-cap companies.

Lastly, based on our year-to-date performance $0.94 a share and our 2021 outlook, we are increasing our 2021 guidance to $1.78 from a $1.70. We continue to see tailwinds that should drive continued growth in 2021 earnings and beyond. We will give preliminary per share guidance for 2022 with the third quarter earnings release. Current trends would suggest income growth for 2022 of 20% or more over our revised 2021 guidance.

I now turn over the call to our CFO, Paul Frenkiel to give more details about the second quarter.

Paul Frenkiel -- Executive Vice President, Chief Financial Officer and Secretary

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 line of credit to another institution to fund PPP loan originations, which are not expected to recur. SBLOC, IBLOC and advisor 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.

Total interest income reflected a reduction of $3 million in securities interest, reflecting lower securities balances, prepayments of higher-yielding securities and lower reinvestment rates. Our average loans for the quarter of $4.6 billion represents growth of 16% over Q2 2020. We believe our loan portfolios generally are lower risk than other forms of lending as a result of their charge-off history, which reflects the nature of related collateral. Our non-SBA $1.5 billion of commercial real estate loans at fair value are comprised primarily of apartment buildings, while our SBLOC and IBLOC securities are respectively collateralized by marketable securities or 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 recoursed underlying vehicles and a prolonged history of pricing leases to minimize losses. Tables contained in the earnings press release, detailed diversification of our loan portfolios. Loan deferrals which has been encouraged by COVID legislation substantially all expired as of July 5, which was the due date for the vast majority of small business loan payments. Of the $48 million of deferrals at March 31, 2021, small business loans with an un-guaranteed principle balance of only $2.6 million had not made their July payment and only $968,000 of all loans remains in deferral.

The $1.3 million increase in interest expense compared to Q2 2020 resulted primarily from the senior debt issuance in Q3 2020, while Q2 2021 cost of funds was 18 basis points. Most of our deposit interest expense is contractually tied to market interest rates. The net interest margin was 3.19% compared to 3.53% in Q2 2020. The reduction reflected the impact of 2021 stimulus payments, which were -- which temporarily increased average balances at the Federal Reserve earning nominal rates. As funds were spent, these balances were reduced and by June 30, 2021, total assets decreased to $6.5 billion compared to an average of $7 billion for the quarter. The net interest margin benefited from the aforementioned $3 million of non-recurring credit line fees, which serve to offset the impact of reductions in loan and securities yields.

The provision for credit losses was negative $951,000, which reflected the reversal of certain pandemic related economic risk factors in the CECL model and the recovery of an allowance on a loan payoff, because SBLOC and IBLOC 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 is approximately 1.2%.

Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income. Total fees and related payments income was up 5% to $21.4 million in Q2 2021 compared to $20.4 million in Q2 2020. Leasing income increased $1.3 million reflecting the impact of the reopening of vehicle auctions after pandemic shutdowns and higher vehicle market prices due to vehicle shortages.

Non-interest expense for Q2 2021 was $43.9 million or an increase of 3%. The increase reflected higher salary expense including incentive compensation and equity compensation expense. We continue to focus on expense management, especially in relation to revenue growth.

Second quarter results also reflected the impact of an approximate 21% tax rate versus higher rates in recent years. The reduction resulted from excess tax deductions related to stock-based compensation. The large deductions and tax benefit resulted from the increase in the company's stock price as compared to the original grant date.

Book value per share increased 16% to $10.77 compared to $9.28 a year earlier, reflecting earnings per share and the impact of stock repurchases. Capital ratios continue at satisfactory levels, primarily as a result of retained earnings, notwithstanding the second-quarter impact of stimulus payments, which temporarily increased average assets.

I will now turn the call back to Damian.

Damian Kozlowski -- Chief Executive Officer and President

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Frank Schiraldi with Piper Sandler. Your line is open.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning.

Damian Kozlowski -- Chief Executive Officer and President

Good morning Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

Just a 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 -- Chief Executive Officer and President

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 to 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 of years as there is a transition in the economy. So that's from the payment side.

From the lending side, it's still between 10% and 15% on the commercial side and the SBLOC side RIA and IBLOC side, we've been growing disproportionately. So 20% to 30% growth there as we have been demonstrating. And on the real estate side, we've already have a -- we restarted that business in the multifamily. We already have a very robust pipeline. We already closed or about to close $25 million in deals and we have another $125 million in the pipeline to close. So it's -- we're experiencing not a lot of weakness across the board, we've got a lot of strength and tailwinds. And I think that will -- we'll give a lot more color when we give per share guidance. And you can look at our new Investor Presentation, which we issued yesterday, which has a lot of additional facts about where we are today and where we think we can go as a company.

Frank Schiraldi -- Piper Sandler -- Analyst

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 didn't stabilize. 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 -- Chief Executive Officer and President

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 -- but we have the big -- 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. We have a -- for the third quarter we have the 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 will maintain -- 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 -- Piper Sandler -- Analyst

Okay. And then you mentioned a couple of partners there. So on the Current front, usually TBBK is the first -- it seems like the first bank partner and the primary bank partner and I know Current has a couple of other or 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 -- Chief Executive Officer and President

So the 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 them -- with our company. So you know 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, 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 -- Piper Sandler -- Analyst

Okay. And then just lastly from me, you also mentioned SoFi, 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 -- ramping up I guess you're saying that business is still ramping up in revenues, they 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 in someways [Technical Issues] or how to think about Galileo?

Damian Kozlowski -- Chief Executive Officer and President

Galileo is a -- Galileo 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 is the Bank, there is a processor and then there is 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 -- Piper Sandler -- Analyst

Okay. Okay. I just wanted to [Indecipherable] expanding at all.

Damian Kozlowski -- Chief Executive Officer and President

Well, they don't -- I don't anticipate, I think we're going to have a long-term relationship with SoFi regardless of their -- that's always up to them, of course, but I think they have a lot of activities we can provide SoFi over long period of time. We'll be able to be a value of companies like that, regardless if they get a charter or not. And there is -- we're not competing with 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 -- Piper Sandler -- Analyst

Sure. I was just thinking with Galileo being owned by SoFi. SoFi getting a bank charter now they have -- 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 -- Chief Executive Officer and President

Well they -- 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 is 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, where we see a lot of the opportunities out there. And more and more we're seeing those partners that are 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 -- Piper Sandler -- Analyst

Okay, thank you.

Operator

[Operator Instructions] Your next question comes from William Wallace with Raymond James. Your line is open.

William Wallace -- Raymond James -- Analyst

Thank you. Good morning guys.

Paul Frenkiel -- Executive Vice President, Chief Financial Officer and Secretary

Good morning, Wallace.

William Wallace -- Raymond James -- Analyst

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 meant to be...

Damian Kozlowski -- Chief Executive Officer and President

The $25 million we closed, no, we've closed or soon to close to $25 million and then we have another $25 million that we should close within the next 60 to 90 days.

William Wallace -- Raymond James -- Analyst

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

Paul Frenkiel -- Executive Vice President, Chief Financial Officer and Secretary

This is all -- 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 main line commercial banking in what asset class, which is this floating way -- floating rate multifamily properties which have very low loss rates, that's where we 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 -- Raymond James -- Analyst

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

Damian Kozlowski -- Chief Executive Officer and President

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 may be 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 are fast amortizing loans and there are also other distribution channels and sale and sale opportunities, so we can sell it to insurance companies or other types of people who may want to put these loans into conduits. So this is a very flexible. So if we need to reduce because of it's growth of other businesses, reduce that portfolio. It's very easy to do it.

William Wallace -- Raymond James -- Analyst

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 -- Chief Executive Officer and President

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

William Wallace -- Raymond James -- Analyst

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 -- Chief Executive Officer and President

Correct. Yes, so approximately at 4.8, but the portfolio is a little smaller than $1.7 billion, but you're in the ballpark. But there are 4.8 loans and they have floors. So they're very accretive, but we are originating in the low 4s now. There is not a big difference about 60 basis points difference between where we're originating loans as replacements and where they were before, but we'll make up for that by holding the portfolio. I think we're about 265% of capital, but we will max out at 300% of capital. So -- 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 originate -- if we need to originate excess loans in order to make up any difference between the roll-off.

William Wallace -- Raymond James -- Analyst

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

Damian Kozlowski -- Chief Executive Officer and President

When we did the credit road map, which is part of Vision 500 part. So there's three elements, you'll see in Vision 500. There is the ecosystem of payments. There is the credit roadmap and then there is the strategy around return of capital and buybacks, right. So, all those things are embedded in the main tenants 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 in 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 next -- 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 -- Raymond James -- Analyst

Okay. Thank you. You did mention the buybacks and just going to see another, excuse me, 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, etc are booked. So would we see more favorable impact of the share count in the back half of the year, should the buybacks continue at roughly that $10 million per quarter range that you had mentioned before?

Damian Kozlowski -- Chief Executive Officer and President

Okay. I'm going to give that to Paul.

Paul Frenkiel -- Executive Vice President, Chief Financial Officer and Secretary

Yes. You're absolutely right Wally, that the first half of the year represents more grants, the vesting of more grants, they are typically fewer, but there are -- there will be some in the last half of the year, but over time, we're planning, we've announced the buyback, it's going to continue at $10 million a year. There is 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 -- Chief Executive Officer and President

Now we are 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% 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 -- Raymond James -- Analyst

Okay. Okay, thank you. And I mistakenly asked this question on the wrong call earlier this week. So I'm going to ask you on the right call this time. Earlier this week, there was some noise around the Senate Banking share sending a letter to the CFB -- CFPB to investigate the time account closures has 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's compliance. So any comment that you could make around and you don't have to be specific to time, but maybe just generically around how you might help a partner make decisions on account closures, etc?

Damian Kozlowski -- Chief Executive Officer and President

Yes, so, we first of all, we take our responsibilities extremely -- regulatory responsibility extremely seriously. It has been covered in the press, the US government was defrauded on both the state and federal level literally billions of dollar and we were able to recover almost $1 billion for state and federal governments. And we're very proud of that. We follow the rules. I can't really comment any specific case, but we are part of that decision making process and we obviously, because we have a platform that not overlooked 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. We report things when they are reportable and we file -- we try to follow the letter of the law, but also to do it in a practical way. We're not -- it's not knee jerk or anything when we go through a process to identify fraudulent accounts and they can have effect on across the client. 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 -- Raymond James -- Analyst

Thank you, Damian, that's very helpful. That's my last question, I'll 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 -- Chief Executive Officer and President

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

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Andres Viroslav -- Director, Investor Relations

Damian Kozlowski -- Chief Executive Officer and President

Paul Frenkiel -- Executive Vice President, Chief Financial Officer and Secretary

Frank Schiraldi -- Piper Sandler -- Analyst

William Wallace -- Raymond James -- Analyst

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