TBBK - NASDAQ

Good day, and welcome to The Bancorp Inc. Q1 2024 Earnings Conference Call. [Operator Instructions] Please note today's call will be recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Andres Viroslav. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's First Quarter 2024 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 available via webcast on our website beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 1 (800) 938-2241 with a confirmation code of BANCORP. 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 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 would 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 $1.6 a share with revenue growth of 8%, while expenses were 3% lower than first quarter of '23. ROE was 28%, NIM was 5.15% compared to 5.26% quarter-over-quarter, mostly due to an increase in Fed funds sold, and 4.67% year-over-year. And the efficiency ratio improved from 42% in the first quarter of 23% to 38% in '24. The Fintech Solutions Group continue to expand relationships and show continued progress. GDV increased 12% year-over-year and total fees from all fintech activities increased 7%. After adjustment for a client termination fee and the realization of '22 revenue in the first quarter of '23 due to a processing delay, fee growth was 16% year-over-year. We continue to add new partners and expand our product capabilities with existing partners. Some of the highest growth areas are our fintech neobank portfolio and corporate payments. We are pleased to announce Block as a new partner to our Fintech Solutions ecosystem. The addition of this new relationship as well as the continued organic growth of the current portfolio should result in meaningful increases to the ACH card and other processing fees line item. In a regulatory environment where many of our competitors have come under significant scrutiny, our focus continues to be helping our partners to innovate with the product sets while maintaining a rigorous approach to meeting regulatory requirements and improving the robustness of our ecosystem. On the lending side, we had growth across the portfolio of 2% quarter-over-quarter. While our institutional book decreased quarter-over-quarter by 3.6%, the rate of decrease was less than in the past year, and was more than offset by growth in other higher-yielding categories, which are mostly fixed. Lastly, with continued strong growth in our Fintech Solutions group and growth across our lending portfolio, we are reaffirming our guidance of $4.25 a share without the impact of $50 million per quarter of share buybacks in '24 and the additional second quarter buyback of $50 million. I now turn the call over to Paul Frenkiel for more color on the first quarter.

Thank you, Damian. As a result of its variable rate loans and securities, Bancorp performance continues to benefit from the cumulative impact of Federal Reserve rate increases. In April 2024, the bank purchased approximately $900 million of fixed rate U.S. government agency securities to significantly reduce exposure to future Federal Reserve rate decreases. At an estimated average 5.11% yield, such purchases have modest impact on current income while significant prepayment protection is reflected in estimated 8-year weighted average lives. Additionally, the bank continues to emphasize fixed-rate loans to continue to further reduce its exposure to rate changes to modest levels. In addition to the impact of the Federal Reserve rate increases, the company benefited from loan growth, with decreases in SBLOC and IBLOC significantly offset by increases in other higher-yielding lending categories. Accordingly, while SBLOC and IBLOC loans decreased $782 million in the past 15 months, other loan growth had approximately offset those reductions by March 31, 2024, at which date, total loans amounted to $5.5 billion. The impact of the aforementioned Federal Reserve rate increases on variable rate loans and securities, growth in higher-yielding loan categories and lesser increases in deposit rates was reflected in a 10% increase in net interest income in Q1 2024 compared to Q1 2023. As a result, in Q1 2024, the yield on interest-earning assets had increased to 7.4% from 6.6% in Q1 2023, or an increase of 0.8%. The cost of deposits in those respective periods increased by only 0.3% to 2.4%. Those factors reflected in the 5.15% NIM in Q1 2024. The provision for credit losses was $2.2 million in Q1 2024 compared to $1.9 million in Q1 2023. The provision for credit losses in Q1 2024 reflected the impact of $919,000 of leasing charge-offs, primarily in long-haul and local trucking and related activities for which total exposure was approximately $39 million at March 31, 2024. Nonperformers increased during the quarter by $7 million for leasing and SBL but mostly as a result of an apartment building loan for $39.4 million, which compares to a September '23 independent as-is appraisal of $47.8 million or an 82% as-is LTV, with additional potential collateral value as rehabilitation progresses and units are re-leased at stabilized rental rates. For the $2.1 billion apartment bridge lending portfolio as a whole, the weighted average origination date as-is LTV is 70% based on third-party appraisals. Further, the weighted average origination date as-stabilized LTV, which measures the estimated value of the apartments after the rehabilitation is complete, may provide even greater protection. That origination date as-stabilized-LTV based on the third-party appraisals for the portfolio was 61%. For the bank's rebel loans classified as substandard, recent third-party appraisals of those loans reflect a weighted average as-is loan-to-value ratio of 79% and an as-stabilized LTV of 76%. Accordingly, even with higher interest rate environment and other stresses, we believe LTVs based upon third-party appraisals continue to provide significant protection against potential loss. Noninterest expense for Q1 2024 was $46.7 million, which was 3% lower than Q1 2023. A a 2% increase in salaries and benefits was more than offset by decreases in other categories, including a $1.3 million decrease in other real estate-owned related charges. Book value per share at quarter end increased 19% to $15.63 compared to $13.11 a year earlier, reflecting the impact of retained earnings. In summary, the bank's balance sheet has a risk profile enhanced by the special nature of the collateral supporting its loan niches and related underwriting. Those loan niches have contributed to increased earnings levels even during periods in which markets have experienced various economic stresses. Real estate bridge lending is comprised of workforce housing, which we consider to be working-class apartments at more affordable rental rates in selected states. We believe that underwriting requirements provide significant protection against loss as supported by LTV ratios based upon third-party appraisals. SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance, while SBA loans are either SBA 7(a) loans that come with significant government-related guarantees or SBA 405 (sic) [ 504 ] loans that are made at 50% to 60% LTVs. Additional details regarding our loan portfolios are included in the related tables in our press release as are the earnings contributions of our payments businesses, which further enhances our risk profile. The risk profile inherent in the company's loan portfolios, payments funding sources and earnings levels may present opportunities to further increase shareholder value while still prudently maintaining capital levels. Such opportunities include the recently increased planned share repurchases of $100 million for second quarter 2022, up from the original $50 million. I'll now turn the call back to Damian.

Thank you, Paul. Operator, could you please open the line for questions.

[Operator Instructions] Our first question will come from David Feaster with Raymond James.

Maybe let's just start with the elephant in the room and touch on this rebel credit. It looks like you all took that into OREO this month and are planning to finish the rehab yourself. Could you maybe just talk about what led you to that decision rather than just selling it today? And any specifics that you can with this credit? What you need to do, the expenses maybe that will come from that and just the time line of when think it can be stabilized and sold at no losses?

Okay. So Yes. Well, situations like this, we go through a process. And when the sponsor, in this case, has as an inability to raise more additional capital to finish the project, and they've already put additional in. And so it goes through a process of whatever needs to be fixed over the next 6 to 12 months in order to lease up the entire property. So we're working with the property manager, we're -- have a project plan in place and we'll finish it as quickly as possible. During that entire process, we're not looking to monetize it for a gain. So if somebody would -- we're in discussions with people about taking over the property and completing the project. So that's ongoing. Paul?

Yes. So I would add that we actually added -- acted immediately to preserve the value and that's really important because you want to keep the construction going, get the apartments released as quickly as possible. Construction has already begun. The rehabilitation has already begun. There is a little bit of construction involved as part of the rehabilitation and it's difficult to estimate, but it will take at least several quarters for that to happen.

Okay. And any estimates on capital that you might have or reserves that you've already got against this that you could use to fund it? Just kind of curious that side of it.

Well, if you look at the LTV as-is on which you would base potential losses, the value continues to be there. So that's why we're going to finish up the construction ourselves and preserve that value and actually potentially increase the value as the property gets stabilized.

Okay. Could you maybe touch on the rebel book maybe more broadly? Are you anticipating more issues like this one? Are you hearing similar pressures from other borrowers? And maybe just touch on how debt service and LTVs are broadly on this book? And maybe what gives you confidence in the remainder of the portfolio?

First, the -- there was a bit of what I would characterize as a wave that you see in our numbers today. And this was originated mostly from the '21 and '22 vintage of loans. So we started this. We've been in this business since 2016. We've had very good performance. We even issued securities. And what happened was there were a couple of shocks that happened. We had the big inflation shock, and then we also had this interest rate shock. Now the inflation shock, obviously, for the business plans of people doing these deals changed how much they had to pay for the materials in order to go in to upgrade these apartments. And generally, people worked with that. Some people got off plan, some people added additional capital. And then you had this interest rate shock. So where that came in, it wasn't a takeout take out -- even though it's maybe less sales of these properties, it's still there's a GFC where you're going to have refining rates in the 6%. It was where if you got into trouble with your project, because of the inflation shock, you had to raise more money, you probably did it once or twice. At the higher interest rate level, it became very expensive to add more capital to finish the project. So that's where we've been working with our borrowers in order to help them with their business plans, and make sure the property gets stabilized and then can be refinanced. So that wave has kind of come through. There might be some more. We haven't experienced a second wave. So there is some stabilization taking place. Paul?

Yes, I would add that if you look at the substandard, loans classified as substandard, which means they have some kind of an issue, even after all the stresses that Damian just went through, given the extra equity and other and the original LTVs, the updated and more current appraisals still show an LTV as-is of 79% and slightly better as-stabilized. So again, we have significant protection against loss.

That's extremely helpful. And maybe let's switch gears to maybe the core business. Great to hear the new partnership with Block. That's huge. Could you touch a little bit on -- elaborate what that relationship consists of? When you expect it to start contributing to growth? And maybe also just touch on the pipeline of new partners and how that's trending? Just given the regulatory challenges in the space and your position, I suspect you're seeing more partners look towards you all. I'm just curious if that's the case and maybe how the pipeline is shaping up.

So that's rapid funds ecosystem. That's where our relationship with Block is. So that, we haven't -- we've had a small fraction of that volume come into the first quarter, less than 15%. So you'll see that roll out over the next couple of quarters. The pipeline is extremely strong, very exciting things going on across our portfolio. And like we've said in the past, we'll be announcing these things when appropriate. Just as we have announced Block, we'll continue to announce these partnerships as it becomes appropriate. But it's very strong. It's only with very large providers that today have significant volumes. So when we do add 3, 4 partners a year, up to 5 partners a year, they bring a lot of economics to the table, and they're very accretive. So it hasn't changed. The last few years, it's been like this, that scrutiny on the industry that obviously allows us to get visibility on almost all major programs that are looking to maybe change their provider. So it continues to be -- the prospects of the business continue to be very strong.

Our next question will come from Tim Switzer with KBW.

I had a follow-up on the rental portfolio, the credit performance we've seen. There is the increase in NPAs. There's another -- it looks about $6 million that moved into nonperforming above that $39 million loan. Could you provide us some color on what also drove the increase beyond that? And then, if there is any other kind of notable loans that have stopped paying but not yet in nonaccrual or shown up in other credit metrics yet, could you provide some color there, please?

So the $6 million that you're referencing is comprised of a variety of leasing and small business loan, just various industries. We do have a lot of diversification. The issue we've had is primarily -- in terms of charge-offs is primarily the trucking and long-haul transportation. I think they just happened to hit -- like several of them just happened to hit this quarter. We're not expecting -- or we don't really have knowledge of anything systemic that should increase those, the SBL and the leasing nonperformers, but we obviously scrutinize the portfolio very carefully, and we will provide more detail in the 10-Q in the tables that are required.

Okay. Great. Appreciate the color there. And it's good to see you guys starting to purchase the securities, $900 million in April. How much do you plan to do more? I think last quarter, you guys said anywhere between $1 billion to $1.5 billion. Is that still kind of the target? And what's your new asset sensitivity as you're trying to close the gap to that 60% deposit beta you have?

Okay. Okay. So it's very -- these are broad strokes. And remember, we run models and things to get to our -- what we think the asset sensitivity is in different environments. But having said that, in very broad terms, if you remember, we opened our balance sheet, hadn't bought a bond and we got all the way down to about 25% fixed. And then when the interest rate increases happened, obviously, it had a dramatic effect on our profitability. Now, with -- since the beginning of last year, putting on fixed rate assets, and then the $900 million in bond purchases, we were about 50% fixed, right? So we've closed that gap substantially. And originally, we were trying to get to 60% fixed rate because our deposit beta was 40%. So it would totally offset our asset sensitivity. So we've made great progress in doing that. So if you think about it, once again, very broad strokes, we were about 7% or 8% for net interest income for 100 basis points move down exposed, and we've lowered that to 2% or 3%. That's the magnitude that we've lowered our asset sensitivity. Now we obviously waited a very long time to buy these purchases. We had been looking at a broad set of indicators and they just recently went very green for us. And we started buying into the CPI print because we thought that might actually be a little higher than forecast, and there would be an overreaction in the market, which there kind of was. But that CPI print, obviously, was mostly due to housing and insurance. So when you look at broad indicators, the economy is definitely slowing, and you saw that in the GDP print the other day. So we think interest rates have kind of gone their highest. They could go higher, and that's why we're still asset sensitive. And if they did go into the 10-year treasury in the 5% range, we probably would buy additional $500 million of more like treasury securities and that would close your gap almost in its entirety. If we don't do that over the next 6 months with the products that we have, or originating in the loan and our -- some of the new credit sponsorship products that we're building on our balance sheet, you're going to close that gap meaningfully without the purchase of additional securities. So we think we're -- once again, we weren't trying to make the most money. We're trying not to be greedy. We thought it was the right time to take the majority of the asset sensitivity off the table, and that's what we did with the $900 million in purchases.

Our next question will come from Frank Schiraldi with Piper Sandler.

Just wondering if you can -- going back to the fee income growth, some of the noise year-over-year and the GDV growth year-over-year. Given pipelines, are you still comfortable in that generally, you're going to be putting up gross dollar volume growth in the 15%-plus range? Or given some of these partnerships in other areas, is growth coming more outside that GDV framework at this point?

GDV is very hard to predict any 1 quarter. So we do think -- we still think that it'll be above trend, above the 15%. Now the fee growth was -- 16% is very high if your GDP growth is 12%, and that's exactly what you said. It's in ancillary businesses like the rapid funds environment. So we're seeing more of those ancillary revenues. So would I -- obviously, I would rather have 16% fee growth than 16% GDV growth. We were predicting more the other way around, 16% GDV and 12% fee growth, but we got the inverse, which is obviously better for profitability. So -- but we still think it will trend upwards, and we'll -- especially with the addition of new partnerships like Block, you're going to see enhanced fee growth realization on GDV. And it's surprised me to see it actually above GDV, but that's because of the growth of the product set and especially in areas like rapid funds.

And then just on the rapid funds and on the Block partnership, sorry, just curious if you can provide a little more color on what is the timing usually? I know it takes a while to get these partnerships up and running after announcement. So is this more of a 2025 maybe incremental boost to revenue growth, the Block partnership?

No, this is now. 15% or less of the transactional volume was in the first quarter, and it's been ramping up. So you'll see an impact in this quarter, and it will build throughout the year. But this is -- remember, Block is a large -- obviously, a large leading fintech with already significant volume. This is not -- this is the adaption of them into our ecosystem and then their continued growth.

Got you. Okay. And you said some of that revenue was actually in the first quarter? Or are you saying in the first quarter now?

The first quarter, there was a small amount of that revenue, yes.

Okay. And then just on the rebel book, obviously, bringing that loan into nonperformers was to be expected and now in OREO and you talked about stabilizing it over some time. I guess just curious why. Obviously, you're -- as you know, you're open to bid, if you can move it faster, you move it faster. Just curious, given the LTV on an as-is basis, why you don't think -- it doesn't sound like you believe that's the more likely scenario to sell it in the near term before completing the improvements. If you could just kind of talk us through that a little bit?

We go down all paths. So obviously, things like this, we've done obviously loans since 2016. We've had virtually no issues that were similar to this. This happened because of the shocks that were experienced in 2021 and '22. And the markets are at higher rates. So the buyers out there might not be as numerous as they were in the past. But definitely, we go down all tracks. So there is interest in the assets that we have. And if we can effect a reasonable sale, we will. But we can't wait for that. We have to -- we want to predict the value of the property and monetize it as quickly as possible. And so in these situations when they do occur, you have to go very quickly to preserve the property, you get in there immediately and complete the work. Remember, this is a project that's been -- got into a little trouble, but it's fairly far along. There's some work that needs to be completed. It's unfortunate -- we never want to get in a situation -- we want our borrowers and our sponsors to be able to complete the project, obviously, and monetize the property either through a sale or through refinancing with a bank or the GSEs, and so we need to step in. It's in the last 1/3 of the project. We need to finish it and monetize it. If we can do it earlier through a sale, we'd be happy to do that.

Okay. And as you stabilize, as you finish improvements, how does the -- how are the costs there? How is that expense actually for the construction for the improvement, the carrying cost of the building? How is that accounted for? And any sort of expectations along those lines of what that -- those numbers could look like?

Okay. Paul?

Yes. So we have a budget, a detailed budget. So we have the estimated cost. And in fact, even after those expenditures, the 82% loan-to-value will be preserved. So the costs, they get capitalized. There are some reserves available, so it won't be dollar for dollar. But as I said, the LTV will still be maintained. And as Damian said, as construction, as rehabilitation progresses, as units are released, the value to prospective buyers increases dramatically and that's how we're planning to dispose of the property.

Okay. So are you saying just given the capital expenditures budget, the reserves that are still there in that plan, that we really shouldn't expect to see a tick up anywhere else in terms of carrying cost?

There'll be some increase to the amount we have on the books because those expenses will get capitalized to the extent we don't have reserves, but it's not going to be disproportionately large. It will be at most -- it will be under 10%.

Yes. And remember, as you lease up, obviously, the LTV actually goes down because as you expand, you release units and they kind of offset each other.

Right. Okay.

So by the time you're done, you actually end up with -- this is why these portfolios are so good because when they do get -- it's not like the first day that these loans have an issue. They're going to have an issue at the end of the project than the beginning of the project. So obviously, if we get a position after a couple of years, have to actually step in, there's probably a lot of work that's been completed, right? There might have been some problems. But then also the sponsor's probably put additional capital in already and now has a problem, raising additional capital. So usually, when we're stepping in, it's not necessarily -- we don't want to do that. We want our borrowers and sponsors to renovate. These are very important units to the economy. These are workforce housing. This is -- they're very hard to replace these units. So this rehabilitation process is essential to occur, whether it's through us or the government or through one of the third-party government agencies. So it's an important part for us to be and we think as a bank to be involved in. And we want our sponsors to be successful so they can go on and rehab other buildings. It's unfortunate we have to step in, but we don't think we're going to take -- we look -- we scrutinize the portfolio. We do not think there are losses in the portfolio.

And then, just lastly on that front, obviously, we'll get got more information in the Q, which is a little ways out. But in terms of any specifics you can give us on the rebel book in terms of any other additional delinquencies you're seeing in that book that will pop up in numbers in the Q? And any guide or any sort of detail you can give us around criticized, classified balances quarter-over-quarter?

So like I was saying before, and I'll let Paul speak to it, too, but we had like a wave, right? And it was originating from the shocks I talked about. And this is towards more the last 1/3 of these projects where people were -- the takeout is not the problem because GSEs are still taking out these loans in the 6% range, a little bit above that now. But -- so the takeout financing isn't the problem. It was the inflation shock and the problem raising money in a higher interest environment, especially when you've already raised additional capital to make up for that interest rate -- for that inflation shock. So that wave has subsided substantially. So there may be a second wave, of course, but it should -- while we might have some more credit migration, it should calm down as we complete these projects and monetize these assets. Paul, would you like to add anything?

Yes. So Frank, the ones -- the loans that are obviously the concern are the substandard. They have some issue and so forth. And so what we do is, if there is an issue, we get an updated appraisal. And as I said before, the LTV on our substandard loans, based on the updated appraisal, still 79% as-is, 76% as stabilized. So again, we have significant protection against loss. And our experience and the experience of others in these portfolios, and if you look at the statistics, you do see -- in difficult times and difficult stressed economies, you do see issues arise where you do have some increases in classified loans, increases in delinquencies. But the losses, you don't have to take our word for it, just look at the third-party appraisals. They still retain their value. And this is the portfolio -- like if you look at what commercial real estate is going to be stressed, but still come out of this, well, it's certainly not going to be office buildings and so forth. But if you just think that it's -- think about workforce housing, the housing shortages, the fact that these rents are very reasonable compared to obviously higher-end rents, this is one that we believe this is the category that we chose purposefully to be in to resist losses and provide protection against losses even in these times. And you don't have to take our word for it. We've always been very open with the LTVs, the portfolio as a whole. We've been for years disclosing that, that LTV at origination is 70%. And even now with the stresses on the substandard loans, it's still been sustained at a 79% LTV. So that's why we believe, as Damian said, that we don't see losses in the portfolio.

Yes. No, I certainly appreciate it. I guess just obviously, NPA migration is something people pay attention to. And so people are going to start wondering what NPA balances could look like next quarter. And so delinquencies today could turn into NPAs tomorrow. So I'm just trying to get a sense if there's any large -- obviously, last -- the K, you had this large delinquency, and now it's into NPAs, which makes sense. And so just curious if there's anything bulky in that book to call out that's delinquent now and you think could potentially fall into nonperforming/OREO status next quarter?

Well, the $39.4 million is the big one. So -- and we've been discussing that. And you have like all the information, I think, that we have to ascertain that there is not loss indicated in that property. Yes.

Okay. So I guess we'll get the criticized classified, the delinquency numbers, we'll get that with the Q?

Yes, of course Yes.

Okay. And then just lastly on just buybacks. Obviously, you doubled the authorization for this quarter. Just kind of curious how you think about buybacks going forward? Any sort of color on -- I guess it seems to me like the plan right now is to return to the more normalized $50 million in third and fourth quarters. But I just wanted to see if there's any color around -- your thoughts there around repurchases.

Yes. So we -- obviously, we have very robust ability to generate capital and our ratios have been moving up even with the enhanced buyback. So it became -- we're very -- as you know, very into the systematic approach where we kind of give it to a third party and they buy the shares on a rigorous daily basis that doesn't distort the market. But it became clear to us, we had enough capital. We've had a significant increase in our metrics, ROE and so it doesn't -- we don't think it aligns. Our P/E ratio being today under 10% and our ROE being 28% and obviously, our efficiency ratio at 38%, ROA at 3%, it just doesn't historically reflect P/E ratios at this profitability. So it became very enticing, we think, for our shareholders to increase our buyback and we had plenty of capital room. So -- and we -- with the -- even with the $900 million of additional share repurchase and the growth in our balance sheet, we will have enough capital even with this buyback to have healthy capital ratios. So it became kind of obvious for us it was the right thing to do, even though we generally don't do one-offs, but it seemed very appropriate to do it this quarter.

At this time, I would like to turn the call back to Damian Kozlowski for any additional or closing remarks.

Thank you, operator. Thank you, everyone, for joining us today. Operator, you can disconnect the call.