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spk00: Good day and welcome to the first quarter 2022, the Bancorp, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your touchstone telephone. If anyone should require assistance during the conference, please press star then 0 to reach an operator. As a reminder, this call is being recorded. I would like to turn the call over to Andrea Fioslav. You may begin.
spk04: Thank you, Operator. Good morning, and thank you for joining us today for the Bancorp's first quarter 2022 Financial Resource Conference call. On the call with me today are Damon Kozlowski, Chief Executive Officer, and Paul Frankel, 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 p.m. Eastern time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 698-4967. Before I turn the call over to Damian, I'd like to remind everyone that when using this conference call, the words the least, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of a 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 bank for its filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date you're of. 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?
spk02: Thank you, Andres. Good morning, everyone. In the first quarter, the Bancorp earned $29 million in net income, or $0.50 a share, from 5% year-over revenue year revenue growth excluding the impact of PPP-related interest and fees with an 8% reduction in expense. Loan interest income excluding PPP and discontinued loans increased 12% while non-interest 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. Balance growth year-over-year was led by institutional banking, which includes our securities-backed line of credit, insurance-backed line of credit, and RIA 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 leasing and SBA growth each growing 1%, excluding PPP loans. Gross dollar volume from McCart's business grew 2% year over year, even with the impact of one-time stimulus and other government payments in 21. Payments fees decreased 2%, reflecting the impact of VARO, which exited the bank in the second quarter of 21. GDV grew 15% over Q4 21, reflecting the impact of first quarter tax refund spending and other growth. We continue to experience business momentum in 22. Loan pipelines across our businesses remain robust and should offset any repayments in our loan book due to increasing interest rates. Our 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 GDVs hard to beat. However, due to continued growth in our existing and new programs, 22 first quarter was able to show a year-over-year increase of 2% in GDV, even without this stimulus, and additionally without borrow volume that exits the bank in the second quarter. We continue to see significant opportunities grow in 22 and beyond and should show increasing growth as the year progresses. Lastly, we have previously announced both our new FinTech hub 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 2023 and our regulatory changes by the end of this year. I now turn our call over to our CFO, Paul Frankel, to give more details about the first quarter.
spk01: Thank you, Damien. Return on assets and equity for first quarter 2022 were respectively 1.7% and 18% compared to 1.6% 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 which there was a net increase in related interest as the impact of new originations exceeded the decreases resulting from repayments. Fees related to those repayments are recorded in net realized and unrealized gains on commercial loans, which 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 Q1 2022. Most of our deposit interest expense is contractually tied to a 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 florts is exceeded. We estimate that rate hikes will have to approach 2% before their impact will increase net interest income. Our net interest margin of 3.12% for Q1 2022 was down from 3.34% in Q1 2021. The reduction reflected a lower yield on loan and securities stocks portfolios as higher-yielding loans and securities matured or repaid. The provision for credit losses increased to $1.5 million in Q1 2022 from $822,000 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 and which reflects the nature of related collateral. Because S-Block and IBAC loans are respectfully 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. Our non-SBA CRE loans at fair value and within real estate bridge lending are comprised primarily of apartment buildings. 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 recourse to underlying vehicles and a prolonged history of pricing leases to minimize losses. Tables contained in the earnings press release detail diversification of our loan portfolios. 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 in Q1 2022 decreased 2% compared to Q1 2021 as the impact of borrow offset growth in other relationships. Non-interest 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 brokered to non-brokered. Q1 2022 results also reflected the impact of a reduced tax rate of approximately 24% versus higher rates 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 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 Damian.
spk02: Thank you, Paul. Operator, would you please open the line to questions? Operator?
spk00: As a reminder, to ask a question, please press star then 1. If your question hasn't been answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Michael Perito with KBW. Your line is open.
spk02: Hey, good morning. Good morning, Mike. How are you? Good. How are you doing? Good, thank you.
spk06: Cool. Thanks for taking my questions this morning. I had a couple things I wanted to hit on. It was good to see the card fees come in pretty strong. I guess kind of a two-part question here. Number one, what's the outlook on... some of your larger partners, you know, what's the volume you guys are seeing? And then, you know, how do we kind of marry that with the pipeline of new partners you guys are launching? I just would love some color there. And then secondly, there were a couple other items in the non-interest income that took a step down, like some loan sales, some leasing income. Just curious if you guys could provide, you know, any context around that and any near-term outlook thoughts would be great.
spk02: Yeah, the GDB has been tough to predict the last two years because of the multiple stimulus and the that have happened in the economy. So there was this tailwind of virtualization that occurred, but there's this bumpiness that occurred because of the stimulus. So if you think about the world of virtual card and the card world, the virtual payments world, I guess things got pushed forward. That's why you saw large increases of 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 $1.7 trillion that the government, and there was other programs, too, 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 GDV was going to be, you know, down slightly in the single digits. We never thought we would actually be up 2%. We really didn't. We didn't think that was even possible. So we were very happy with this GDV number. What's happened is you're 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 GDV 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, you know, this double-digit growth, we're kind of – it's hard to predict, but if you look at our pipeline, it takes a while for many of the – we have a very robust pipeline, new implementations, product expansions, but it takes a while 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, you know, 15 to 20 percent GDP growth prior to the pandemic. That's what we're – we think is going to happen. On the fee side, the fees are very bumpy. For, say, leasing, those are sales of used cars. It totally depends when contracts expire and whether or not we take those cars back and sell them. For the real estate fees, that has to do with the early repayment of our portfolio that's 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 that will go through the system over the next, you know, about eight months or so. And you'll see those in the line, but we can't predict quarter to quarter when those will happen.
spk06: Very good. And I don't know if it was just my line, but you broke out a smidge there in the middle. So just the GDV comment. So the part that I missed, I think, was did you say that at this point you guys are budgeting a year-on-year, still some conservatism next quarter, but then expect to return to a more steady GDV growth rate in the back half of the year? I just want to make sure I didn't miss.
spk02: Yeah, the next quarter, it's not as hard to predict as the first quarter was, but there's 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 I think we will have, it's not as much of 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 programs. you know, they're 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, pure run rate look. The third probably will be too, but by the end of this year, all those noise will be out of the system.
spk06: Got it. And then on the margin, you know, Paul, there's a couple things going on here, I guess. I guess the first The question is just, you know, when can the liquidity you built up in the first quarter, you know, with the loan growth you have, I imagine not long, but how long do you expect that to remain elevated and just where does just deploying that take the margin to? And then I guess let's start there. I have a follow-up.
spk01: Okay. So a lot of that liquidity in the first quarter is temporary. We have it every year. It's even without the stimulus, which we had last year, we have the impact of tax refund deposits in our accounts. So that inflates temporarily deposits. In the first quarter, the money goes out fairly quickly, although there will be some residual left in the second quarter. So there won't be a lot of excess by the end of the second quarter. On the other hand, we have a history of strong deposit growth, which we expect to continue in all of our programs.
spk06: If the liquidity was normalized, does that take you back kind of right up to where the NIM was in the fourth quarter, or were there other elements at bay that would have changed that materially?
spk01: There are other elements. If you look at securities income Q4 to Q1, the balances were about the same, but income was down about $900,000. So to some degree, while we've managed the balance sheets, with considerable protection in down rates, that's primarily the floors, but also securities within our investment portfolio, we're not totally immune to eventually having those higher rate securities prepay and higher rate loans prepay. The good news, of course, is that as the interest rate environment normalizes to someplace at least around the rate of inflation, which is 2% or 3% toward the end of the year, we believe that net interest income will benefit significantly as the Fed finishes its rate increases.
spk06: Got it. And then just lastly, and then I'll let someone else come in, but still on the margin, the comment I think you said that you expect you need Fed funds to go up 200 basis points before you guys start to see the benefit, that is a static analysis, correct? Meaning most of the the higher floors, if I'm not mistaken, are in the portfolio that you guys are selling. And as that works down, could that lower that number theoretically as you guys move forward?
spk01: Yes, yes, it does. Every quarter, that threshold, it'll creep down from closer to 2% to lower than that, to closer to 1.5%. It's just, as Damien 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.
spk02: And just recall when they repay, we get the fees, obviously, about 1.5% generally from different sources. One is because we booked the loans at 99 and we don't amortize. We amortize the fee at that point. So it's a nice offset to the loss rate. of the interest income in that quarter. But we're building that CRE portfolio very quickly. So we already have $800 million replaced. I mean, if you think about it, that's at 4%. That would have been a $32 million hole. We would have had an 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 of CRE transactions that will close in the next 60 to 70 days. So that will be another 300 net of new loans that will come on that will be priced above 4% for the second quarter.
spk06: And do you have an estimate per hike on what your NII would benefit once through floors, Paul, by chance?
spk01: Yeah, so we actually estimate that, like right now, up 200 might be a 5% or 6% increase. That's conservative. That's based on our model. And, you know, obviously we'll try to maximize that.
spk02: Yeah, and remember, 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 or up the maturity scale in order to try to get yield in the investment portfolio. So we're down over 40% in the investment-related income because we just didn't think it was the right thing to do to generate that type of income in an interest rate environment that would have been you know, 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.
spk06: Very good. Thank you, guys. Sorry to be long-winded, but thanks for taking all my questions. Appreciate it.
spk02: Thank you, Mike.
spk00: Our next question comes from William Wallace with Raymond James. Your line is open. Okay.
spk05: Good morning. How are you guys doing?
spk02: Good morning, Wally. We're good, thank you. Hope everything is well.
spk05: Yes, thanks. Maybe just to put a bow on this last line of questioning. So in the first 200 basis points, NII doesn't benefit, but you're not liability sensitive, right? This is just, we should think about it as neutral, but the remaining loans in your portfolio are almost all floating, so that will offset the increases in the deposit costs. Is that correct?
spk02: Yes, but We're being conservative. You're in a trap with this. We don't know exactly what's going to run off and what's going to be created. It's positive. There's no way to calculate it that it's not positive. So when Paul is being conservative, it's reasonable, but it could be earlier in the interest rate cycle. So you could start seeing that benefit more like 125, 150, and then have a very large impact at 200,000. Regardless, if they do raise the interest rates, it's hard to see how that would be a negative for the bank. You know, knowing where the floors are today, knowing that our portfolio is about 70% variable, and also knowing that we could reinvest in longer-term securities, all those things are very positive for net interest income and margin.
spk05: Right, right. And as – if the Fed raises aggressively, I mean, I guess theoretically – we could get that 200, you know, the futures market tells us we're getting it this year. Does the decision by the borrower to prepay change? In other words, there's no incentive once they come off the floors. They're going to reprice at the same rate if they go somewhere else, right? So does that slow the transition out of the held for sale into the balance sheet portfolio? It could.
spk02: It could. We've already seen our rates in the marketplace start to climb. It's pretty high. It's around the 470 level where the rest of the portfolio floors are. If the market is now more over four now for anything but the larger deals, it could have an impact, but there's maturities coming anyway. If you remember... This portfolio kind of was frozen two years ago, and they're three-year loans with, you know, a 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 can't be sure. Nothing will be extended. But I think in the environment there's a huge incentive to to lock in longer-term financing if you can get your project done. And there's plenty of bank liquidity out there, so there are alternatives for these borrowers.
spk05: And presumably it doesn't really matter. Once they come off floors, you're happy to keep them anyway, right? These are all good loans from a credit perspective, correct?
spk02: You remember during the pandemic we had virtually no issues, a few hotel issues. I mean, we really had amazing credit performance from that portfolio, I think, you know, there was some worry from, because we couldn't securitize it, that there might have been some credit issues in there, but the performance of it speaks for itself.
spk05: Right. Okay. All right. Moving on, I wanted to address the expense part of the equation. I wrote in my first look that the, you know, your revenue was below expectations, but your expense adjusted down. And so, My question is, is this a function of variability in the expense base, or was the big decline in the salary benefits where you're lapping bonus accruals and stuff, and it just kind of just happened? Or do you really have that much variability, and if so, what drives that?
spk02: Well, two of the categories were easy. About $2.5 million of that was just reduced legal costs. and that's just legal bills, right? And the other one was FDIC insurance because, you know, we were 80% brokered and now we're 100% core. So those two were significant reductions. We're not going up across the other expenses, really, because we've made so many investments in 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 Salesforce level. And so they're performance-based. Everything we do is based on performance and growth and targets. And so you'll have a lower accrual on those things when performance isn't as good as the models would predict. So there isn't definitely an offset in that area. So those things together lowered our expense base this quarter. But not the FDIC performance. insurance that's based on deposits not the legal that's really depends on whatever legal issues and last year we had we had already announced that there were some sec things that they were looking at that we needed to respond to uh so there were higher costs and there was another employee suit that was also high cost so you know those things come and go the the comp the comp will always be you know ratcheted up so if we over perform at the end of the year which is With interest rates and everywhere we're going, yeah, you'll see an increase in that line based on the metrics that we use in order to judge performance and then accrue bonus for it.
spk05: Okay. Thank you, Damian. I appreciate that. I'll step out and let Frank ask a question if he's on.
spk00: Our next question comes from Frank Chivaldi with Piper Sandler. Your line is open. Morning.
spk03: Morning, Frank. Just to follow up on the comp line, so it's really just the 4Q was kind of inflated by incentive comp, it seems. Is there any sort of direct tie between the gain on sale line when you do realize these gains and some variable comp in the comp line or not really?
spk02: No. Okay. No, not the gain. It might be in the most abstract way if, say for the leasing business, if they got really good gains and it might be a discretionary bonus difference, but there's no formulaic on the gains. Okay.
spk03: 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 215 guide for the year in terms of just the gain on sale here?
spk02: Well, we thought we were going to have about four. On the vehicle part, which gain on sale? Are you talking about the CRE or the vehicle gains that we get in the lease?
spk03: Yeah, I was just talking about CRE.
spk02: Okay. Well, we think it's going to be about 400 at the end of the year. But that could 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. What are we at now exactly?
spk01: About 800.
spk02: Yeah, 800. So you think about 400 times 1.5%, that will give you the fees that will come into from those gain on sale for the rest of the year. But it could be double that. Okay. Right? So that's what we mean. This has been very – if you think about just generally what – if we were thinking about where we were from last year, it's actually been very good where we are positioned right now in this quarter. We had the PPP in there in the first quarter of last year, right? They're spreading fees. We had the roll-off and the build in the CRE portfolio. So we had a lot roll-off and a lot come on. You had the stimulus in there for the GDV, and then you had the bond runoff. So you had a lot of things that we needed to deal with, but we've dealt with pretty much all those now, and we're in a very good position, especially with the interest rates and buybacks. We're in a very good position to be able to perform as we go through the year. So we think there's a lot of variability around it, but we think we're in the – We're very happy with this quarter, and we're very happy where we are.
spk03: Great. And then just on the – you know, just back to the rate picture for a second. You mentioned the conservatism behind the 2% number that Paul gave. I'm just wondering if there's, you know, any reason to be more conservative this quarter versus previous quarters. It seems like that number's moved higher, and I'm just wondering if there's anything – On the loan pricing side, you think it will take a little bit longer to get that boost in NAI, or is it just being more conservative this quarter?
spk02: Frank, we know that generally, as this plays out, it's going to be a huge positive for the bank. So by the time we get to 23, if all these things actually happen, we're going to be in a very good position, the bank is. However, we can't predict exactly how they will raise interest rates, which loans we'll pay, how we will originate new loans, with what type of floors. You know, you have an I-block that has a floor of 3%, but you have an S-block that has no floor, right? You have a fixed-rate IRA. You have roll-off with CRA. It's just too hard to predict and give anything other than conservative guidance. If we get 250 rate increases... over the next two Fed meetings, you know, will that kind of put us at the go start? Probably. You know what 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 will have worked out any of the ambiguity. That's what we're kind of saying. So there's this 125 to 200 range where we can't really predict what ultimate impact it will have on the performance of revenue and net income. So we don't want to, you know, we can't really give guidance on that. We just know by as the year works through, we're in a very positive situation because we dealt with those four things that I just described a few moments ago. You know, those four are kind of behind us. Now, we're looking towards a much better perspective of performance possibilities, I guess, or forecast than you would have had this time last year.
spk03: Okay. And then just lastly, just, you know, a broader question on the consumer side of things. You've talked about, you know, maybe some announcements on that side. Just wondering if anything on the macro front has kind of changed your calculus there or if, you know, we should still expect to see you, you know, enter that side of things sometime soon.
spk02: I think you're talking about credit sponsorship, correct?
spk03: Yeah.
spk02: 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 will 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 in stone. So you know how things, they're never in stone until they are announced and stuff. But we're excited about that opportunity, and we think it will be very accretive to the bank. Okay.
spk03: All right, great. Thank you.
spk02: You're welcome. Thank you.
spk00: This concludes the Q&A session. I'd like to turn the call back over to Damian Koslowski for any closing remarks.
spk02: Yes, thank you for joining us today. We really appreciate your interest in the bank, and thank you, operator. You can disconnect the call.
spk00: You're welcome. Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.
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