Bancorp (TBBK) Q3 2024 earnings call transcript

Thank you operator. Good morning and thank you for joining us today for the Bank Corp's 3rd quarter 2024 financial results conference call on the call of me today or Damon Kozlowski, Chief Executive Officer and Paul Frankel, our Chief Financial Officer. This morning's call is being webcast on our website at www. thebankcorp. com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p. m. time today.

The dialing for the replay is 1-800-839-1162. Before I turn the call over to Damon, I would like to remind everyone that our comments and responses to questions reflects management's view as of today, October 25th, 2024. Yesterday we issued our 3rd quarter earnings release and updated investor presentation. Both are available on our investor relations website. We will make certain four lucky statements on this call. These statements are subject to the safe harbor provisions of the private security litigation reform act of 1995 and are subject to risk and uncertainty that could cause actual results to differ materially from the expectations and assumptions we mentioned today.

These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAP financial measures during this call, additional details and reconciliations of GAP to adjust at non-GAP financial measures during the earnings release and the investor presentation. Please note that the Bank Corp undertakes no obligation to publicly release the results in many revisions to forward-looking statements which may be made to reflect events or circumstances after the date here of or to reflect the occurrence of unanticipated events.

I would like to turn the call over to the Bank Corp's Chief Executive Officer, Damon Kozlowski. Damon?

Thank you, Andres. Good morning, everyone. The Bank Corp earned a dollar for a share in the 3rd quarter. Revenue growth was led by our FinTech Solutions Group. GDP growth was 15 percent, while total fee growth from FinTech payments fees and credit sponsorship fees was 22 percent. We continue to grow total credit sponsorship balances which were 200 million, 280 million at the quarter and compared to 70 million at the end of the second quarter. We are excited about the prospects for newly added and prospective payments clients and expect our non-interest income to reflect their impact in 2025.

On the lending side, our substandard multifamily loan assets continue to be elevated. We believe we are at or close to peak in substandard assets and are employing multiple strategies to reduce that number without incurring losses. We also have the portfolio reviewed by an independent third party to validate our internal ratings. The substandard assets continue to be centered in our 21 and 22 vintage that was impacted by supply delays and a sharp rise in rates.

We continue to believe that we will have little to no losses on this portfolio due to the conservative leverage of the loans. Anticipated rate decreases should also aid in reducing the amount of substandard assets. In addition, the Aubrey property in Houston continues to be on track for the December 24 close with our deposit on the property growing from 125,000 to 375,000 currently.

The other lending lines were led by our small business lending with 14 percent, your rear growth. Moreover, our institutional business continues to stabilize and quarter end balances were essentially flat to prior quarter. In other matters, due to the potential repayment of outstanding senior secure debt of 96 million, planned buybacks will be reduced to 150 million in 2025 or 37.5 million a quarter from a total of 250 million in 24.

Our 24 buybacks included a 50 million special buyback in the second quarter. Depending on prevailing rates, we may reissue debt of 100 million or more to replace existing senior debt.

In that event, we would likely use all or most of the proceeds to increase our stock buyback. Also in our financial reporting, we will be breaking out more detailed business segment profitability for the first time. As you will see, the majority of our economics originates from the non-interest income and deposit funding generated by our payment ecosystem. The methodology we used was simple.

We charged interest expense to the lending businesses using a three year average market rate while our FinTech payments business received the resulting interest income. Those allocations are shown in the interest allocation line. The actual cost of our deposits was charged to our FinTech solutions business as their interest expense. The corporate segment includes our bond portfolio and was charged the actual cost of our deposits as interest expense.

Expenses for each business are driven by both direct expenses incurred and allocated expenses based on estimated usage. This methodology better explains how our best in class returns are generated and the central role of the bank course, FinTech payments franchise to our profitability. A schedule summarizing this view of our business appears at the end of the press release.

Lastly, we are issuing 25 preliminary guidance of 525 a share supported by our continued double digit growth in FinTech fees and credit sponsorship. Our 25 guidance does not include the impact of plan stock buybacks of $150 million that I previously mentioned. I now turn the call over to Paul Frankel for more color on the third quarter. Paul?

Thank you, Damien. While the Federal Reserve began to reduce rates in September, the purchase of $900 million of long-term fixed rate U. S. government sponsored agency securities in April 2024 significantly reduced exposure to Federal Reserve rates decreases.

Additionally, an emphasis on fixed rate loans continues in the company's efforts to optimize its margins. The majority of the increase in loans compared to June 30, 2024 was comprised of consumer FinTech loans.

We are proceeding prudently in our FinTech credit strategies and currently are generating balances with lower potential loss exposure. We believe we will be able to originate loans with higher yields and or fees in the future.

The third quarter net interest margin of 4.78% compared to 4.97% for second quarter 2024 and reflected $1.6 million for $1.2 million after tax, but prior period interest reversals on rebel loans, either transferred to nonacrual or related to loan modifications.

Reflecting those prior period interest reversals, net interest income increased 5% in Q3 2024 compared to Q3 2023. As noted in our last press release, company examined the sensitivity of its allowance for credit losses to increases or decreases in its rebel loans classified as either special mention or substandard. As a result, a new seesil factor resulted in a $2 million increase in the quarterly provision or $1.5 million after tax.

At September 30th, 2024, rebel loans classified as special mention and substandard respectively amounted to $84.4 million and $155.4 million compared to $96 million and $80.4 million at June 30th, 2024. Notwithstanding the increase this quarter in loans so classified, the respective weighted average as is and as stabilized loans of values of 77% and 68%. Based on appraisals performed within the past 12 months, continues to provide significant protection against loss.

Each classified loan was evaluated for a potential increase in the allowance for credit losses on the basis of the aforementioned third party appraisals of apartment building collateral and again which was updated and performed in the past 12 months.

Average syntax solutions group deposits for the quarter increased 11% to $6.64 billion from $6.01 billion in third quarter 2023.

The provision for credit losses was $3.5 million in Q3 2024 compared to $1.8 million in Q3 2023. In addition to the aforementioned impact of the new rebel factor, the provision for credit losses in Q3 2024 reflected the impact of $1.3 million of leasing charge offs. Of those charge offs, $600,000 resulted from transportation and trucking for which total outstanding amounts of $34 million.

While the macroeconomic environment has challenged the multi-family bridge space, the stability of the bank court's rehabilitation bridge loan portfolio is evidenced by the estimated values of underlying collateral. The $2.2 billion apartment bridge lending portfolio has a weighted average origination date, as is LTV of 70%, based on third party appraisals. Further, the weighted average origination date has stabilized LTV which measures the estimated value of the apartment after the rehabilitation is complete may provide even greater protection from losses.

Non-interest income for Q3 2024 was $32.1 million, which was 20% higher than Q3 2023. Pre-paid debit card, ACH, and other payment fees increased 16% accounting for the majority of the increase. Those increases reflected both higher rapid funds transfer income and higher pre-paid and debit program sponsorship income driven by both new client relationships, achieving scale year over year, and the continued organic growth of longstanding client relationships.

For the consumer FinTech loans noted previously, the income statement reflected the new income statement line item, consumer credit FinTech fees, which generated $1.6 million of quarterly fees.

As previously noted, we believe we will be able to originate loans with higher yields and or fees in the future. Non-interest expense for Q3 2024 was $53.3 million, which was 12% higher than Q3 2023. The increase included in 11% increase in salaries and benefits, the 892,000 after tax loss mentioned earlier by Damien and increased other real estate owned expense.

Book value per share, a quarter end, increased 18% to $16.90 compared to $14.36 a year earlier. That reflected the impact of retained earnings and also the impact of the unrealized gains on the securities portfolio, primarily as a result of the 2024 securities purchases.

In summary, the bank horse 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 believe and consider to be working-class apartments at more affordable interest rates in selected states.

We believe that our underwriting requirements provide significant protection against loss as objectively supported by LTB ratios based on third-party appraisal. Further, S block and I block loans are respectively collateralized by marketable securities in the cash value of life insurance, while SBA loans are either SBA 7A loans that come with significant government-related guarantees for SBA 504 loans that are made at 50 to 60% LTB.

Additional details regarding our loan portfolio 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 in stockholder value, while still prudently maintaining capital levels.

Such opportunities include stock repurchases, which are planned to be continued for the remainder of the year with additional repurchases in 2025.

I will now turn the call back to Damien.

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

Morning, Frank.

So, our pipeline is extremely strong right now, even more than I've said in the past, and we're seeing it, and there's been a lot of implementations over the last year, which is continuing to show momentum in our GDB, even in this month in October. So, nothing to announce, however, we're continuing to expand our long-term relationships with new product sets, including credit sponsorship. There's a lot going on there, and we're in discussions with new partners that want to move to our platform, so it's extremely robust at this time, but nothing to announce.

So, I can give you a couple of insights, are, you know, these programs take a long time to implement, and sometimes they kind of pay off all at once, so if you're looking at our GDB, and we were saying we're going to be above trend this year, now this is an estimate, and this moves around a lot, but we're experiencing above 20% now GDB growth in the month of October, and we think that you just don't know how that's going to play that are, that happen continually for the customers of the applications, you know, the program managers.

So, it seems once we have a bump up in that volume, it doesn't, it doesn't go back down again. So, we're experiencing that now, I would think that 15% number plus is also a good number for next year, and could be a bit higher, more towards the 20% range, but we'll have to see it can be very volatile.

I don't, we really haven't, it's not been enough yet, I think. It's clearly that there's building liquidity in this niche with the forward look on rates. So the market was a bit stalled for a while with new deals, and that's starting now to unclog a bit. So, there's forming pools of capital. So, when we're looking to, you know, whether it was the Aubrey or with certain loan modifications we've done on the Rebel book, they're just more capital available.

The market conditions have been, have definitely improved, as well as, you know, new investors coming in, or existing investors who look to add to their portfolio. So the, the environment that we had in 21 and 22 is kind of on the, that is something that's been repaired a lot in the marketplace. People have a much better perspective on rank growth and cap rates, all the things that you want in a good market, and that's unclog the market a bit.

So we, we really believe we're at or near peak and that's why we had a third party come in the validate and look at all the loans and ensure that we weren't being too aggressive and downgrades and that it was right where it should be at the standard of the market.

We have a plan in place, we believe that we can reduce it in the next two quarters. So we have identified properties working with the sponsors, we've modified certain loans and we look to, we're looking to offload or have those loans financed. So we're hoping to make, first of all, we think we're at the peak near the peak.

We think there won't be a lot more and we think we can reduce that, that balance number on the substandard criticizing classified assets over the next two quarters. If you look to the full resolution of that group of loans, that'll take a little bit longer, but that'll be throughout 25 and by the end of 25, we should have all or most of those loans refinanced.

Thanks for the caller.

Hey, how's it going, David?

So, right now, we're working with multiple partners to implement new programs. I would say there are three that are well-known providers that are looking to implement their programs at the bank work. The ramp up is primarily with Chime now and four product areas and it'll probably be 400 million-ish, we're thinking by the end of the year in footings.

Now, the velocity of those loans is very high, so we've had about a 1.6 billion actually lent through, even though the balances are not very high, it's the repayment and recycling of those loans. That's very quick and that's why those fees grew so quickly. So, the end of next year, depending on the time of implementation, we expect the balances to be around 900 to a billion by the end of next year and it does look like the growth after that could be substantial.

We're not putting a number on it, but we're talking about a doubling of those balances, we think, at the minimum by the end of 25. So, that obviously would generate a lot of spread and fee revenue because of the velocity of the loans. So, it's a good example to show that our guidance, if you look at our guidance for this year, there's a lot of momentum in that business that we think will be able to meet our full year guidance with our fourth quarter, even though our run rate right now, even though you take out those one-time items, we mentioned is more like 111.

So, we definitely have a $1 to $2 million opportunity just in that bucket and the credit sponsorship in the fourth quarter.

We haven't just finished our full implementation of something we mentioned before, which is the rapid funds transfer balances, RFT balances per block that we mentioned in the past. That is a $1 to $2 million opportunity and our GDP, as I mentioned below before, is significantly above trend. All this is volatile, so these are just estimates and that is a $1 to $2 million opportunity. So, you have a situation where if you look at that 111, that's about $0.07, so you're ready at 118 for the fourth quarter, but then, because our deposit balances are much higher than expected, we're able to fund our bond purchases without any borrowings right now. So, that's another $1 to $2 million opportunity, that's how we, so this area, the FinTech space, is showing rapid, rapid above trend growth with new fee sources, and it's very encouraging.

So, our asset sensitivity has continued to decline. We moved it from 8 to under 2 with the bottom purchases and putting on fixed rate exposure. So, our NIMM for 2025 should be very stable, so you have to add back some of the reversals we had in the third quarter. So, the NIMM should be in the high force, probably in the 490 to 5 range for 25.

And depending on, we don't think it's the Goldman forecast of 3 to 325. We still think the Fed will be around the 4% range on Fed funds. If that happens, and we continue to grow our deposit sources and the other fee income, it's fairly easy to get to that 525 number we put on the table for 25.

Yeah, there was an application glitch where, in those situations, we have to rename files into it manually, and because of a naming convention, and a whole bunch of serendipitous things that we've all put in multiple controls to prevent, we had a loss on return, like, non-sufficient fund files, four of them. And so they got delayed. And to avoid confusion, working with our partner, we decided to share the cost and not submit the files late, which might have caused consumer confusion.

So this is, we believe, a one-time event, very, a whole list of serendipitous events happened, and we've closed those gaps, and we've even changed the naming convention to ensure that can't happen again if there's another application failure. So this hasn't happened before. I've been here eight years. We've significantly improved the platform. It's one of those things, and it's not systemic.

Well, it's hard to know because, for example, when we had fixed rate exposure that we put on during the pandemic, for example, in our activities like SBA, but leases that were done, you know, at the beginning of the low interest rate or at the end of the low interest environment. So that's burning off. So you're, you are getting higher rates in some of our businesses. And then it's saying some new rebel loans that would actually be lower rates. So it's hard to tell. I think it'll be basically a wash.

The real game changer is non-interest bearing deposits. So as I said, the thing that we can't predict is our deposit levels, even though they're very, they're well above where our estimates were at the beginning of the year. So that's helping things like the funding of the bond purchases. And then also, obviously, the amount of areas where we don't pay that share are growing. So I think it'll be basically a wash. I don't think it'll, I think you're going to stay in that 490 to five range. I don't think there's going to be wild swings unless we have a one time event or like we've had a reversal in the previous and the last quarter.

So it'll be, I think it'll be fairly stable. It's hard to predict. It might move around a lot, but it's just, there's ends and outs basically. So you can't really give a good estimate. So we've estimated that it's going to be fairly flat.

I'll give that to Paul. Paul, would you like some time?

Yeah, sure. So we do have a hundred percent, like, for instance, the consumer. The two hundred eighty million dollar consumer loan. They go, those go in and a hundred hundred percent. So there was some movement as you suggested. But really the changes, the quarterly changes were really kind of minimal. We monitor the capital and we do those projections quarter to quarter. And they won't, they're not going to change meaningfully. And because we're generating so much earnings, like we have that scheduled out. So that will maintain those ratios and that can take it into consideration when we estimate the guidance.

So it won't have any impact.

Well, that's exactly why, because it's really theoretical. The current see still stands for current expected credit, credit losses. So we don't really expect any. And that's based primarily on the LTVs of the, as is LTVs and the as stabilized LTVs. And so we don't really expect any losses on a portfolio. And that kind of is difficult to, to reserve against when you don't really have any objective means of doing so. But to the extent you do have an objective means, which is the, which is the level of classified assets, then theory would suggest you would add some, some level of, of, of reserve.

So we're being disciplined. We're staying with the theory, but on the basis of the strength of the LTV, it's a modest increase, which by the way, as, as the level of substandard loans. And, and, and special mention loans goes down that actually gets, you have to consider that that should get reversed. But it really is a theoretical accounting requirement and we're staying disciplined to it.

Yeah, we do expect that. Yeah, we do expect that the modifications are peaking. We have multiple levels of, of review. We have the department itself based on its detailed knowledge of each loan has to send a quarterly certification to us. The executive management and a whole host of control parties that identifies all the problem loans on top of that. We have a layer of credit review loan review and as Damien mentioned earlier, this quarter, because we do have an elevated amount of substandard loans. We called in a yet a third party to, to review all the, to view a very significant amount of the loans just to make sure that they had all been identified.

So that really is the basis of why we think that the loans with issues have been identified and we think they're peaking.

It is, it's, we haven't sold any gain on sale. So this is all on balance sheet. And it's, and, and in this case, it's mostly fees for getting the money early. So we would or not, while we get a spread on the loan, our business partner is giving free advances of which the source of income is actually if somebody wants it, even though they can get it in 2 days or. 3 days at the most, they want it immediately. And so they, you know, it could be a $50. They want it and they pay a fee based on getting that money early.

And because it's, you know, once again, this is a kind of a rapid loan. And they need the money at that point. And so they're willing to pay a small fee in order to get that money. And that's the majority of those fees is that 1.6 million is the early. Basically getting the money a little bit early. And the client, the customer is willing to pay a small fee to get that.

But we also have secured yet. Yeah, we also have secured credit cards. And while you don't see fees, the income for that, that, that benefit to the bank is significantly reflected in greater deposits and a lower cost of funds.

Well, it will change because the partners that were will be an expansion of these type of pro with kind of 4 product types now. Kind of variations of credit like products with one of our partners trying. But our new partners that were implementing will need to or have the business model distribute the loans. You know, we will hold assets for 30 to.

Three to 30 days. And then they will be distributed to investors. Now, there will be also certain assets that we like or depending on the program, we will hold in 5% or 10% of those assets longer term. And those are very high spread loans, obviously, compared to our traditional lending. So there will be 3 types, right? Secured on balance sheet, heavy fees, they'll be fully distributed 3 to 30 day underwriting risk. But once again, they'll be small spread, but a lot of fees, a lot of velocity, and then there'll be a small portion of multiple different programs that will be on balance sheet. So be very diversified. Our future look, if we've said to the market, you know, in 5 years, but we think it's going to be sooner now because the balances, we think there's just such a large pipeline and the programs that we've already implemented are going so well.

That we want, you know, 1520 programs, it'll look similar to our banking as a service on the on the debit deposit side. It'll be diversified with the 3 business models that have already detailed, but in this case, we also get all the payments activity too. So this activity is high velocity, high fees, and when we hold it higher rates off the back of our banking as a service debit infrastructure, so it's extremely profitable business.

Thank you, everyone, for joining us today. Have a great day and operator. Could you please disconnect the call?