Good day and welcome to The Bancorp, Inc. Q1 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing star one on your telephone keypad. Please note today's call will be recorded, and I'll be standing by if you should need any assistance. 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 spe`ak 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 $1.06 a share with revenue growth of 8% while expenses were 3% lower than first quarter of 2023. ROE was 28%. NIM was 5.15% compared to 5.26% quarter-over-quarter, mostly due to the increase in Fed funds sold and 4.67% year-over-year. And the efficiency ratio improved from 42% in the first quarter of 2023 to 38% in 2024. The FinTech Solutions Group continued 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 million revenue in the first quarter of 2023 due to a processing delay, fee growth was 16% year-over-year. We continue to add new partners and expand our product capabilities with the existing partners. Some of the highest growth areas of 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 innovate. Their product sets will maintain 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. It 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 2024 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, The Bancorp's 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 eight-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, where an increase of 0.8%. The cost of deposits in those respective periods increased by only 0.3% - 2.4%. Those factors were 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. Non-performers 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 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 released 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. The origination date as-stabilized LTV based on the third-party appraisals for the portfolio was 61%. For the banks' REBL 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. Non-interest expense for Q1 2024 was $46.7 million, which was 3% lower than Q1 2023. 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 504 loans that are made at 50%-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? Yes, sir. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself at any time by pressing star two. Once again, if you would like to ask a question, please press star one. Our first question will come from David Feaster with Raymond James. Please go ahead. Hey, good morning, everybody. Good morning, David. Maybe let's just start with the elephant in the room and touch on this REBL credit. It looks like y'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 decis ion rather than just selling it today? Any specifics that you can with this credit, what you need to do, the expenses maybe that'll come from that, and just the timeline of when you think it can be stabilized and sold at no losses? Okay. So in situation. Yeah, go ahead. Well, in situations like this, we go through a process, and when the sponsor, in this case, has 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 6-12 months in order to lease up the entire property. So we're working with the property manager. We 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? Yeah. So I would add that we actually 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'll take at least several quarters for that to happen. Okay. 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 REBL book maybe more broadly? Are you anticipating more issues like this one, or 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. Okay. First, there was a bit of what I would characterize as a wave that you see in our numbers today. And this originated mostly from the 2021 and 2022 vintage of loans. So 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 into 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 because the takeout, even though it's maybe less sales of these properties, there's a GSE where you're going to have refinancing 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? Yeah. 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 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. 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, 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 y'all. I'm just curious if that's the case and maybe how the pipeline's shaping up? That's Rapid Funds ecosystem. That's where our relationship with Block is. We've had a small fraction of that volume come into the first quarter, less than 15%. 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. 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. It's very strong. It's only with very large providers that today have significant volumes. When we do add three, four partners a year, up to five partners a year, they bring a lot of economics to the table, and they're very accretive. It hasn't changed. The last few years, it's been like this. The scrutiny on the industry, obviously, allows us to get visibility on almost all major programs that are looking to maybe change your provider. So it continues to be the prospects of the business continue to be very strong. That's great. Glad to hear it. Thanks, everybody. Thank you. Our next question will come from Tim Switzer with KBW. Please go ahead. Morning. Thank you for taking my questions. I had a follow-up on the REBL portfolio, the credit performance we've seen. There was the increase in NPA. It looks about $6 million that moved into non-performing above that $39 million loan. Could you provide us some color on what also drove the increase beyond that? And then if there's any other kind of notable loans that have stopped paying but not yet in non-accrual 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 in terms of charge-offs is primarily the trucking and long-haul transportation. I think they just happened to hit 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 the SBL and the leasing non-performers. 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. It was 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-$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. Okay. So these are broad strokes. And remember, we run models and things to get to 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, 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 moved 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 very long time to buy these purchases. We have 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 six months with the products that we have are originating in the loan and 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 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. Great. Thanks, Damian. That's a very clear strategy. I'll jump back in the queue. Thank you. Our next question will come from Frank Schiraldi with Piper Sandler. Please go ahead. Hey. Good morning. 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%+ 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 one quarter. So we still think that'll be above trend, above the 15%. Now, the fee growth was 16%, is very high if your GDV 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 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. But we still think it'll trend upwards. And especially with the addition of new partnerships like Block, you're going to see enhanced fee growth realization on GDV. And it's surprising 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 announcements. So is this more of a 2025, maybe, incremental boost to revenue growth, the Block partnerships? No, 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'll build throughout the year. But remember, Block is obviously a large leading fintech with already significant volume. This is the adoption of them into our ecosystem and then their continued growth. Gotcha. Okay. And you said some of that revenue was actually in the first quarter, or are you saying in the quarter now? The first quarter, there was a small amount of that revenue in, yes. Okay. And then just on the REBL book, obviously, bringing that loan into non-performers was to be expected. And now in OREO, and you talked about stabilizing it over some time. I guess just curious why, obviously, as you noted, you're open to bids. 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 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 2022. 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 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 troubles, but it's far along. There's some work that needs to be completed. We never want to get in the situation where 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 third 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. As you stabilize, as you finish improvements, how are the costs there? How is that expense? Actually, for the construction, for the improvement, the carrying costs of the building? How is that accounted for and any sort of expectations along those lines of what 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 costs? 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'll be at most under 10%. Yeah. And remember, as you lease up, obviously, the LTV actually goes down because as you expend, you release units, and they kind of offset each other. So by the time you're done, you actually end up with this. 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, at 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 sponsors probably put additional capital in already and now have 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. 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 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 scrutinize the portfolio. We do not think there are losses in the portfolio. And then just lastly on that front, obviously, we'll get more information in the queue, which is a little ways out. But in terms of any specifics you can give us on the REBL book in terms of any other additional delinquencies you're seeing in that book that will pop up in numbers in the queue 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 a wave. It was like a It was like a wave, right? And it was originating from the shocks I talked about. And this is towards more of the last third 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. 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 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? Yeah. Yeah. So, Frank, 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 is 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, if you look at, of 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 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 that, as Damian said, that we don't see losses in the portfolio. Yeah. 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 decade, 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 non-performing/OREO status next quarter. Well, the $39.4 million is the big one, so. We've been discussing that. You have all the information, I think, that we have to ascertain that there is not loss indicated in that property. Yeah. Okay. Okay. So, I guess we'll get the criticized, classified, the delinquency numbers. We'll get that with the Q. Yes. Of course. Yes. 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 just wanted to see if there's any color around your thoughts there around repurchases. Yeah. So 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, 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 we don't think it aligns, our PE ratio being today under 10 and our ROE being 28%. And obviously, our efficiency ratio at 38%, our ROA at 3%. It just doesn't historically reflect PE 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. 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. Okay. All right. Thanks for the caller. Thank you. 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. This does conclude the Bancorp Q1 2024 earnings conference call. You may disconnect your line at this time. Have a wonderful day.