Q2 2022 Bancorp Inc Earnings Call
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Welcome to the Q2 2022 Bancorp incorporated earnings Conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and <unk>.
Session. If you have a question. Please press zero then one on your Touchtone phone.
I will now turn the call over to address those slots.
Thank you Vanessa good morning, and thank you for joining us today for the Bancorp's second quarter 2022 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This mornings call is being webcast on our website at www dot the bancorp dot com there'll be a replay of the call available via webcast on our website.
Beginning at approximately 12 P M eastern time today.
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 that could cause actual results performance or achievements to differ materially from those anticipated or six.
Adjusted by such statements for further discussion of these risks 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.
Like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The bank's core generated 53, a share earnings from 3% revenue growth and 2% year over year reduction expense gross dollar volume G. D. V showed continued improvement with year over year growth of 5%. We would expect this trend to continue in the coming quarters loan growth continued to be strong all been.
<unk> balances quarter over quarter led by real estate bridge lending with 38% growth in institutional which includes S block IV block and RIAA financing with 10% quarter over quarter growth. Both businesses grew significantly year over year with commercial real estate growing to $1 1 billion, such as third quarter 2021, resumption and it's.
<unk> growing 35% total loans of the bank core excluding loans at fair value grew 14% quarter over quarter.
61% year over year, excluding previously discontinued assets.
Expenses decreased 2% year over year as we continue to manage expenses rigorously focused on scalability and platform productivity curve.
Current economic conditions and the rise of interest rates should have a positive impact on earnings growth over the next two years.
<unk> is asset sensitive due to its approximately 70% variable loan book and very stable deposit funding towards payments ecosystem that is spread over more than 50 payment program partners. We expect deposits to reprice to approximately 42% of fed funds increases when rates are raised by the federal reserve low rates repriced with a slight.
Lag with significant amounts of repricing. The following month. This lag was experienced in June as funding costs increased with the delayed increase in loan rates. However, starting in June previous rate increases will begin to directly impact loan interest income and net interest margin.
We believe our loan book in Securities portfolio was lower risk.
And in asset classes that have taken the losses throughout economic cycles significant amounts of liquid or cash collateral back both our S block and I black loans.
Loans have partial to 75% guarantees or 50% to 60% loan to values.
Fleet leases have the creditworthiness of our borrowers many of which are government institutional entities with an established history of minimizing losses through appropriate residual values on vehicle collateral and our floating rate transitional multifamily loans are supported by new money from sponsors and rising rents that we believe will offset the impact of interest rate increases most of these.
Loans are in states that have had high occupancy rates and economic growth with increasing populations. In addition, we have generally held purchasing government bonds and other fixed rate securities during the low interest rate environment experienced over the last two and a half years. So we have substantial capacity to add that fixed rate exposures as interest rates rise lastly, the bank.
There is also somewhat insulated from inflation as our GDP based fees are contractually based on the total value of transactions. This helps support fee growth even in a recessionary environment, where the total amount of goods sold stagnates or declines, but prices continue to rise with a strong business pipeline and rising rates, we are raising our guidance for 2022.
$2 15, a share to the range of $2 25 to $2 30 per share. This range excludes the impact of 2022 share repurchases, but includes interest rate assumptions based on fed funds expectations. We expect to issue guidance for 2023, and our third quarter 2022 earnings release, I will now turn over our call to Paul Frankel to give more.
Sales on the second quarter.
Thank you Damian return on assets and equity for Q2, 2022 were respectively, one, 7% and 19% compared to one 7% and 19% in Q2 2021.
Q2, pretax income increased $4 million or 11% to $41 million in the second quarter compared to $37 million in Q2 2021.
Additionally, the prior year quarter included $4 $3 million of P. P E related interest and fees substantially all of which was eliminated in the current year quarter.
Also reflecting the $4 $3 million PPP reduction was $55 million of Q2 2022, net interest income, which as a result was comparable to the prior year quarter. Additionally, in Q2 2022 funding cost contractually adjusts.
Just it immediately to federal reserve rate hikes, and increased to 44 basis points from 18 basis points during Q2 2021.
The immediate funding expense increases and the lag loan rate adjustments noted earlier were reflected in a decrease in our net interest margin to three three.
<unk>, 3.17% for Q2 2022 from 319% in Q2 2021.
While loan rates lag they adjust more fully to rate changes so as loans reprice, we expect that increases in loan yields in Q3, and Q4 will exceed the increase in funding costs and begin to positively impact margins and net interest income.
The provision for credit losses was a credit of $1 $5 million in Q2 2022 compared to a credit of 951000 in Q2 2021.
The credit in the current year reflected the impact of low reserves on credit deteriorated loans and a greater proportion of government guaranteed loans on our seasonal loan pools.
Those factors were partially offset by the impact of loan growth.
The credit in 2021 reflected the reversal of pandemic related provisions.
<unk> debit and other payment related accounts, our largest funding source and the primary driver of noninterest income.
Total fees and related payments income of $22 4 million in Q2, 2022 increased 5% compared to Q2 2021.
Non interest expense for Q2, 2022 was $43 million, reflecting a decrease of 2% from Q2 2021, notwithstanding a $1 $2 million settlement related to the Cascade matter.
In 2022.
The decrease reflected lower FDIC expense, resulting from the reclassification of certain deposits from.
Broker to non brokered and lowered incentive compensation related expense.
Book value per share at quarter end.
Increased 7% to 11 55.
[laughter] compared to $10 77.
A year earlier, reflecting retained earnings.
Partially offset by fair value adjustments to the investment portfolio.
Resulting from the higher rate environment.
Quarterly share repurchases have continued to reduce shares outstanding.
I will now turn the call back to Damien.
Thanks, Paul Operator could you please open up.
The line to questions.
Yes, Sir we will now begin our question and answer session. If you have a question. Please press zero then one on your Touchtone phone.
If you wish to be removed from the queue. Please prestero then too.
Youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero and then one on your Touchtone phone.
And we have our first question from Frank Schiraldi with Piper Sandler.
Morning.
Good morning, Fred.
Wondering on the day I mean, you talked about the obviously the GDP growth year over year is really strong given.
A really strong 2021, I know there are some headwinds to year over year growth.
In the first half of this year that will dissipate a bit in the back half. So I'm. Just wondering if you can update us on your thoughts on year over year GDP growth in the back half of this year.
Yes, so it's it's.
Accelerating it looks like and that's because of the.
The we expected the burn off kind of of the stimulus, but the kind of gapped up and never got down again, so it's returning the trend where over the loss of the borrow a program and the bump in stimulus. So now it's going to be much smoother, we're adding new programs. So.
The volume is so much larger than it was a couple of years ago. So.
You're going to get.
High single lower double digit growth and.
And we should we should nicely move into that as we go through the year and then the beginning of next year. He cant always predict those depending on what's happening with the economy, but it looks like we're returning to more of the double digit trend.
<unk> trend.
And are there any concerns in terms of the pipeline.
Talk of Neo bank competition, and higher cost of capital maybe shaking some of.
Those institutions.
Out.
What are your thoughts there in general.
We haven't seen it we have an incredibly strong pipeline, adding new products and new programs, we're dealing with a much more mature well funded programs and we're not only in the fintech space where across many verticals corporate incentive.
State cards.
Health care all of those things are doing well. So we haven't seen any deterioration in the more mature programs wanting to have a more.
Complex platform in order to do business, So where we were in good shape right now we haven't seen any deterioration.
Okay, Great and then on.
On the balance sheet, just wondering just thinking about growth from here can you continue to grow G. D V at a greater pace than growing deposit balances are just how are you managing balance sheet growth from here and where do you expect to be in terms of footings.
By year end.
Well, we we continue if you looked at we had extraordinary loan growth over the year over year, if you take out the discontinued.
You took out the securities portfolio and that was replacing assets that were that were running off and.
We had if you look at the quarter over quarter annualized were in the 30% range. So that's going to obviously slow down because we're replacing a lot of the loans, but youll see that continued we're targeting 15 overall portfolio of 15 or 20%.
Portfolio growth until we Max out the balance sheet.
And.
It's been disappoint, we've got some really great opportunities in the S block area, we had very strong growth and increasing.
Spreads in the real estate portfolio that should.
Calmed down a bit so we're targeting that 15% to 20% growth going into the end of the year and hopefully in that range in 2023.
Okay and in terms of like just thinking about deposit balances. We should generally just think about sort of matching that growth to GDP growth is that make.
Most of them, yes, we are.
As you know, we're very liquid we have a lot of ways to increase our deposit base, we might have to do some short term, we never know going into the third and fourth.
Fourth quarter, and then the first quarter of 2023 because of the seasonality taxes gift cards those type of things. So we usually leave it fairly open during those two quarters to see where we're going to be at the end of the first quarter. So we will know how to put in more permanent funding if necessary we did see.
From the stimulus a big increase in deposits. Once again, we we thought that would burn off that has not burned off and it's been replaced by other programs and growth in our current programs. So we expect the funding to mostly come.
As we Hasnt as it has in the past is continued growth in the 50 or more programs that we have we don't expect to.
<unk> changed our funding structure, so mostly will be based on the payments there may be opportunities grow a little bit more aggressively and then we'll either have to borrow short term or put in some more.
Longer term deposits.
Fed funds plus but thats.
That's not something we can predict.
And Thats only a result of faster than what we expect.
<unk>.
Got you, Okay, and then just finally.
Terms of interest rate hikes, I, just want to make sure I understand the math so.
70% of the loan book is variable rate.
And now that you're through the floors on the.
Cree held for sale I guess that's.
Variable rate as well so that's within the 70%.
Talk about the.
The loan betas.
Yes, so what's happened is.
You've got two things going on in the second quarter, you had some interest rate increases and immediately we take.
The funding cost part of it so it goes up our funding cost goes up but we have a lag.
We had floors, which went through number one when we also had a lag in the loan pricing. So it goes from the next month things like S block will reprice based on prime the next month.
Right. So if it was at the end of the month, you'll get it in the beginning of so for the recent 75 increase things like gas block will reprice in the beginning of August there are other things like the CRE portfolio. There based on sofa, so far as an average thats kind of backward looking about 60 days so.
That impact of the last interest.
Rate increase in June is really only going to be felt in in August .
Alright excuse me in July so you have this.
Immediate funding impact a lag in pricing in fact, SBA some of the SBA loans repriced quarterly so as we go through the year and approach 2023, youre going to have this.
<unk>.
This revenue does NIM kick in as the loan.
The different schedule on loan repricing happens throughout the.
The next six months.
Okay, great. Thank you.
Thank you. Our next question is from Michael Perito with K B W.
Hey, guys. Good morning, Thanks for taking my questions.
Good morning, Mike.
To just follow up on that last line of questioning I mean are you guys kind of willing to give any like ranger indication of where you think the NIM might be able to settle in in the back half of the year based on the updated guide I mean are we talking something like north of three 5% by the end of the year or how are you guys thinking about that.
Okay.
So it will go up.
It will go up.
Now that will go through the floor as it should go up about.
60, excuse me, 58% of whatever the increases right. So.
Across our portfolio. So you can make the calculation now that we're through the floor is like for this recent one will get 58% of that 75 basis points that just.
Happened a.
David to go that will bleed into the NIM.
Based on the fact that and then you have to obviously realize that 70% is variable. So you get this and it's lagged so is a it will obviously increase.
If we continue with the fed funds paas neutral and they're talking.
Changes, maybe a $3 50.
Our rate by the end of the year could be less could be more that's obviously going to have a big impact on NIM it'll be in the it'll go through the mid to the high threes and when we do our modeling and you looked at the fed Fund's future. This is of course very variable it could range depending on the.
Assets that we hold in all the other calculations you need to do but it'll be it'll go from if you continue with these interest rates increases that will go from the low threes to the high threes and potentially next year. If you continue with this process and are normalized.
Tightening through the two 5% range to the three and a half for 4% fed funds rate, you get close to 4% or around 4%.
Helpful. Thank you just a few more for me just on the card fees to themselves.
The sequential the linked quarter growth rate was I think a little ahead of GDP. Just wondering if there was anything in there that that could kind of revert to normalized moving forward. It at.
That we should think about as we kind of forecast the back half of the year.
No.
We're more normal now remember we had a period, where general purpose reloadable was really declining and debit was taking over and general purpose reloadable was generally higher spread.
Higher fee basis points, then debit so you had that going on and we had the tiers for the big programs and they are all through their tears, so youre going to get a better match of GDP and fee growth.
Then you would have had.
A year and a half ago. When you had massive growth in debit versus general purpose reloadable, especially energized by the stimulus payments. So a lot of that went through debit didn't go through general purpose reloadable and so you saw a disproportionate GDP growth, but not the same.
<unk>.
Fee growth.
Got it okay.
And then on the just.
The expense run rate it took a step up sequentially here just wondering if you guys could talk to that increase in and maybe provide some context of expectations for the back half of the year.
Well, that's Paul's favorite subject, so I'll give that to Paul.
Sure. So so we had if you look linked quarter, we did have an increase in.
And salary expense and.
That was driven by.
Incentive compensation.
There is some variability you have to pick up that expense when those decisions in the production.
Implies that youre going to have that expense.
So I think using this quarter as a run rate is probably what we should be doing and.
You will see some inflationary increases I think where we're very automated and we've got a lot of scalability. We've made significant investments in that so we're not looking that as it at that as an extreme increase so I think youll have modest increases from.
Here on in.
Okay.
And lastly, do you expect the tax rate for the remainder of the year to be more like.
In the first quarter or at the higher rate of the second quarter.
It'll be at the higher rate in the 'twenty it should be in the 26% range.
That's what that's what we're using for our internal planning.
Got it great. Thank you guys for taking my questions.
And thank you.
We have no further questions I will now turn the call over to Damian Kozlowski for closing remarks.
Thank you everyone for joining us today appreciate your interest and we'll talk soon operator, you can disconnect the call.
Thank you and thank you ladies and gentlemen. This concludes our conference. Thank you for participating you may now disconnect.
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