Q3 2022 Bancorp Inc Earnings Call
Good day and welcome to the Bancorp Inc's third quarter 2022 earnings Conference call.
All participants will be in listen only mode switching.
Should you need assistance. Please signal a conference specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Audrey is very soft Investor Relations. Please go ahead.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's third 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 call is being webcast on our website at www dot the Bancorp dotcom there'll be a replay of the call available via webcast on our website beginning at approximately 12 P M eastern time today.
The dial in for the replay is 187734475 to nine with a confirmation code of 5997176 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.
But for Mac in 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.
Further discussion of these risks and uncertainties. Please see the bancorp's filings with the SEC listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward looking statements, which may be made to reflect events or circumstances. After the date hereof or.
To reflect the occurrence of unanticipated events.
I'd like to turn the call over to the Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The bank core generated 54 cents per share earnings from 14% revenue growth and 9% year over year expense growth exclusive of the $1 75 million dollar FCC civil monetary penalty. This quarter net income climbed 8% year over year with <unk>.
Strong increases in net interest income and G. D D. Gross dollar value of transactions with the impact of those increases partially offset by the FCC settlement pretax income rose, 21%, excluding excluding that settlement net interest income and net interest margin significantly increase this quarter net interest income was up 27.
Driven by our 70% make some variable rate loans and higher balances NIM increased from 3.17 in Q2 to 3.69 in Q3 as fed fund increases disproportionately affect loan rates versus funding costs, which are contractually contained period end total loan balances.
Excluding held for sale increased 11% over the linked quarter led by real estate bridge landing with 34% quarterly growth.
D V grew 15% compared to Q3, 'twenty, one with significant growth across most verticals with the exception of general purpose reloadable programs, which continue to show modest declines due mostly the adoption of debit by our Fintech partners card fees year over year increased 5% and other payment fees increased 17, four the total envelope.
Activities in Fintech solutions group fees in aggregate grew 6%.
Due to product and customer expansion from our current partners and new members to our ecosystem. We returned to historical trend growth in the third quarter first quarter of 'twenty two showed only 2% GDP growth over 'twenty, one due to the impact of stimulus in 'twenty, one and a loss of <unk>. The second quarter showed improvement growing 5% over 2021.
As these impacts lessened, we believe the third quarter reflected a more normalized G. D V run rate and anticipate high single to mid double digit growth rates to be sustained over the foreseeable future.
Revenue growth continues across our platform as lending volumes steadily increased and new payment partners are added to our ecosystem. The expansion of both net interest margin due to rising rates and payment fees across our verticals should support significantly increased profitability. In 2023, we are issuing preliminary guidance for 'twenty, three or $3 20 a share.
Excluding the impact of future buybacks, but included the impact of rate increases based on Fed fund futures. We also reiterate 225 to $2 30 guidance for 'twenty two the three 'twenty guidance for 2023 would represent approximately a 40% increase in earnings per share over 2022 and result in an <unk>.
ROA percentage in the mid twenties, and an ROA above 2%. We are also planning to increase our share repurchases to $25 million, a quarter or $100 million in 2023 from $15 million a quarter or $60 million in 2022, I'll now turn the call over to Paul Frankel to give you more details on the third quarter. Thank you Damian.
Return on assets and equity for Q3, 2022 reflected the impact of the $1.75 million SEC settlement and were respectively, 1.7% and 18% compared to one 8% and 18% in Q3 2021.
Q3, pretax income increased 6 million or 16% to 42 million compared to $36 million. In Q3 2021. In addition to considering the current year $175 million SEC settlement in that comparison the prior year included <unk>.
$1.2 million of Pvp related interest and fees substantially all of which were eliminated in the current year quarter.
Also reflecting a $1.2 million P. P. P reduction was $65 million of Q3, 2022, net interest income, which nonetheless increased 27% over Q3 2021.
Additionally, in Q3 2022 funding cost contractually adjusted immediately to federal reserve rate hikes and increased to 1.19% from 18 basis points. During Q3 2021, while funding costs generally adjust immediately they adjust to only a portion of ray.
It increases.
Loans on a more lag basis adjust more fully the majority of these loan rate increases occur over 90 day period.
As a result, continuing quarterly rate hikes in the second and third quarters of 2023 led to an increase in our net interest margin to 369 3.69 in Q3 2023 22 from 3.17% for Q2 2022 as well.
<unk> continued to reprice with continuing expected rate increases we believe that increases in loan yields in Q4 2022 and in 'twenty 'twenty three we will continue to exceed the increase in funding costs and continue to increase margins and net interest income.
Provision for credit losses was 822000 in Q3 2022 compared to $1 6 million in Q3 2021.
However, $3 $3 million net unrealized fair value loss was reflected in net realized and unrealized gains on commercial loans at fair value, which reduced diluted net income per share by approximately four cents there.
The loss resulted primarily from the only movie theater in the company's portfolios that loan was originated in 2015 and was a legacy loan from the initial entry into the C. M. D. S securitization business, which was subsequently discontinued after discontinuance non SBA loan originations.
Were primarily comprised of.
The 2.15 billion of non SBA commercial loans at fair value and real estate bridge loans, which together comprise.
Comprised of non SBA CRE portfolio 2.05 billion are comprised of apartment building loans.
Prepaid debit and other payment related accounts, our largest funding source and the primary driver of noninterest income total fees and other payments income of $21 million in Q3, 2022 increased 6% compared to Q3 2021 non interest expense for Q3 2022 was.
$45 million, a 14% increase over Q3 2021 exclusive of the $1.75 million SEC settlement FCC settlement noninterest expense increased 9% the largest component of that increase was a 12% rise in salaries.
<unk>, reflecting higher incentives for business generation financial crime, and compliance expense and higher employee insurance expense book value for share at quarter end increased 6% to $11.81 compared to $11.13 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 should continue to reduce shares outstanding I will now turn the call back to Damien. Thank you Paul operator could you. Please open the line for questions.
Absolutely we will now begin the question and answer session to ask a question here if I started in the one on your Touchtone phone.
We're using a speaker phone we ask you. Please pickup your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Today's first question comes from Michael Perito VW. Please go ahead.
Hey, Mike Damian Paul Good morning, how are you guys.
Very good thank you.
Great. Thanks for taking my question. So I wanted to start on the New guide I I. Appreciate that you guys probably aren't looking to give a lot of line by line color here, but I was wondering if you could maybe give us some flavor on what some of the key drivers are of that that 40%.
EPS growth rates at the $3 20, EPS Guide suggests I mean, I imagine the NIM probably Scott.
Yeah, well the NIM is a big driver.
You can give them great. Thanks.
Sorry, we lost you a bit there. So the biggest driver is the net interest income so as Paul was saying, we get the deposit immediately re prices, but we get this most of the loans reprice over a 90 day period.
So we've got this lag that's a building profitability that's going to happen over the next six months as they continue to raise rates and we really won't feel the full profitability effect.
Until you know somewhere between May and June of next year, if it's a the.
The current fed funds predictions. That's one main driver of the other main driver is just the payments continues to restore.
Restore to trend.
And we're seeing that fee growth come up we expect it to better match the actual GDP growth over the next couple of quarters. So those two things combined will really have a very large impact on the net income realization from our revenue.
And what's driving the pickup in card fees I saw on the release you guys mentioned, there's a couple of new partners and any other color there would be if it sounds like you think that could get up to a double digit rate, maybe the next quarter or two.
Yeah. So.
Totally depends on which programs grow after the you still have a little lag.
G D V is going down and prepaid reloadable, which is more profitable and we're building more debit so theres still a little bit of that in there, but we renegotiated over the last couple of years.
The proportion of interchange versus deposit funding, we get from some of our partners because they wanted more interchange and so right. Now you saw we've been predicting around 40% to 42% deposit beta with us getting about 58%, but we had that pretty much this quarter, but we still have that lag so some of them.
That fee is being taken into the NIM.
Because we're getting more of the deposit funding. However, when we look at our portfolio. We've got a couple of new Big partners coming in we have sustained profitability from some of our large accounts and we don't have a lot of additional tiers that we're gonna breakthrough, where theres pricing lower based on volume. So we should see that 6%.
You know get up closer to the whatever the GTA V is so we expect the GDP is still to be double digit.
Mid double digits over the next year and we are hoping that those that fee level is going to be more like nine to 11, maybe even a little bit more percent, that's kind of where our estimate is.
Great very helpful and then just lastly.
For me I'm on.
On the Opex side.
Paul any thoughts on where that there was a little noise this quarter any thoughts on where that might settle in and if you look ahead to kind of the first quarter of next year.
Should we expect some kind of inflationary pressure around competence salaries and benefits and things of that as we think about the run rate for 'twenty 'twenty three.
Yeah, I think the statistics ive been looking at where is that nationally.
Salary increases or are in the 5% range.
So you know we have some pressure on us we think its fairly modest.
So, but we're not you know obviously, we live in the same economy as everybody else and there is more inflation, so it'll increase more than a little bit more than 3%, but we still think that that is going to be modest and that our earnings will continue.
To be driven by the significant growth in revenues and we won't we're not gonna add.
The.
The platform.
Ross has we've done a lot of work on the efficiency side. So there, while we're still adding volumes greater than 10% in the loan book.
Youre not going to get the same growth in head count. So we're gonna have limited head count as a percentage, but we will have absolutely some inflationary pressure probably not more than 5% on the.
On the on the payroll side now the other expenses that had been very controlled so there might be a few instances where those are going to be in fact.
Affected but.
We have some long term contracts with some of the services that are provided to us. So some of those are inflation protected over next couple of years.
Very good. Thank you guys I appreciate you taking my questions have a good weekend.
Okay. Thanks, a lot Mike.
And our next question today comes from Frank Schiraldi, whereas Piper Sandler. Please go ahead.
Good morning, Frank.
I also just wanted to try and focus if I could add a little bit on the guide because I think that's the most important number that we saw in the quarter just given what is really bit growth, obviously yep, what the when you talk about the pipeline and the.
The card fee kind of matching GDP.
So are you, saying that you really only need or you really sort of a you know.
Indicating maybe low double digit growth in card fees don't want ahead. So if you've got you know 10 or 11% card fee growth over the next year. That's that's supportive of that 320 number.
Ah yes.
But there were being on the three 'twenty just to make a general statement, we're still a quarter away from the ended the year and Theres a lot of volatility of the marketplace. So we're very careful to make sure that if we're going to put out a preliminary guidance that it is our guidance.
That we think is thoughtful depending on the market environment.
So there's a wide ranging scenarios.
And what could happen next year, including both a significant recession to a soft landing right.
We're definitely put a guidance and that we feel regardless of the market conditions that the bank will be able to meet so they're there. It's a conservative thoughtful scenario bill three 'twenty that we think will be able to meet because we have the ability to adjust what we're doing as a company.
In order to make sure that we can.
Meet those expectations, but the the guide itself are the fee the fee part of it is a small part of it just proportionately just because of the the.
The significant impact.
The interest rate increases so if we if were anywhere near that.
The fed futures, which right now is between $4 50, and $4 75.
The fed will stop.
Raising and that raise will at least maintain 450 at the end of the year that <unk> should be easy for the bank to me.
Okay.
And so I guess that would be the rest of the 320, if we do go into a deep recession and the fed turns around and starts cutting rates, that's because that's a big part of the of the growth.
Yes, so we yes, we modeled that out but you would have to cut it.
We'd have to be severe and a lot of our floor loans new loans, we have had floors like for the real estate portfolio. So.
It would be we'll update the guidance, where we're we're listening just like everybody else everybody. You know you could turn on CNBC for a four.
30 minutes and have such wide opinions on what's going to happen.
With the economy that where we're being careful as we were during the pandemic.
To ensure that we're not giving the best thoughtful guidance that we can and we'll update it as we get more clarity.
Okay, Great and then.
Just on <unk>.
I guess similar line of questioning but just in terms of the balance sheet.
Its historic less several years I've been sort of a mix shift.
To.
Loans and out of lower yielding securities.
As we think about the balance sheet over the next year. So we think that level of securities balances has sort of stabilized youre going to start moving higher or.
And so you know increase the overall level of size of the balance sheet.
And where do you kind of see that.
Over the next year.
Falling out in terms of you know.
Total asset size.
So.
We have a lot of room on the security side, because we purposely stopped buying securities.
Three years ago, three and a half years ago, when the interest rates kind of tapped out on the 10 year alarm $3 30, I think and that was purposeful.
We bought a lot of securities at that time, it took some asset sensitivity off the table, but we really did.
Put a drag on profitability, we just thought as Paul was saying before we really took a position that.
Both the monetary and fiscal stimulus was going to lead to significantly ultimately to inflation and significantly higher rates. So we have a lot of room to put on fixed rate assets.
As we tap out and interest rate cycles. So we will be we're not sure when usually it's.
Some were prior to the last interest rate, we're keeping our eyes on it but we will add.
And I'm thinking amount of bonds.
We are around 800, we used to be around $1 5 billion. So.
Regardless of that.
And that's really to take a lock in the obviously the fixed rates, so and theres other ways to do it too. So we're definitely going to take fixed rate exposure on our balance sheet over the next year and it totally depends on how what's going on in the marketplace, but we're hoping to be honest with you were hoping for more normalize.
Interest rate.
Situation.
We're hoping that we don't.
Inflation, it's two and a half and you're at zero.
Interest rates youre going to have inflation and you probably should have your fed funds somewhere between 102 hundred basis points higher than inflation in order to have a normalized economy. We sure hope that's what happens if that happens the bank is incredibly well positioned for the next couple of years to generate significant earnings growth.
Great and then just last question on that front.
You've talked in the past about the.
The consumer business consumer lending business.
Guy.
Have any sort of new business lines.
You expect you're going to ramp up too.
In 2023 to provide sort of.
To help with this guide or is it really just the.
A business that's on the bank now in terms of the growth rates the margin.
To get to that 320.
Yeah. The base the base III 20 doesn't include a lot of extra <unk>.
To the point that you know certain lending.
We've cut back for our own purposes based on the fact, there might be a hard consumer landing two more nominal amounts we're gonna be in that business, but we're talking a couple of hundred million instead of six or 700 million. So we've really pared that back in the 320 <unk>.
That's total upside we'll see if we get that part you know we will have a higher loan growth we've kind of looked at the loan growth and said you know that theres obvious areas, where we're doing can some consumer lending like S block that might be impacted so we've been very conservative on our $3 20 preliminary estimate and as we get more clarity.
Going into this quarter and you know.
It is.
You never know until you see it because we've got a complex.
The funding source for many different programs. So we have to see the deposit growth and we have to see where in the economy things are slowing down though we have some areas like in leasing we still have a tremendous amount of demand from backlog for new leases. So there's offsets there so where we don't have.
Lot of fancy nuts, and the 320, let's put it that way. So we it's fairly insulated from a reliance on big new programs.
Okay, Alright, thank you for all the color.
Okay. Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Damian Kozlowski for any closing remarks.
I appreciate everyone attending one thank you and talk soon.
Operator, you can disconnect the call. Yes. Thank you. This concludes today's conference you may now disconnect your lines and have a wonderful day.