Q4 2022 Bancorp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Bancorp, Inc, Q4, and fiscal 'twenty to 'twenty two earnings conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
And at times. During this call you require immediate assistance. Please press star zero for operator. This call is being recorded on Friday January 27, 23, I would now like to turn the conference over to address Vaslov's. Please go ahead.
Thank you operator, good morning, and thank you for joining us today for the Bancorp's fourth quarter and fiscal 2022 financial results conference call on the call with me today are came in cause Laskey, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This mornings 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 18776747070 with a confirmation code of 735 96 one.
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.
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 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 now I'd like to turn the call over to the Bancorp's.
<unk> Executive Officer, Damian Kozlowski Damian.
Thank you Andres good morning, everyone. The Bancorp earned 71 cents a share in the fourth quarter driven by 28% revenue growth while expenses were approximately flat year over year GDP gross dollar volume transaction growth accelerated to 13% year over year, driven by continued double digit growth in most categories.
Core loan growth, which excludes loans previously generated for securitization was 4% quarter over quarter led by floating rate CRE multifamily with 12% growth year over year core loan growth was 45% with 168% growth in CRE multifamily, 22% growth in institutional which includes as block.
I block plus.
A financing at 14% growth in commercial which includes fleet leasing and SBA loans, excluding PPP loans net interest margin grew dramatically quarter over quarter from $3 six nine to $4 21 compared to $3 51 in the fourth quarter of 2021, driven by the impact of Federal reserve rate hikes.
Efficiency and productivity continues to be a key focus of management with expenses approximately flat year over year ROE rose significantly over prior periods to 24%.
2022 was another year of strategic and financial progress for the Bancorp, we continue to improve our ecosystem for our Fintech partners, while investing across our platform to improve functionality and efficiency in all business lines. Two O. Two three should show continued financial and operational improvement with a focus on continued rigorous risk management.
Credit oversight. In addition, our focus in 'twenty three we'll be determining our next strategic steps as a company. However, after having established exemplar performance. We are now turning our attention to the major initiatives, which was sustained profitability and growth as we approach the regulation I I Durbin balance sheet limit of 10 billion.
We believe that TBB case unique capabilities can be monetize more broadly and that's a 10 billion limit will not limit our ability to generate increased profitability. This incremental profitability, we'd be generated from fees by distributing both assets and liabilities GDP growth and the sale of unique.
<unk> services and other platforms that will drive sustained EPS growth and ROE for.
For 2023, we are confirming our guidance of $3 20, a share not including the net impact of share buybacks of approximately $25 million a quarter or 100 million for full year, we will update our guidance as we learn more in the coming months. However, we believe our guidance is attainable even.
Even with significant economic ambiguity and potential stress in the macro environment I'll now turn the call over to Paul Frank Our CFO for more details on the fourth quarter and full year 2002.
Thank you Damian <unk>.
Return on assets and equity for Q4, 2022 were respectively to 1% and 24% compared to one 7% and 17% in Q4 2021. These increases were significantly driven by a 47% increase in net interest income.
In addition to the rate sensitivity of the majority of our lending lines of business management has structured the balance sheet to benefit more from a normalized and higher interest rate environment. Accordingly over a period of years. It is largely allowed as fixed rate investment portfolio to pay down while limited purchases were focused on <unk>.
Bill rate instruments. Additionally, the rates on the majority of loans adjust more fully than deposits to federal reserve rate changes Accordingly in Q4 2022, the yield on interest, earning assets increased to five 9%, while the cost of deposits had increased to one 7%.
These factors were also reflected in the 4.2% NIM in Q4, 2022, which represented a significant increase over prior periods.
The provision for credit losses was $2 $8 million in Q4, 2022 compared to $1 6 million in Q4 2021.
The $2 $8 million included an upward adjustment of approximately $900000 in the qualitative economic factor Nrc's, a model, which is forward looking to the extent that economic uncertainty is resolved in the future a reversal of that provision component would result.
Firstly deterioration in the economy could result in additional forward looking provisions.
Prepaid debit and other payment related accounts are our largest funding source and the primary driver of noninterest income total fees and other payments income of $22 million in Q4, 2022 increased 10% compared to Q4 2021 now.
Noninterest expense for Q4, 2022 was $43 million, which was comparable to Q4 of 2021, a decrease in legal reflecting the resolution of various matters and a decrease in salary expense offset increasing FDIC insurance and travel expense.
Book value per share at quarter end increased 10% to $12.47 compared to $11 30, a year earlier, reflecting retained earnings partially offset by fair value adjustments to the investment portfolio, resulting from the higher rate environment or at least share repurchases should continue to re.
<unk> shares outstanding.
I will now turn the call back to Damien Thank.
Thank you Paul operator could you open the line for questions.
Hello, ladies and gentlemen.
If you wish to ask a question. Please press the star followed by the number one or you have touched on phone you'll hear a three pronged acknowledging your request if he would like to rejoin your request. Please press the star followed by the number two if you are using a speaker phone. Please lift the handset before pressing any keys.
One moment. Please for your first question.
Your first question comes from Frank Schiraldi.
Please go ahead.
Morning.
Good morning, Frank.
Wondering if you guys could a good strong quarter on GDP growth year over year, I guess really you had been guiding to something along these lines, but just your thoughts on.
Runway from here and and how that how much of that translates through to.
Card fee income growth.
Yeah I think this was a very good normalized quarter, we had the stimulus we never gapped down and we've been building all year back to trend. So we had one I think it was five in and now we're at 13, I think youre going to see this range.
12% to 15% GDP growth going forward. This year, I think youre going to see around 910, maybe even 11% translation into fees year over year.
And that was before that was kind of the trend before the big stimulus bump so very encouraging when we look at our pipeline. We've got some real successes and corporate payments that have ramped up very quickly. So it looks like it's going to be.
At that level, hopefully, we will get a bit more but it looks like it's going to be a strong year.
Alright.
And then.
Just on loan growth the S block Adblock.
Portfolio growth, but it has slowed a little bit certainly over the last couple of quarters and I'm. Just wondering if you could talk about your outlook for your outlook for growth in that.
That portfolio.
Yes that is what.
What what is likely to happen what we've seen them before when you get this rapid I mean, this is historic but I mean, you get a rapid change and you know on liquid borrowing. So so quickly that people get a little sticker shock. So it's a little bit encouraging that we were only down 1% to be honest.
And there were more payoffs, but were offset by more origination so that should by the middle of the year.
When interest rates stopped people normalize and then you'll get people just not.
The lending for needs rather than just lending for liquidity. So it won't be and obviously, we're coming closer to that balance sheet limit. It won't be we won't have like historic 20% growth, but we will have some growth.
But it won't be it won't be as dramatic as we previously had.
Until things really normalize once they normalize we'll go back to the previous trend likely.
Yeah.
And then and then finally I'm just wondering if you could talk about you know things that youre doing.
To protect margin here as we go.
Perhaps comes in the peak of this rate cycle and.
What sort of margin reaction do you expect if we get a rate cut or two.
The end of 2023 or into 2024.
Yeah, So as Paul was saying, we've totally opened our balance sheet to the variables.
Syed and.
We thought there would be but this was more dramatic than we expected, but we really thought there was going to be a rise ultimately a rise in interest rates, but we've left.
And our pivoting very quickly we have a project in place called project Flex So are we.
We're going to put out a lot of fixed rate exposure, we have a fixed rate program now and our CRE business, we're putting on more fixed rate exposure in our commercial business and then we once again, we haven't bought a bond one easy way to do it is simply to lock in forward rates through.
357, and 10 year agency Securities So.
We're very aware of the situation and we're going to significantly lower the variable part of our balance sheet as we pick out at rates I think we came into this when we started this process. We were more like 55% are variable and that's with the growth of those variable rate businesses.
Went up and we didn't buy any.
Our fixed rate exposure. So now we just have to turn that around.
And the good thing is as rates drop of course balances will go up and things like the imac S block area. So we run those models, we're going to soften the impact of those interest rate changes and we're in a really great position because we've got plenty of room to do that so we're forecasting that and we will be up.
Sort of locked in I think.
An increasing amount of fixed rate exposure one thing to note our financials today do not account for bond purchases. So one thing to note that we haven't even built that fixed rate exposure on the bond side into the $3 20 earnings per share estimates.
Okay, Alright, that's helpful and just as you're thinking about.
Great exposure in the in the loan book.
Can you talk about what sort of products are you looking at or are you thinking about permanent financing on the multifamily side.
Not perm, but there is a market because of.
For the fixed rate side, and the CRE transitional loans, so, especially at lower dollar.
Numbers because interest rate caps have become very expensive. So we require interest rate caps on our loans to protect against the volatility in interest rate and usually have reserve. So we've.
Theres not a lot of programs out there on the fixed rate side for these transitional loans. So it's been.
We've already done over $50 million and we just launched it just recently so.
That'll give you a three year cushion and I also remind you that we have floors on all our one of the great things about our portfolio, it's variable on the upside, but a lot of it is not variable on the downside. So we have floors on all the loans on the CRE side. So even if we do get a significant downdraft on the.
<unk> side yeah.
Those rates won't be significantly affected.
Okay.
Okay I appreciate all the color. Thanks.
Ladies and gentlemen, as a reminder, should you ask a question. Please press the star followed by the number one. Your next question comes from Michael Perito with <unk>. Please go ahead.
Yeah.
Hey, guys. Good morning, Thanks for taking my questions.
Hey, Mike.
I wanted to.
Follow up on that.
Kind of margin line of questioning a little bit and maybe drill down on the liquidity position a bit more specifically, David I know you mentioned some high level stuff, but so would you guys say, it's fair for us to assume that.
Over the next six months or so.
The excess cash position you guys will probably.
Putting to work a bit more on on the bond book side, I mean, I think it's good what like three years since you bought a bond, which obviously looks right now, but just curious kind of functionally how we should think about the investment portfolio or does it does it kind of trough out here in the next quarter or two and then start growing or what you guys are thinking there.
Yeah, well, we it depends.
We're really it's almost a daily thing we're watching everything the yield curves everything we have so much flexibility in our balance sheet because.
Because we have plenty of ways to get deposits and we have plenty of room up to the durbin limit. So we really are deciding exactly how much fixed rate exposure, we're gonna take and when we're going to take it.
To lock in we might give up a little margin, but we're not going to give up a lot and.
And we also have.
Like I said floors on all of the CRE loans was protect us for three years. So we're really dealing with that as black portfolio.
Which is the.
The one without floors that really adjust very quickly with interest rates and those are if you recall those are all demand loans on top of it so not that we're going to demand loans, it's just that.
And in every scenario, we've got an incredible amount of balance sheet flexibility to put on fixed rate exposure. So and if you look at our loan yields that's the lowest yielding.
Portfolio and in our higher.
Coupon portfolios, we actually have fixed rate protection in there. So we're in a very good position enable the flex the balance sheet.
In order to put on a lot more fixed rate exposure.
Thanks.
Very helpful. And then on just on loan growth, where the pipeline is kind of at today and in the various business lines and was there any of the slowdown this quarter I don't want if I can catch it all but but I think there was some good catch up on the deposit side, you know the balance sheet looks a little bit better positioned here to support some growth in 'twenty. Two 'twenty three just curious kind of what some of the dynamics were there and youre.
Near term expectations around around loan growth yes.
Yes, well, we did have some catch up youre right and Thats actually economically helps us it wasn't purposeful, though we're not stretching though I mean, we're.
We're not stretching it all on credit quality.
So when.
When you get in times like this with volumes get low people get a little bit too.
There's been some announcements about people getting into commercial and stuff.
At the time to do it properly.
We're just being very very careful we're underwriting to the standards. We've always underwritten to the market is being affected by rates, but we still have we had strong growth in leasing because there's a big backlog and car deliveries still for.
For the commercial side, you are being very careful on.
While we have the government guarantees on the SBA. That's has slowed down because interest rates are jumped so much and people don't know if they want to invest in new businesses, but you know even if we went through.
2023 with.
Even a flat or up.
5% to 10% that really.
We will still meet our expectations the earnings per share so.
I think we're in a really really theres a lot of upside potential if we get trend growth, obviously there'd be significant upside potential we have been very careful with our guidance. We have scenario planned it out and looked at a lot of we've left a lot of things out like historic growth, we've left out bonds.
We're obviously getting I mean, I talked a few.
Earnings calls before we were kind of end of the 4% range, where we thought this would top out on our NIM.
Flown right past that and during this quarter, we've had increasing significantly increasing net interest income while our GDP is restored to trend. So there's.
A lot of Green lights here, and we're going to have a lot more information in January and by the end of the first quarter, we're going to know a lot and then if we have to adjust guidance and take a hard look at will have also now a little bit more about rates. So.
I think it's going to be an exciting quarter and I want to know what it is and I know you do too.
And then just lastly for me I mean, you guys have held expenses flat for almost two plus years now.
Obviously, you guys kind of have a structurally higher profitability.
Outlook with this NIM north of 4% I know you have initiatives you're working on I think there has been a little disruption on the customer side, because there's some regulatory actions to competitors. Just curious is there any.
If we think about the rate of investment in the Opex growth I mean is there room for that to grow a bit more this year than it has in the past few years as you guys see some opportunities or how should we be thinking about that.
Well we're always.
Focused on efficiency productivity, but the.
Once there is core inflation there is no doubt that that will affect us next year one of the areas just employee costs. So we've been I mean, we've gone now for almost five years basically with flat expenses I mean, if you look on a historic basis and that's all been restructuring.
Of different things that we've done on the operational side I think youll see from historical.
Oracle perspective, we're not going to be zero, we're not going to be at 2%.
We really wanted to continue to invest in our people and while on the regulatory side isn't our issue because theres been so much investment.
And that side of our business, that's not where the cost is going to come from it's going to come from the embedded core inflation now, we're obviously benefiting from brakes rise and inflation in our GDP and everything else. So I think this is year that youll still get a big differential.
To have a big differential between revenue growth and expense growth, but you'll you'll have above what our trend has been which has been flat above that trend.
Uh huh.
We will have.
We'll have at least 10% jaws between revenue expense will probably be significantly more than that but you wont see flat expenses. This year due to mostly due employee costs and core inflation.
Got it very helpful color. Thank you guys for taking my questions.
Again, ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the number one.
There are no further questions at this time I will now turn the call over to Damian Kozlowski for closing remarks.
Thank you operator, it's been it was really good quarter for US we made a lot of progress.
I said, we're looking forward to the next quarter to really tell us a lot more about 2023 so.
As we get information.
We will.
Continue to talk with everyone on the phone and.
When we get to the.
And to the first quarter I think we will have a lot more information to share about how 2023 Mike.
Ultimately.
And on the metrics in which we measure this business. So thank you everyone and have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.