The Bancorp Inc. Q1 2023 Earnings Call

Speaker 1: Good morning ladies and gentlemen and welcome to the Bancorp first quarter 2023 earnings conference call. At this time, our line is in lesson-nelly mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.

Speaker 1: This call is being recorded on Friday, April 28th, 2023.

Speaker 1: I would now like to turn the conference over to Android Zero Live. Please go ahead, sir.

Speaker 2: Thank you operator, good morning and thank you for joining us today for the Bank Corp's first quarter 2023 Financial Results Conference call. On the call of me today, or Damian Kuzlowski, Chief Executive Officer, and Paul Frankl, our Chief Financial Officer. This morning's call is being webcast on our website at www.dbankcorp.com.

Speaker 2: There will 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 1-877-674-7070 with a confirmation code of 423-750. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call that words believes and...

Speaker 2: 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.

Speaker 2: 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?

Speaker 3: Thank you, Andres. The Bancor earned 88 cents a share on 47% revenue growth and 25% expense growth. Net income grew 70% year-over-year. ROE for the first quarter was 28% versus 18% in the first quarter of 2022. ROA for the first quarter.

Speaker 3: was 2.6, first 1.6 in the first quarter or 22. GDP growth was 19% year over year. Fentex solutions, fee growth was 24% year over year. Nim expanded quarter of recorder from 421 to 467. Efficiency ratio remained at 42% quarter over quarter.

Speaker 3: loan growth, excluding loans held for sale, was 29% year-over-year with a slight 2% decrease quarter-over-quarter reflecting the steep increase in client borrowing costs. The recent dislocation in the banking market did not materially impact our company. With granular deposits spread across more than...

Speaker 3: 130 million insured small accounts through our FinTech.

Speaker 3: Ecosystem, a lower risk variable rate and short duration credit book and significant liquidity and borrowing capacity. CBPK was well-possession to manage increased volatility in the beginning of 23. Over the last three years plus we have purposely and methodically built a platform that would benefit

Speaker 3: from rising rates and rigorously protect our company from an interest rate shock or systemic event risk created from a banking system dislocation. We have included two new schedules in our earnings release. The first is more detail on our deposit base that has an overwhelming majority of insured and low balance stored value card accounts.

Speaker 3: and the second is a review of our significant borrowing capacity. The first quarter significantly surpassed our expectations in ROE, R-O-A, G-D-V growth, FENTech Solutions V-growth, NIM efficiency ratio net income growth, and EPS. Indications are that continued financial momentum will result.

Speaker 3: result in further improved metrics in 2023. Moreover, other...

Speaker 3: potentially positive tailwinds that might additionally improve performance in 2023. Number one, above trend payments, GDV growth of more than 15%. Two, a Fed funds rate above 5%. Three, increased NIM performance due to slower loan growth versus higher deposit growth.

Speaker 3: 4. Purchase of agency, treasury and other securities which have not been included in our forecasts. We have not purchased significant long-term fixed rate securities since 2018.

Speaker 3: Due to these factors in our first quarter performance, we are raising guidance from 320th share to 360th share without including the impact of share bybacks of 25 million per quarter for 2023. I now turn the call over to Paul Frankl, our CFO for more on the first quarter.

Speaker 3: Before reviewing quarterly results, I would like to comment on the low-risk liquidity profile of bank form.

Speaker 3: As Damien noted, the bank's deposit face is largely comprised of small balance accounts. Now withstanding the corresponding unrealistic risks that are small depositors with draw their funds in a short window, bank court exceeds potential liquidity needs by maintaining lines of credit with the Federal Home Alone Bank and the Federal Reserve Bank.

Speaker 3: of approximately $3.3 billion.

Speaker 3: Bank Corps is lined with the Federal Home Lone Bank, is collateralized by its apartment building loans, as residential collateral is mandated by that agency's charter.

Speaker 3: The Federal Reserve Bank also has collateral requirements which bank worked much satisfied for its line of credit with them.

Speaker 3: Additionally, Bancorp has access to significant other institutional liquidity which it periodically tests.

Speaker 3: Bancorp has also maintained a low interest rate risk profile and emphasized variable rate assets with policy mandated risk limits.

Speaker 3: As a result of its variable rate loans and securities, bank were benefited from the higher rates this quarter.

Speaker 3: And that resulted in the increases in return on assets and equity to 2.6% and 28%.

Speaker 3: These increases were significantly driven by 62% increase in net interest income.

Speaker 3: In addition to the rate sensitivity of the majority of our lending lines of business, management has structured the balance sheet to benefit from a more normalized and higher interest rate environment.

Speaker 3: Accordingly, over a period of years, it was largely allowed to fix rate investment portfolio to pay down while limited purchases were focused on variable rate instruments.

Speaker 3: Additionally, the rates on the majority of loans adjust more fully than deposits to the Federal Reserve rate changes.

Speaker 3: Portingly, in Q1 2023, the yield on interest earning assets had increased to 6.6 percent, while the cost of deposits had increased to 2.1 percent.

Speaker 3: Those factors were also reflected in the 4.7% NIM in Q1 2023, which represented another increase over prior periods.

Speaker 3: The provision for credit losses was 1.9 million in Q4 2020-23 compared to 1.5 million in Q1 2022. Of the 1.9 million, approximately 1.3 million resulted from the impact of historical net charge-offs applied to the estimated remaining lies about standing loans.

Speaker 3: The balance of the $1.9 million resulted primarily from first quarter charge-offs.

Speaker 3: Additionally, a million dollar charge against a movie theater property in other real estate owned was recognized in other non-interest expense.

Speaker 3: Prepaid debit and other payment related accounts are our largest funding source and primary driver of non-interest income.

Speaker 3: Total fees and other payments income of 25 million Q1 2023 increase 24% compared to Q1 2022 and 14% after eliminating $1.4 million termination fee and $600,000 of income related to 4th-4th-2022.

Speaker 3: Non-interest expense for Q1 20203 was 48 million, which was 25% higher than Q1 20202. Majority of the increased results of firms salary expense, which also increased 25%, and which reflected higher numbers of staff and financial crimes.

Speaker 3: compliance and information technology.

Speaker 3: Staffing increases reflected increases in deposit transaction volume and the development of new products. The increase also reflected higher stock compensation expense as a result of a focus on stock ownership.

Speaker 3: Book value per share quarter end increased 15% to $13.11 compared to $11.41 a year earlier, reflecting retained earnings partially offset by fair value adjustments to the investment portfolio resulting from the higher rate environment. Water league share repurchases should continue to reduce shares outstanding.

Speaker 1: I will now turn the call back to Damien. Thank you, Paul. Operated, could you open the line for questions? Thank you, sir. Ladies and gentlemen, we now begin the question and answer session.

Speaker 1: Should you have a question, please press star followed by one on your chat show film. You'll hear three tone brand accolades in your request and your questions be pulled in the order they receive.

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Speaker 1: One moment please for your first question.

Speaker 1: If your first question comes from David Feaster with Raymond James, please go ahead. Hey, good morning, boys!

Speaker 4: Morning, David. Maybe let's start with GDV. Great to see the growth in the quarter, and I know it can be really hard to dissect, but can you just maybe talk about some of the drivers of that and what you're seeing? You're talking to the deck about growth at both existing clients and addition of new clients, last year that are scaling up.

Speaker 5: government and new products in the corporate payment space.

Speaker 5: So it was very, it was surprisingly a robust.

Speaker 5: You know, above trend, you know, when you get past that 15% as I mentioned, but it's not concentrated in one area. So we're very pleased with the broad base.

Speaker 5: nature of it, but also the new product sets and things like corporate payments of, you know, surpass their expectations.

Speaker 4: That's great. And then maybe you just have to phone on, you know, just giving the volatility and the market. I would probably think this pushes more clients to you just giving the scale and stability of your platform. I know you've always got a lot of clients that are looking to join. But have you seen any shift in kind of the pulse of the market or changing the increases in the...

Speaker 5: Any real change, as we mentioned before, there's many companies that come to us that we don't implement, and they go to one of our competitors because they're not of the size of the maturity level to really take advantage of our ecosystem, and so we don't add those partners to it until they mature somewhere else.

Speaker 5: But it's been very stable, it's been very broad-based, it's development of new areas and new product sets within our existing clients.

Speaker 5: We think the, you know, double digit GDP growth is well supported and we have pretty good visibility for the next 18 to 24 months, lot of stability.

Speaker 5: And we don't, as you know, our partners, once they're here, they to stop using us takes at least a year, but multiple years, if they're going to leave. So we have a lot of visibility and stability in the portfolio and in the pipeline.

Speaker 4: Okay, and then maybe just touching on the lone portfolio for a second and specifically, you know, within the bridge, obviously, the real estate bridge. Obviously, there's a high focus on CRE and appreciate the color and the slide deck on the segment. I'm just curious.

Speaker 4: What do you see in this segment? Obviously you've got strong underwriting standards. But as you look broadly, just curious, your thoughts on that segment, and then maybe any color on what drove the S block and I block the clients in the quarter. Was that just market volatility or any other trend you're seeing there? Yeah, well, the CRE is extremely stable. Now, the whole market has slowed down because

Speaker 5: There's been a huge repricing obviously because the rise of interest rates are underwriting standards have not changed. We have interest rate caps on all the loans and floors and many times reserves. So we haven't had any dislocation whatsoever in that portfolio and we've had a lot of the wind down of the old portfolio and people have been finding financing. Take out finance.

Speaker 5: price-sensitive clients, the historic interest rate rise, and people simply got a little sticker shock. We've seen that slow down, though, substantially and moderating. And we expect our pipeline has been growing this month in the S block and I block side. So we expect it to get more normal for the same reasons with the interest rate as the interest rates top out.

Speaker 5: So we're not concerned by that at all. We just got more liquidity from that business and that went into obviously Fed funds at $475. So it didn't really have an impact. It didn't really have an impact. And we want to have excess cash because we ultimately will lock in.

Speaker 5: and buy fixed-rate securities when the time is right. So we're, I think that's going to slow down a lot, and over this quarter and the next quarter, there won't be as many pay downs.

Speaker 5: And even if there was pay downs, it's not going to have a big impact on our financials.

Speaker 1: Yeah, that's helpful. Thanks everybody. Thank you. Please, in gentlemen, as a reminder, if you have any questions, please press star one. Your next question comes from Frank Scheraldi with Piper Sound Loop. Please go ahead.

Speaker 6: Thanks, good morning. Bernie Frank. On the, just a follow up on the loan book. The F block, so, you, David, you talked about a stronger pipeline there. Is it still probably in the near term sort of net?

Speaker 5: Hey, Downs, do you think or do you think it's more stable at these levels? Well, what we've seen in this month is there's stability returning. The pipeline's been growing. It's just that they were so steep the interest rate increases over such a...

Speaker 5: short period of time people opening their getting their

Speaker 5: what they had to pay for their coupon all of a sudden radically changed a perception of maybe borrowing against securities and insurance but it's been stabilizing this this month so it should moderate a lot once again if we're

Speaker 5: I don't think it will be anywhere near as high as it was in the first quarter. It will be more towards the flat side. I can't be sure of that, but it will be more towards the flat side. Even if we did have paid out half as much as we did in the first quarter, once again that would just go into our cash position.

Speaker 5: and it would be at 5% or 5 in a quarter at Fed funds. Right. Okay. And then on the multi-family bridge loans.

Speaker 6: If you add that to the legacy portfolio you still have on the books, is that sort of are you at limits of what you want to see on the balance sheet? Just curious if you have more room to grow that business overall or if flow growth will be more driven by SBA going forward.

Speaker 3: Yeah, Frank, I think that we do have some room, extra room there because the loans were making now are apartment building loans and if you recall when COVID was an issue.

Speaker 3: We actually cited the company, the consultants that went back, all the way back to the great depression and documented that the type of lending that we do is one of the safest forms of lending that we can do. So we're confident we can increase that and have a measurable effect on the balance sheet.

Speaker 5: Do you remember that we're generally it's 300% of capital?

Speaker 5: We're going to keep that book, but there is, in a lot of ways, we can recycle those loans. Like we're not going to do COLO type structures like we have done in the past, but there's a very large market for those type of loans to recycle and we would take gain and fees for anything that we thought was in excess of that. So...

Speaker 5: There is, in a lot of ways, we can recycle those loans. We're not going to do COLO type structures like we've done in the past, but there's a very large market for those type of loans to recycle and we would take gain and fees for anything that we thought was an excess of that.

Speaker 5: We've got room and obviously our capital has grown even with our buyback our capital is growing Significantly this year. So we do have room Lastly with the four curves, you know sort of in flying that we're near peak of fed funds and and and

Speaker 6: I mean, we'll see what happens, but implying that we get down significantly in rates in terms of Fed funds in 2024. I know you have floors in these multifamily loans that protect you on the way down. And you give any sort of detail on other hedges you might have on the portfolio or what your expectations are.

Speaker 6: for the NIM given us, you know, let's say a 25 basis point contraction in the flood funds. Yes, so as you saw in our

Speaker 5: You know, our mix is shifting every day now. So we're putting out fixed rate exposure, excluding the bonds in all our programs at a greater rate. And the new CRE loans obviously have very high floors on them, right? So we're getting less acid sensitive by the day. And if we have normalized rates over the next...

Speaker 5: you know 18 months in the four plus range there really will lock in a lot of get rid of a lot of that asset sensitivity just through the loans that we're doing. Now if we add to that a substantial purchase and fix rate bonds obviously as we top out at rates and they start to cut

Speaker 5: The yield curve will disinvert, hopefully. And then that's when we'll start the purchase program of fixed rate securities. And that should really mitigate any downside. Our base cases that rates are not going to go far below. You don't know this, but far below.

Speaker 5: say in the three and a half percent range for the foreseeable future uh... if they do of course more of the floors kick in the loans and will by by the way before that will buy a substantial amount of we have just so much more flexibility that probably the average bank just because we have such a big

Speaker 5: part of our balance sheet that has not been invested in long-term security. So it's kind of the opposite, it is the opposite situation of where all the problems are. Bank, obviously we didn't do any of that. So now we have, can take full advantage of higher long-term rates.

Speaker 5: especially if the view and yield curve changes and will lock those rates in.

Speaker 6: Okay, so you think you know you put up a name in the mid-4s 4% range. You think that's doable in a sort of a you know a sub 4% Fed funds kind of outlook in 2024 if that's where we get.

Speaker 6: Okay, so you think you know you put up a name in the mid fours, four percent range. You think that's doable in a sort of a you know a sub four percent Fed funds kind of outlook in 2024 if that's where we get. Yes.

Speaker 5: We're, you know, we can't be sure, but I think we're going to be able to stay. It totally depends on...

Speaker 5: The Fed net overreacting to things and we're going back to zero interest rates even though we were at zero interest rates And we were making a 19% ROE too So I think if you have any kind of normal situation in the in the we get normal Fed fund rates And they're in this this is a very sustainable and if we have a little bit of time

Speaker 5: We're going to get far less acid sensitive. We did this in 2018. We got far less acid sensitive just at the right time. And I think we've left ourselves immense flexibility to be able to lock in long-term fixed rates in the portfolio.

Speaker 6: Great, thanks for all the color.

Speaker 1: Thank you. Your next pushing comes from Jim Switzer with KBW. Please go ahead.

Speaker 7: Hey there, thanks for taking my question. I'm on from Mike Perrito. Good morning. I just wanted a good morning. Could you clarify real quick on the comments you just made about?

Speaker 7: You're planning to maybe start purchasing these treasury securities. Are you gonna wait until you see the Fed starting to cut or are you going to be a little bit more proactive? It's not like you're waiting until the Fed

Speaker 5: Well usually that's the best time. But we'll start when we feel, and we're looking at this on a daily basis, we're looking at and have a lot of advisors on this and looking obviously at all the market color. But we don't have to...

Speaker 5: panic buying because we've got a lot of flexibility. So we can see how it plays out the interest rates on a long we have to see inflation numbers there's some this morning that probably in a few minutes and we're just gonna we're gonna watch it. We have so much room we could easily buy one and a half two billion dollars of fixed rate securities at a much higher rate than.

Speaker 5: obviously our peer group and we're going to constantly watch it and then start nibbling when we think the time is right and then fully allocate that part of the balance sheet in order to mitigate our variable rate exposure on some of our other assets like our institutional business and once again there's

Speaker 5: Variable parts of our portfolio that aren't really variable because they have floors like to see our relows. So we're in a very good position and we're going to remain flexible like we did before and take a full advantage of our current balance sheet position. It's much easier

Speaker 5: Obviously in a higher interest rate, the trade for fixed, for its variable, then it is the other way around as we all learned, obviously. So we're watching everything. We're going to continue to put on loans that are fixed rate. Every day our acid sensitivity goes down and we get the benefits of much higher rates on the loan side.

Speaker 5: We all have been navigated and maintained our name.

Speaker 7: Okay, yeah, that's pretty clear. And let's say the Fed hikes one more time and then holds it right here. Would you expect continuing in expansion over the rest of the year as you keep growing this loan book?

Speaker 5: Well, you're going to, yes. So there's still some lag as we've discussed before. Our funding costs adjust immediately and then it takes up to 90 days or more for our to fully adjust and our variable rate loan book. So you're still having a wave of adjustments.

Speaker 5: come through the system. Plus, every loan we put on, I think...

Speaker 5: people in the marketplace see that our loans are even a pricing above.

Speaker 5: above 100% of the increase. And that's because we're putting on, which is rarely strange to get that kind of bump in the revenue numbers, but we're getting over 100% in the loan book because we're putting on these much higher rate assets that are fixed. So yeah, it should continue to expand for those two reasons.

Speaker 7: Okay, great. And if we look at the low-import folder, take out the S block and the runoff commercial portfolio, I think you did about 5% quarterly loan growth. Is that reasonable to expect over the rest of the year for the other categories?

Speaker 7: And if we look at the loan portfolio, take out the S block in the runoff commercial portfolio, I think you did about 5% quarterly loan growth. Is that reasonable to expect over the rest of the year for the other categories? Yes. Yes.

Speaker 7: Okay, great. Thank you. That's all for me.

Speaker 1: Thank you. There are no further questions. It looks like we have a following question from David Feaster. Please go ahead.

Speaker 4: Hey, maybe just following up, kind of touching on the expense side. Obviously, there's some significantly higher expenses.

Speaker 4: I'm just curious, maybe given the revenue strength, are we starting to accelerate some expenses or projects, or was there anything maybe more one time in that other expense line item? And then just as we think about the efficiency ratio, it kind of sounds like with some of the initiatives that you're just talking about.

Speaker 4: Do you think we kind of stay here in that low 40% realm or given the stability and the growth opportunities? I mean, do we drop a low 40% just curious how you think about that?

Speaker 5: Yeah, well, yeah, it'll be around 40, but it could drop below that obviously because of the revenue growth. But go ahead, fall. Yeah, so

Speaker 3: The expenses that was not interest expense was driven largely by number of employees and staff additions in terms of salary expense. Other expenses also increased. Those were volume driven, volume driven by new customers, new accounts. cotas ?????toum wireless.

Speaker 3: the transaction, the increase in GDV and other transactions. We expect that some of those expenses will moderate. There was some catch-up expense in terms of number of employees. But we have very good prospects. We have really good growth and there has to be some...

Speaker 3: continuing to grow at least at double digit rates and so we're we're staffing up for that.

Speaker 4: Okay, that makes sense. So this is kind of a good core run rate, and again, expect some continued growth as we're just, any growth in the expense line on just as we're planning for future growth that you're talking about. Yeah, and remember we had, yes, but remember, there's some real core inflation in the economy too, which hit us. Yeah.

Speaker 5: So, you know, we made salary adjustments for our employees. We've changed grades. It's good sign that attrition is down across the industry. Ours is about half of what the industry is. And we have incredible stability in our top 7-100 employees. We'd have virtually no attrition in that.

Speaker 5: in that group of individuals. But that adds to it. So we'll see what happens with coordination, how that affects employee costs and stuff. But we definitely see a moderation, I think, Paul. We'll definitely see a moderation. Yeah, I think we'll still have, as Damien said, we had some...

Speaker 3: inflation adjustments to our salary structure. So you'll still see some elevated increases compared to the prior year. But over the next year or so it should moderate when we have more fully staffed up.

Speaker 5: which we need to do. Yeah, but we're investing a lot. I mean, from our whole tech stack to how we use the cloud to across our entire portfolio, putting new systems, you know, the best systems there are for things like ACH, et cetera, those investments have been happening continuously for the last part.

Speaker 5: That's why we have our position in the marketplace because we really have built a substantially robust infrastructure and ecosystem across not only the tech.

Speaker 5: aspects of it, but all the compliance, third party risk, oversight, all those things are incredibly important for the programs that are our partners.

Speaker 7: Thanks a lot of things. Thank you. Thank you. Your fellow in question is from Tim Switzer. Please go ahead. Thanks for taking my follow up. I was actually going to ask that expenses, but since I'm on here, if I get a quick one, the tax rate was just a little bit lower this quarter, what are your expectations going forward?

Speaker 3: The tax accounting is a little bit confusing and I won't go into the details here. We do talk about it in our 10Q and so forth. But I think for your models, the normal historical rate of around 26% is closer to an annualized rate. The tax accounting is a little bit confusing and I won't go into the details here.

Speaker 3: But ongoing, the tax accounting is a little bit confusing and I won't go into the details here. We do talk about it in our 10Q and so forth. But I think for your models, the normal historical rate of around 26% is closer to an annualized rate. So get perfect. Thanks. That's all for me.