Q2 2023 The Bancorp Inc Earnings Call

Speaker 2: Good morning, ladies and gentlemen, and welcome to the BAN Corp 2nd quarter, 2020-3 earnings conference call.

Speaker 2: At this time, all lines are in listen only mode.

Speaker 2: Following the presentation, we will conduct a question and answer session.

Speaker 2: If at any time during this call you require immediate assistance, please press star zero for the operator.

Speaker 2: This call is being recorded today. Friday, July the 28th, 2023.

Speaker 2: I would now like to turn the conference over to Andres Vieros-Los. Please go ahead sir.

Speaker 3: Thank you, operator. Good morning, and thank you for joining us today for the bank corps second quarter, 2023 financial results conference call. On the call with me today, are Damian Kuzlowski, Chief Executive Officer and Paul Frankl, our Chief Financial Officer.

Speaker 3: This morning's call is being webcasts on our website at www.thabankcorp.com. There will be a replay of the call available via webcasts 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 720-317.

Speaker 3: Before I turn the call over to Damien, I would like to remind everyone that when using this conference call the words Belize anticipates, expects, and similar expressions are intended to identify forward looking statements within the meaning of the private security's litigation reform act of 1995. Such statements are subject to written uncertainties which could cause ash results, performance, or achievements to different materially.

Speaker 3: from those anticipated or suggested by such statements. For further discussion of these recent uncertainties, please see the bank course 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 bank court undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events.

Speaker 3: 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 Vancouver Chief Executive Officer, Damian Kuzlovki. Damian?

Speaker 4: Thank you, Andre. Good morning, everyone. The bank court made 89 cents a share, 41% revenue growth and 17% expense growth. RWE was 27% and RWA was 2.6%. Core loan growth, quarter-required, reflected a reduction of 8% in institutional lending, and respective increases of 2% and 4% for our small business.

Speaker 4: Commercial and real estate bridge-lining businesses, which also show 10 and 65% growth year-over-year respectively. Name increased to 483 from 467 quarter-requarter and 317 year-over-year. Gross, dollar volume growth in our Fintech solutions, payments business was 15%.

Speaker 4: Continued strong growth across verticals with only general purpose reloadables showing a decline. New corporate payment programs continue to show growth significantly above expectations. The Bancorp continues to be well positioned in the current environment. Our balance sheet flexibility, lower credit risk, and high level of core insured deposits support continued improvements and profitability.

Speaker 4: regardless of potential dislocations or weakening economic conditions.

Speaker 4: While the sharp increase in the Fed funds rate affected our growth in loans, this impact was mostly fell on our institutional business, which is comprised of our S block and I block variable rate, consumer loans, long term historical growth trends seem to be normalizing and pipelines across our businesses are increasing.

Speaker 4: Our fintech solutions business continues to show strength, supported by current programs, the addition of new products, and the implementation of new partners. Due to significant implementation times that can last 18 to 24 months, we have good visibility on the potential growth in 2024. Our current estimate is that we will have above trend G.

Speaker 4: DV growth in 2024 of more than 15%. Key areas of growth are neobanks, healthcare, and new corporate payment programs. In addition, we continue to strengthen our relationships with our key members of our ecosystem and recently signed a long-term extension and expansion of our partnership with CHIME.

Speaker 4: We continue to invest a lot of time and energy across our company in the development of new products and services, especially expansion of fee businesses and the monetization of our core capabilities. As we approach the Reg II Durban Amendment restriction on our balance sheet size of $10 billion, we believe we can significantly grow the business without needing additional balance sheet above that limit.

Speaker 4: Lastly, with continued strong business momentum and a favorable balance sheet position, we're confirming our 23 guidance of 360 a share without the impact of anticipated stuff by bags of approximately 25 million per quarter. In the third quarter earnings release, we will give both preliminary guidance for 2024 and indications of our buybacks for next.

Speaker 5: The primary driver increases in return on assets and equity for Q2, 2023, which were respectively 2.6% and 27% compared to 1.7% and 19% and Q2, 2022.

Speaker 5: These increases reflected a 60% 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 from a higher interest rate environment. Accordingly, over a period of years, it has largely allowed its fixed rate investment portfolio to pay down.

Speaker 5: while limited purchases were focused on variable rate instruments. Additionally, the rates on the majority of loans adjust more fully than deposits to Federal Reserve rate changes.

Speaker 5: As a result, in Q2 2023, the yield on interest-earning assets has increased to 7% from 3.6% in Q2 2000.

Speaker 5: 22 or an increase of 3.4%.

Speaker 5: The cost of deposits in those respective periods increased by only 2% to 2.3%.

Speaker 5: Those factors were also reflected in the 4.8% NIM and Q2 2023, which represented another increase over prior periods.

Speaker 5: The provision for credit losses was $361,000 in Q2 2023 compared to a credit of $1.5 million in Q2 2022.

Speaker 5: Q2 2023 net charge-offs amounted to $938,000.

Speaker 5: Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income.

Speaker 5: Total fees and other payments income of $25 million in Q2 2023 increased 10% compared to Q2 2022.

Speaker 5: Non-interest expense for Q2 2023 was $49.9 million, which was 17% higher than Q2 2022.

Speaker 5: The majority of the increase resulted from salary expense, which increased 28 percent and which reflected higher numbers of staff in financial crimes compliance and information technology.

Speaker 5: Staffing increases reflected higher deposit transactions and volume and development of new products. The increase also reflected higher employee incentive and stock compensation expense as a result of a focus on stock ownership.

Speaker 5: Book value per share quarter end increased 19% to $13.74 compared to $11.55 a year earlier, reflecting the impact of retained earnings.

Speaker 5: Quarterly share of repurchases should continue to reduce shares outstanding. I will now turn the call back to Damien.

Speaker 4: Thank you, Paul. Operator, could you open the lines for questions?

Speaker 2: Thank you, sir.

Speaker 2: Ladies and gentlemen, we will now begin the question and answer session.

Speaker 2: If you would like to ask a question, please press star followed by the number 1 on your telephone keypad.

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Speaker 2: One moment please for your first question.

Speaker 2: Your first question will come from Frank Schiraldi at Piper Sandler. Please go ahead.

Speaker 6: Good morning.

Speaker 7: Good morning, Frank.

Speaker 7: On the on GDP growth, you know another strong quarter and I think they mean you said that we should expect above 15% going forward. I'm not sure if I heard that right, but if I did and any more color just in terms of You know if you could put some some sort of guardrails around that statement

Speaker 4: Okay, I did say that and I said that for 2024. So we have a very good understanding of the projects under implementation and new product expansion.

Speaker 4: So these implementations we've discussed this before can't take.

Speaker 4: 18 to 24 months to fully implement.

Speaker 4: into our ecosystem. So looking at that pipeline, we're fairly confident that we'll get above trend growth for 24. So above that 15% level, which has been kind of the historic breaking point between slower and kind of the trend line for the last seven years. We are yet to invite your negative reside, please. I'm Platé Yanuch ??een.

Speaker 4: which is actually 15%, but about 15% to make it.

Speaker 8: Make it easy.

Speaker 7: And then in terms of just the new partnerships, new programs you're signing, is there any pressure on margins there? Just wondering what sort of the take rate is from you know 15% GD or above in terms of the the revenue stream that provides.

Speaker 4: through fee income? No, no, the, the, it actually, the, for the new programs and stuff, it usually is more profitable in the early years because there's minimums and then there's tiers. For our larger clients, yes, they, the, the programs that all thewh rhythm has been created or no longer,

Speaker 4: They have so much volume that the incremental volume doesn't take a lot of costs. So we do get price breaks on tiers for our larger programs that are growing. But we have a lot of new products and services, the relationship that we've had to GDP and key growth should be maintained over the next.

Speaker 4: a couple of years, but I can't guarantee that. It totally depends on who's growing and when.

Speaker 4: I can't guarantee that. It totally depends on who's growing and when. And...

Speaker 4: the outlook on this business has really never been brighter. It seems that we have

Speaker 4: We have a lot of very good business opportunities, a lot in new partnerships, but also the expansion of partnerships across all of our verticals. So we are in a very good position on the Fintech Solutions business.

Speaker 7: Okay, great. And then on the the S block contraction balances this core, you talk about sort of normalization. So do you expect to see more runoff here? Can you offset that with other

Speaker 4: you know, loan sources? What are your thoughts about both total, you know, S block and total loan growth here in the near term? Okay, so they are, our pipelines are increasing, so we should see less runoff on the institutional side. You know, that was obviously with the historic rise in interest rates, the price sensitive clients who are borrowing against.

And that also depends obviously of how aggressive the Fed is too. The other pipelines are fine. They continue to grow those books of business and remember we have two concerns. One is those if we do get paid back on those loans they go on the Fed funds obviously at 525.

which which the we don't get hurt that much on the spread and we're we're constantly repricing our portfolio as new loans We do new loans and and they run off our sheet so it doesn't really hurt us plus

We're kind of husbanding cash right now on our balance sheet because we are ultimately going to buy bonds To get a lot more fixed rate securities exposure So we're not very concerned about the runoff of that business that it seems to be normalizing and will

and it doesn't hurt us that much. So I think we're in a fantastic position on our balance sheet to be very responsive to the current environment.

Okay, and you know, it seems like what the Fed's

you know, commentary and what the market's expecting. We're getting maybe pretty close to the end here in terms of Fed rates. And so would we, you know, do you think we expect to see securities purchases back after this year at any sort of size range?

you know, you think of when putting securities on the books here, what we could see in terms of securities asset ratio by year end. Any thoughts there?

I don't think we're going to buy securities. This isn't a guarantee. I don't think it's going to happen to the end of this year. I think you're still going to have a fairly inverted yield curve and that's probably going to disinvert next year.

So I don't think there's securities purchases will happen this year, but I you know, we're being very nimble on this We have to pay attention to what's going on the marketplace I mean strange things happen you saw the 10-year move last year on news in Japan So you never know what's going to happen and we'll take advantage of those opportunities

So I would expect them to happen probably midpoint next year. And we are way, our balance sheet is actually smaller than it should be. If you look at the amount of securities we have versus our peer group and general and banks, we have at least

15% room to add security. So a billion, a billion, five we could add pretty easily. And now that we have such great amount of liquidity on the balance sheet, we'll be able to do that very effectively without having to borrow into the market or anything. So I think we're gonna keep it.

We're being we're watch it every second of every day We are in a fantastic position obviously because we had You know really anticipated the interest rate increases and we're slowly moving back up the fixed rate scale. So

If you looked at what we did over the last four years is we went from the mid 30s to 26 percent fixed rate assets and we're already back to 32 percent fixed rate assets and have taken 11 asset sensitivity off the off the board because now we're flexing the balance sheet back to a fixed rate structure with a target of 60 percent in order

to change our structure to be much more fixed, to mitigate the downside impact if there's rate cuts.

Right. Okay, and so you're saying 60% thick. I mean, the deposit rate is like 40%, right? In terms of that. Yeah, so it basically, it would basically wipe out, it would lock in the profitability up and down, by the way. So, that's why we're waiting to see. So, we could get the 6% on the FETS lens.

our GDP growth.

There's a lot of resiliency in the economy and we still have an 8%, you know, we're over 8% on the deficit too on fiscal spending. So there's a lot of stimulus still in the economy also. So we're going to just keep an eye on it. And we're in such a good position that we don't, it's kind of where we were with the bond. So there's a lot of resiliency in the economy and we're in such a good position that we

for four years because we're in a good position on liquidity and deposits etc. So we're doing the same thing in this case.

All right, great. Thanks for all the color.

Your next question comes from David Feaster at Raymond James. Please go ahead.

Hey, good morning everybody.

Good morning, David. Maybe just following up on one of the questions, or one of the things you talked about in your period of marks, you talked about, you know, expanding relationships. Obviously, we...

you extended and expanded the Chime relationship and you talked about going deeper with the existing partners.

Could you expound on that? Where are you seeing opportunity for expansion there and what other initiatives do you have in place to continue?

to deepen relationships.

So generally, I think people have accepted that they got to be broader FinTech, especially neo banks, but also other vehicles outside of government. So we're in discussions across all of our major clients that they want to add services.

They want to add product capabilities. So this is something that's happening across the entire franchise. But if you take a large, a neo-bank for example, they're wanting to not just be a debit provider, but they want to build a portfolio of products around their key clients and extend it to credit. So that's exactly what we're doing.

So where we can support them in doing that, we help them in many cases innovate, but also they may be with another provider today that they want to put into our ecosystem, that's happening, but also in the, obviously in the credit area, where most of the debit providers wanna build.

and start to build both sides of the balance sheet business in order to increase their profitability. So we're, you know, with our partners, they're very deep relationships over very long terms. As I just said, we just expanded our relationship with Chime in those areas, and we'll continue to do that. I think that's where the, there's gonna be a lot, in fact, we're not dealing with very many startups, obviously, there's.

helpful. Maybe just touch it on the pipeline of partners that you have. It sounds like you're still continuing to onboard folks at a pretty rapid pace. I'm just curious.

You know did.

Has has the pipeline I guess with the the market dynamics has the pipeline? Have you seen continued?

increases in the pipeline just as maybe this pushes more partners to you and then maybe as you go through these negotiations I guess how is your pricing power? Are you seeing the competitive landscape heat up and maybe you're having to concede more or just given your dominance in the space and your reputation or are you able to kind of defend that?

in these negotiations. You have to remember we're fairly a small piece of the pie.

when you're talking about when we're in negotiations, it's not like we're 50% of their cost structure.

So, you know, and it's something that you can't mess up. You have to be right all the time and you have to have a profile now, especially with regulatory scrutiny, where they're sure that they're not gonna have a problem on the regulatory.

So, you know, that's the main reason. We say no to a lot of smaller business that are going to banking as service providers for because they don't have the scale and they don't have the sophistication. So we're only dealing with the large players in the industry.

I think we see almost all the large engagements out there and talk to people about them. And they're names that you would know. So the ones that we don't have, we've been in, probably been in discussions with, and those are potentially some of the programs that will be joining our ecosystem, which we will announce.

We obviously can't do that now, but our pipeline is very consistent with our ideology of only servicing those larger sophisticated clients that are broadening their product sets. We're doing very little startup or banking of service business and that really supports

you know, ramping up quickly. So some in the past, maybe five, seven years ago, we had much more of that type of business. It's Chime, for example, was in its infancy at the time. And that was kind of our portfolio, though we do have health care and government cards and everything back then too. And then we also had a large general-purpose reloadable.

platform which has gone away across the industry. So now it's converted themselves into the large major players that want product expansion or security in execution or regulatory confidence where we clearly have an expertise in.

So all that together has really played into all the investments we're making or have made in building this very unique, very robust, very forward-looking ecosystem for the payments industry and we're continuing to invest in it.

and we're focusing on the biggest players with the most sophisticated complex needs who want to really change and grow their client relationships.

Okay, that's a good color. And then last one, maybe just touching on the expense front and to your point on the investments that you've made. I'm just curious how you think about the expense run rate. It sounds like the expense run rate may be relatively sticky just given the new hires.

Is that fully reflected in here? How do you think about hiring and investments going forward? And then we talked about last quarter, I think the efficiency ratio maybe dipping below 40%. Is that still in the cards from your perspective as you look forward?

Absolutely. So we built into the cost structure.

from what we knew that we were going to have significant revenue increases this year because the We had to take a position on the yield curve obviously we set the balance sheet purposely To benefit from it, so we looked into this year and said we're going to make investments So our people number of people are up about 7%

and we're able, we've had very low attrition, and we're able to recruit great people. And we're gonna take advantage, you know, there's a little dislocation, obviously, in the banking industry. So we're taking a little bit of advantage of that to make sure we set the cost structure up for the next couple of years so that we don't have big increases. All the increases you see.

We're still getting efficiencies on the operating level. All the increases are people. That's the big determinant in being able to innovate. But if you look year over year, we have about, I'd say, $3 million that really aren't run rate expenses. So when you see that increase of the mid-20s in employee costs, there's a couple of categories there.

where it's not really like like, first of all, we don't have the same origination. So we can't catch there's about a million dollars of capital costs, you could capitalize the cost of origination that aren't in this year, over year over year, then we have about $2 million. Some of it is because of the proportion we pay in cash bonus for equity.

is higher this year and we had some severance. So there's about three million dollars that really isn't built in cost structure in this quarter. So when you look year over year you see 17% total, you see mid-20s and the employee cost. The employee cost is really a little bit less, but having said that next year we've built into this knowing about this.

you know, once in a lifetime interest rates increase. So we're trying to set ourselves up so that we have everything in place, the people.

of the project list and everything so we know what we're going to build over the next couple of years so that our cost structure doesn't rise in the same way that it would during this.

you know, historic rise.

in revenue here.

So kind of front-running the expenses and investing on the front end and should start seeing the operating leverage Maybe you start coming next year and really going forward after that

Yeah, we're just not going to grow the employee cost. I mean, we've really invested in employees here. So once again, you look at the operating expenses, they haven't gone up. So you look on the other operating expenses, they're flat. I think they're actually down this quarter versus last year. It's all big.

the real determination of innovation and being able to grow this franchise and Really setting ourselves up for the next five years is going to be not you know determined with all the capabilities and platform and architecture we built but we have to have the best people in the industry have to pay them well and We're setting ourselves up to not

to have the experience of year over year increases over the next few years, but to have those people in place to make sure that we can guide the company forward.

That's helpful. Thank you.

Ladies and gentlemen, once again, if you would like to ask a question, please press star one now.

Your next question will come from Michael Perrito at KBW. Please go ahead.

Hey guys, good morning. Thanks for taking my questions.

I appreciate the color this morning. You guys covered a lot of it. Just a couple follow-ups. As we think about the balance sheet, with the S block loans kind of taking a step down here.

and possibly being in this higher for a longer rate environment.

other areas maybe to add on the loan portfolio side. I mean, are we getting closer to maybe, you know, kind of credit products taking up a little bit of that baton and starting to represent a portion of the loan portfolio? Did you guys look at maybe any other kind of lower risk verticals that are tangible to what you guys do because of all the disruption, whether it's like capital call wise.

the company have done a lot of that in the past and other lives so it's interesting to bring that up but no the we need the room if you look at we're very constrained on the balance sheet and we need to put in fixed rate securities for liquidity and other reasons right and to lock in profitability over the next 12 months

Right, so we want to flip from this very variable rate balance sheet to the majority being fixed. So we're probably not going to add a traditional vertical, though we have product expansion. We've had some product expansion, institutional and commercial. We're not going to get out of our box in real estate, most likely of these transitional products,

loans that we're doing of apartments and red and purple states that are really workforce housing. We're not going to get out of that space in a meaningful way. Where we will put on credit exposure is in credit sponsorship.

So we don't know how big a part, I mean that could be in five years 25 or 30 percent of our entire 10 billion dollar Reg II limit. So that's where a lot of the product development is happening. That's where it's going to soak up some of the liquidity. So once again, we're in an extremely good liquidity position right now.

We're not worried about the runoff in the S block. That's our lowest coupon book. And that goes into Fed funds. And we need a bunch of cash in order to buy fixed rate assets. So we're not worried about it. You know, we've looked at everything across the board. We understand the credit universe very well, even

You know, the more esoteric areas like leverage finance and everything, we're very familiar what we could do. But I don't think when I talk to investors, that's what they really want us to do. We have an extremely low risk credit profile, very short duration, very, very low default rates with very high recovery rates. The story here is

is our funding source, our fintech solutions business, and how we're going to manage our business as more of a technology company as we hit 10 billion. That's the story that's going to really supersize investor value, plus with our high capital returns, rigorously returning that capital through buybacks.

over the next five years. So that's the formula, that's where we're concentrated and that's where we think the most value is. And so we're not a traditional bank. We're not gonna be growing our assets to 50 billion. We're focused on uniqueness and low event risk. I mean, in almost a religious way. We do not wanna expose.

these type of returns to any type of credit risk that we think might have an exogenous shock if we have, you know, a substantial change in economics.

to any type of credit risk that we think might have an exogenous shock if we have you know a substantial change in economics going forward due to interest rates.

No, that all makes perfect sense, Damon. That's kind of why I mentioned the errors I mentioned. Obviously, I totally agree. You don't want to add credit noise to an otherwise fairly clean credit story, so that makes sense. Maybe a follow-up, and you kind of mentioned it, but just –

I think to Dave's question earlier, you were talking about product expansion. Can you maybe get a little bit more specific about the products that you are looking at? Like are we talking about point of sale finance solutions? Are we talking about like earned wage access, or early wage access? Are we talking about maybe other credit card, or credit builder type products?

Just curious what you guys are working on internally that your clients are looking to expand. You'll be on kind of the debit card solutions that you're offering today.

That's exactly right. Those are the categories. So, you know, things like building people's ability to access the financial system, they're very important for the client sets of our neo banks especially. So they want tools. And those and I think people everyone's recognized that the lifecycle

and being the lead bank in the life cycle personally of a consumer is where you want to be. So as they grow their portfolio financially, you want to be with them and provide them tools. So those are exactly right. Those are the areas where there is need building across the spectrum. We're the

One of the first obviously that did you know a couple days early to get paid that that's a bank or innovation with our partners the things like Over drafts being free and Unlimited of course not endless, but you know giving those tools

are very important innovations that were, you know, some of those that came with our partnerships.

from our larger neo bank partners. So you know we want to be there for.

I think we've got a very good meeting in the minds between our partners and us. I mean, we've set ourselves up to try to help more than our peer group and the banking and service providers. And we're constantly in discussions across the board with our partners around it.

looking at their product frameworks of where they want to go. And so that gives us incredible clarity as to what we need to build additionally to help them innovate. But it's all around the, for the neo bank, mostly around the consumer, their lifecycle of wealth, adding tools.

That helps them and that also increases our partners profitability. So it's a win-win. And then on top of that we have all these other verticals in healthcare and government. All these are expanding.

And then we have big new wins like in corporate payments where it's way above expectations. You know that's an area where we got into in a big way last year and it's really exceeded our expectations. So you know it's across, it's very broad-based, it's very focused on what our partners want and that's why we're investing in...

Perfect. Thanks for the color, Damian. Thanks for the question. I appreciate you taking my question.

Thank you.

There are no further questions on the phone line, so I will turn the conference back to Damian Kozlowski for any closing remarks. Thank you, operator. Thank you everyone for joining us today. I appreciate your involvement in our earnings call. And operator, you can disconnect the call.