Q3 2023 The Bancorp Inc Earnings Call
Speaker 1: Good morning ladies and gentlemen and welcome to the Bancor Inc Q3 2023 earnings conference call. At this time.
Good morning, ladies and gentlemen, and welcome to the Bancorp, Inc. Q3, 2023 earnings Conference call.
At this time all lines are in listen only mode.
Speaker 1: Following the presentation, we will conduct a question and answer.
Following the presentation, we will conduct a question and answer session.
Speaker 1: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, October 27th, 20th.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday October 27 2023.
I would now like to turn the conference over to Andreas Spitzer slot.
Please go ahead.
Speaker 2: Thank you, Jerry. Good morning and thank you for joining us today for the Bancorp's third quarter 2023 financial results conference call. On the call with me today are Damian Kozlowski, chief executive officer, and Paul Frankel, our chief financial officer.
Thank you Gerry good morning, and thank you for joining us today for the Bancorp's third quarter 2023 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This mornings call is being webcast on our website at Www Dot to Bank Corp, Dotcom there'll be a replay of the call available via.
Speaker 2: This morning's call is being webcast on our website at www.thebankcorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p.m. Eastern Time today.
A 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 043391.
Speaker 2: The dial in for the replay is 1-877-
Speaker 2: 674-7070 with a confirmation code of 043391.
Speaker 2: Before I turn the call over to Damien, I would like to remind everyone that when using this conference call, the word believes anticipates expects and similar expressions are intended to identify forward-looking statements within the meetings of the private security litigation reform act of 1995. That statements are subject to risk and uncertain.
Before I turn the call over to Damian I would like to remind everyone that when using 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 anticipate.
Speaker 2: could cause actual results, performance, or achievements to differ materially from those anticipated or suggested by such statements.
It was suggested by 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 like Bancorp undertakes no obligation to publicly release results of any revisions to forward looking statements, which may be made to reflect events or circumstances. After the day.
Speaker 2: for the discussion on these risks and uncertainties, please see the bank court's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which be only as of the date hereof. Think bank court undertake 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 bank court's chief executive officer, Damian Kuzlowski. Damian? Speaker.
Hereof 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.
Thank you Andres good morning, everyone.
Speaker 3: The bank court earned 92 cents a share with revenue growth of 31% and expense growth of 6%. ROE was 26%. The minimum expanded to 507 from 483 quarter of a quarter and 369 year over year. GDV increased 17% year over year and total fees from all of our Fintech activities increased 12%.
The Bancorp earned 92 cents a share with revenue growth of 31% and expense growth of 6% ROA was 26% the NIM expanded to $5 seven from 483 quarter over quarter and $3 69 year over year, GDP increased 17% year over year and total fees from all of our Fintech activities increase.
12%.
Speaker 3: The Bancorp continues to produce record-core profitability and exemplar financial performance in a challenging interest rate and macro environment for most financial institutions.
The Bancorp continues to produce record core profitability and exemplar financial performance in a challenging interest rate and macro environment for most financial institutions. We continue to invest heavily in the development of new products and services, especially in our Fintech solutions ecosystem, he's investments should have meaningful impact on <unk>.
Speaker 3: We continue to invest heavily in the development of new products and services, especially in our Fintech Solutions ecosystem. These investments should have meaningful impact on performance and grow-style or volume, growth in 24 and beyond. As I stated in our last earnings call, we expect to have above-trend GDP growth in 2024, of more than 15% in an increasing participation in providing credit sponsorships solutions to our business partners.
Performance in gross dollar volume.
Growth in 'twenty, four and beyond as I stated in our last earnings call. We expect to have above trend GDP growth in 2024 or more than 15% and an increasing participation in providing credit sponsorship solutions through our business partners. We also opened our new Fintech Hagen Sioux falls focused on collaborative space for our.
Speaker 3: We also opened our new Fintech Houdam Sioux Falls, focused on collaborative space for our Bancord team and business partners, while providing best in class work space to innovate and create the future of packing solutions.
Bankcard team and business partners, while providing best in class workspace to innovate and create the future of package solutions.
Speaker 3: As a result of our investments in growth and efficiency, our RLE is driving a continued increase in our regulatory capital ratios. Welfare Reform stone force remains mine. Arms benefit to thembutharon.com. The recession framework remains the ownership of Camera Law. Normally we live within
As a result of our investments in growth and efficiency. Our Aro. He is driving a continued increase in our regulatory capital ratios with the Reg E.
Speaker 3: I, I, Durban balance sheet limit of 10 billion, they bank core is fast approaching the maximum equity capital needed to support our business growth into the future. Therefore, we are significantly increasing our buyback in 2024 by 100 million to 200 million or 50 million a quarter.
I I Durbin balance sheet limit of $10 billion they'd Banc Corps is fast approaching the maximum equity capital needed to support our business growth into the future.
Therefore, we are significantly increasing our buyback in 2024 by $100 million to 200 million or $50 million a quarter.
Speaker 3: Since the inception of our buyback in 2021, through September 2023, we have purchased 6.4 million shares at an average cost of $27. We believe our stock continues to be significantly undervalued when considering our long-term equity returns and EPS growth prospects. Therefore, our capital return policy will remain focused on stock buybacks rather than dividend.
Since the inception of our back buyback in 2021.
Through September 2023, we have purchased six 4 million shares at an average cost of $27. We believe our stock continues to be significantly undervalued when considering our long term equity returns and EPS growth prospects. Therefore, our capital return policy will remain focused on stock buy.
<unk> rather than dividends and.
Speaker 3: In addition, in our 2023 fourth quarter, full year conference call, we will announce our new strategic framework that will propel our company forward to 2030. We will outline how the Blank Corps will continue to grow revenue, profitability, and announce new long-term targets. Having already achieved exemplar bank performance with robust growth, with little need for new capital, the bank work can produce future performance that is truly extraordinary in the financial services industry.
In addition in our 2023 fourth quarter full year conference call, we will announce our new strategic framework that will propel our company forward to 2030.
Outline how the buying core will continue to grow revenue and profitability and announced a new long term targets, having already achieved exemplar bank performance with robust growth with little need for new capital Bancorp can produce future performance that is truly extraordinary and the financial services industry.
Speaker 3: We are reiterating our guidance for 23 at 360 a share. We are also initiating 2024 preliminary guidance for 425 a share without including the impact of share buybacks. And in addition,
We are reiterating our guidance for 'twenty three at $3 60, a share we are initiating 2020 for preliminary guidance of $4 25, a share without including the impact of share buybacks and in addition.
Speaker 3: This does not include bond purchases where we would normalize our balance sheet similar to pure bank.
This does not include bond purchases, where we would normalize our balance sheet similar to peer banks. This is approximately 18% earnings growth over 2023 guidance, we expect the bank or to continue to meaningfully meaningfully outperform our peers and deliver superior growth and continued improvements in Roe.
Speaker 3: This is approximately 18% earnings growth over 2023 guidance. We expect the bank order to continue to meaning flu, meaningfully outperform our peers and deliver superior growth and continued improvements in ROE and RLA. I now turn the call over to our CFO and my colleague Paul Frankel for more color on the third quarter. Paul.
I'll now turn the call over to our CFO and my colleague Paul Frankel for more color on the third quarter Paul.
Speaker 4: Thank you, Damien. As a result of its variable rate loans and security, Bangkok continues to benefit from the cumulative impact of federal reserve rating.
Thank you Damian as a result of its variable rate loans and securities Bancorp continues to benefit from the cumulative impact of batteries. There are rate increases that factor was the primary driver and increases in return on assets and equity for Q3, 2023, which were respectively to 7% and 26.
Speaker 4: That factor was the primary driver in increases in return on assets and equity for Q3 2023, which were respectively 2.7% and 26%, compared to 1.7% and 18% in Q3 2022.
Percent compared to one 7% and 18% in Q3 to 2022.
Speaker 4: These increases reflected a 37% in net interest in
These increases reflected a 37% of net interest income.
Speaker 4: 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 is largely allowed to fix rates, investment portfolio to pay down, while limited purchases were focused on variable rate and...
In addition to the rate sensitivity of the majority of our lending lines of business management as structured the balance sheet to benefit from a higher interest rate environment. Accordingly over a period of years and it's largely allowed as thick its fixed rate investment portfolio to pay down by limited purchases were focused on variable rate instruments.
Speaker 4: Additionally, the rates on the majority of loans adjust more fully than deposits to Federal Reserve rate chains.
Additionally, the rates on the majority of law suggests more fully than deposits to federal reserve rate changes as a result in Q3 2023, the yield on interest earning assets increased to seven 4% from four 8% in Q3 2022 or an increase of two 6%.
Speaker 4: As a result, in Q3 2023, the yield on interest earning assets increased to 7.4% from 4.8% in Q3 2022, or an increase of 2.6%. The cost of deposits in those respective periods increased by only 1.4% to 2.5%.
The cost of deposits in those respective periods increased by only one 4% to two 5%.
Speaker 4: Those factors reflected in the 5.1% NIMM in Q3 2023, which represented another increase over prior periods.
Those factors were reflected in the five 1% NIM in Q3, 2023, which represented another increase over prior periods.
Speaker 4: The provision for credit losses was $1.8 million in Q3 2023 compared to $822,000 in Q3 2022. Q3 2023 net charge-offs amounted to $922,000, substantially all of which were in leases.
The provision for credit losses was $1 $8 million in Q3 2023 compared to $822000.
In Q3, 2020 to Q3 2023 net charge offs amounted to $922000.
Substantially all of which were in leasing.
Speaker 4: Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income.
Prepaid debit and other payment related to accounts, our largest funding source and the primary driver of noninterest income totaled.
Speaker 4: Total fees and other payments income of 24 million in Q3 2023 increased 12%. Compared to Q3 2022. Non-interest expense for Q3 2023 was 47.5 million, which was 6% higher than Q3 2022. Majority of the increase resulted from salary expense, which increased 9%, and which reflected higher numbers of staff and financial crimes, compliance, enhanced
Total fees and other payments income at 24 million in Q3, 2023 increased 12% compared to Q3 2022.
Noninterest expense for Q3, 2023 was $47 5 million, which was 6% higher than Q3 2022. The majority of the increase resulted from salary expense, which increased 9% and which reflected higher numbers of staff and financial crimes compliance and information technology.
Staffing increases reflected higher deposit transaction volume and the development of new products. The increase also reflected higher stock compensation expense as a result of that focus on stock ownership and lower expense deferrals as a result of lower loan production book.
Speaker 4: Staffing increases reflected higher 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 and lower expense deferrals as a result of low loan product.
Speaker 4: Book value per share at quarter end increased 22% to $14.36.
Book value per share at quarter end increased 22% to $14.36.
Speaker 4: compared to $11.81 a year earlier, reflecting the impact of retained earnings.
Paired to $11 81, a year earlier reflected the impact reflecting the impact of retained earnings or at least share repurchases will continue to reduce shares outstanding.
Speaker 4: Orderly share repurchases will continue to reduce shares outstanding. I will now turn the call back to Damian.
I will now turn the call back to Damien.
Operator would you please open the lines for questions.
Okay.
Thank you.
Speaker 1: Ladies and gentlemen, we will now begin the question and answer session.
Ladies and gentlemen, we will now begin the question and answer session.
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Speaker 1: Our first question comes from the line of Michael Perrito of KBW. Please go ahead.
Our first question comes from the line of Michael Perito of K B W.
Go ahead.
Okay.
Hey, guys. Good morning, Thanks for taking my question Marni.
Speaker 2: David, I wanted to start just kind of on the state of the kind of bank as a service environment here.
David I wanted to start just kind of on this.
State of the kind of banking as a service environment here.
Speaker 2: You know, obviously, I think we've talked about this in prior quarters. You guys are well-positioned and, you know, have a strong balance. I'm just curious, though, if you can give us some flavor on what the kind of incremental growth opportunities that you're looking at, especially as you think about the earnings growth that you're expecting next year. You know, are there new partnerships? Are there new products with current partners? Are there any kind of growth assumptions embedded in that that we should be thinking of?
Yeah, obviously I think we've talked about this in prior quarters you guys are are well positioned.
I have a strong balance sheet, just curious though what.
If you can give us some flavor on what the kind of incremental growth opportunities that you're looking at it, especially if you think about the the earnings growth that you you're expecting next year are there are there new partnerships are there new products with current partners or is it.
Are there any kind of growth assumptions embedded in that that we should be thinking of.
Speaker 3: Yeah, so we add around five or six big partners a year.
Yeah, So we add.
Around five or six big partners a year.
Speaker 3: and we're continuing to do that. There's been substantial regulatory pressure on the banking as a service industry. So people are migrating to more, I think more sophisticated platforms where safety and soundness, you know, is the focus. So that is helping to maintain our pipeline. We continue to say no to most new businesses because it's a,
And we're continuing to do that there has been substantial regulatory pressure.
The banking as a service industry.
So people are migrating to more I think more sophisticated platforms, where.
Safety and soundness.
Is the focus so that that is.
Helping too.
Maintain our pipeline, we continue to say no to most new businesses.
Because of <unk>.
Speaker 3: of what, you know, in their own cycle, where they are, those programs. We're taking only the most mature programs. And so we don't, we have great visibility 18 months in advance. So we know what those programs are. We've in many cases already signed contracts and we know what their volume is.
What what you know.
In their own cycle, where they are are those programs were taking only the most mature programs and so we don't.
We have great visibility 18 months in advance so we know what those programs are in many cases already signed contracts and we know what their volume is because some of the newer programs. Obviously, we'll have the growing volume, but if you're taking a mature program you've got a really good idea of the economics. So we've seen only a competitor intensity.
Speaker 3: because some of the newer programs obviously will have the growing volume, but if you're taking a mature program, you've got a really good idea of the economics. So we've, we've seen only a competitor intensity lesson and the mover, remember we're very broad. We're just not at neobanks. We're in healthcare and we're at government cards and we're across all the sectors of payments across our entire.
Listen and the move or the remember we're very broad we're just not at neo banks were in health care, and whereas government cards and we're across all the sectors of payments across our entire economy. So there still continues to be a for us a robust pipeline, where we're only dealing with the most mature and.
Speaker 3: So there still continues to be, for us, a robust pipeline where we're only dealing with the most mature and large programs.
Large programs.
Speaker 2: Perfect. That's helpful, Caller. And then, just as we think about the loan portfolio here,
Perfect. That's helpful color and then just as we think about the loan portfolio here.
Speaker 5: Are there any other levers that you guys can or expect to pull in 24 to, you know, potentially offset the smaller S-block portfolio that, you know, might persist for a bit if rates stay higher, which obviously would be good for margin and not a kind of a huge NII problem, but I'm just wondering if there's any other levers to pull to replace that or if you expect any rebound in that portfolio going forward.
Okay.
Are there any other levers that you guys can or expect that pull in 'twenty four to potentially offset the smaller S block portfolio that might persist for a bit if rates stay higher which obviously would be good for margin.
Kind of like the Puget I problem, but I'm just wondering if there's any other level levers to pull to replace that or if you expect any rebound in that portfolio.
Going forward.
Speaker 3: Yes, so it's definitely slow, you know, the sticker shock, the most part, it's consumer, basically. So the sticker shock, obviously, if you're going to go from a zero rate environment to a Fed fund.
Yes, so it's definitely slow the sticker shock the most probably.
Tumor basically so the sticker shock, obviously, if youre going to go from a zero rate environment to a fed funds.
Speaker 3: target of around 530, that's dramatic for some people. So the people that can de-lever will.
Target of around $5 30, that's that's dramatic for some people. So the people that can delever well.
Speaker 3: And that's lessening. So you can see that normalizing, the amount that has run off the portfolio has gone down in the last three quarters, and we see that normalizing. So what we expect across, and we see that in our other businesses, too. We see that in leasing, we dodged a bullet with the UAW strike. It looks like that will be resolved. If that went on for a few more months, it could hurt our leasing business.
And that is lessening. So you can see that normalizing the amount that has run off the portfolio has gone down in the last three quarters and we see that normalizing so while we expect across them and we see that in our other businesses too we see that in leasing we dodged a bullet with the UAW strike it looks like that will be resolved at that went on for <unk>.
Few more bites it could hurt our leasing business.
Speaker 3: And we're seeing our pipelines grow in our SBA and our real estate business. So we're expecting across the portfolio around 12 to 15% growth in the loan book in our footings.
And we're seeing our pipelines growing our SBA and our real estate business. So we're expecting across the portfolio around 12% to 15% growth.
Growth in the loan book and our footings more like 12, and the S block Eyeblack area in more than 15 ish and the CRE multifamily business remember, we don't have the big roll off in the portfolio anymore. We had that legacy portfolio. So our total footings didn't grow a lot, even though our new footings dead.
Speaker 3: More like 12 in the S-block, I-block area and more than 15.
Speaker 3: ish in the CRE multifamily business. Remember, we don't have the big roll-off in the portfolio anymore. We had that legacy portfolio, so our total footings didn't grow a lot even though our new footings did.
Speaker 3: So more like 15 in that area and probably more in the middle for leasing an SBA around 13 and a half percent. So we think we'll be able to do that. The big economic arrow in our quiver, though, is the fact that we still haven't bought any bonds and that's not in the guidance.
So more like 15 in that area and probably more in the middle for leasing and SBA around 13, 5%. So we think we'll be able to do that.
The big economic Arrow in our quiver, though is the fact that we had we still havent bought any bonds and thats not in the guidance. So when we play that out into our normal scenario.
Speaker 3: So when we play that out into our normal scenario, that could, if we don't hit those targets.
That could if we don't hit those targets.
Speaker 3: and the interest rate environment is right, we'll buy more bonds.
And the interest rate environment is is right, we'll buy more bonds.
Speaker 3: If in a normal scenario where we do get those footings and we start buying bonds in the middle of the year and we're getting about an 80 basis point premium over Fed funds, I think you'd see an incremental impact to earnings per share of another 15 cents.
In a normal scenario, where we do get those footings.
And we start buying bonds in middle of year, and we're getting about a basis point premium over fed funds I think you'd see an incremental impact to earnings per share of another 15.
So we've got an enormous amount of latitude.
Speaker 3: So, you know, we've got an enormous amount of latitude in our earnings projection. So, when we modeled it out, there's a lot of ways we can get to that 425. So, we have a little less origination. Of course, it's a very ambiguous environment right now. And we've looked at a lot of scenarios. But we feel very comfortable on a preliminary basis issuing this 425 guidance.
And our earnings projection so when we modeled it out there's a lot of ways. We can get to that 425. So we have a little less origination of course, it's a very ambiguous environment right now and we've looked at a lot of scenarios, but we feel very comfortable on a preliminary basis issuing this.
425 guidance.
Speaker 5: Got it. That's helpful. And then just lastly for me, and then I'll let someone else jump in, just on the credit side, Damien or Mark, whoever's on, just curious, you know, really the multifamily bridge product, any updates on kind of the performance there? I know we've bifurcated that portfolio quite a bit over the last nine months in terms of its makeup, geographic densities, et cetera, but just curious, any updates on your end in terms of the performance of that book, or are you guys kind of altering any of the underwriting just as we kind of get deeper into this?
Got it that's helpful. And then just last one for me and I'll, let someone else jump in and just on the credit side, David or Mark Whoever's on just just curious you know really the multifamily bridge product any updates on kind of the performance. There I know, we've bifurcated that portfolio quite a bit over the last nine months in terms of its makeup geographic densities, etc.
But just curious any updates on your end in terms of the performance of that book or are you guys kind of altering any of the underwriting just as we kind of get deeper into this.
Speaker 5: kind of commercial real estate panic, I guess we can call it. Just any update there would be great.
Kind of commercial real panic, I guess, we can call. It just any update there would be great.
Speaker 3: No, we've, we've, uh, the market is definitely shrunk for these type of deals. There's no doubt that the market is smaller, but we haven't, we've been very, very careful. You know, we've had a, kind of a, an amazing event, the way we positioned our balance sheet and we've taken advantage of it. So I've, we, myself and Mark Conley, who you just mentioned, who's our chief credit officer, we've, you know, we've sat down with very commercial people, lead our businesses and said, listen.
No. We are the market is definitely shrunk for these type of deals Theres no doubt that the market is smaller but we haven't we've been very very careful we've had a kind of a an amazing event the way we positioned our balance sheet and we've taken advantage of it so I.
Myself and Mark Connelly, who you just mentioned who is our chief credit officer, we've we've sat down with very commercial people.
Lead our businesses and said listen.
Speaker 3: This is not the year to stretch in any way. We need to narrow our credit underwriting. So it hasn't changed that much, but we've made sure that we didn't push at all. And that's why you've seen maybe a little bit less than trend growth in some of the roll-off. On the S-block portfolio, we wouldn't match other companies' price cuts.
This is not the year to stretch in any way, we need to narrow our credit underwriting so it hasnt changed that much but we've made sure that we didn't push it all and that's why you've seen maybe a little bit less than trend growth in some of the roll off on the ice block portfolio. We wouldnt match other companies price cuts. So we're very comfortable with that we want.
Speaker 3: So we're very comfortable with that. We wanna be set up for 2024 and 2025. We've got a lot of flexibility. We haven't seen deterioration at all in the multifamily, but once again, we're not.
Set up for 2024 and 2025, we've got a lot of flexibility, we havent seen deterioration at all in the multifamily, but once again, we're not we're not underwriting where where there were some problems in the market. We don't have subordinate subordinate debt and deals. We have reserves, we have interest rate caps on our floating rate loans and our cap rate.
Speaker 6: We're not underwriting where there was problems in the market. You know, we don't have subordinate debt and deals. We have reserves. We have interest rate caps in our floating rate loans. And our cap rates are more like 8%. Some people have gone down to 6%. We don't do any of that stuff. And so we haven't seen any credit deterioration. Excellent.
They're more like 8% and some people have gone down the sex, we don't do any of that stuff and so we haven't seen any credit deterioration.
Excellent. Thank you guys for taking my questions how can we have.
Thank you so much Mike.
Speaker 1: Our next question comes from the line of Frank Shiraldi of Piper Thandler. Please go ahead.
Our next question comes from the line of Frank shut all day of Piper Sandler. Please go ahead.
Good morning.
Good morning, Frank.
Speaker 7: On the 12% fee income growth year-over-year, is that a reasonable translation rate going forward on 17% GDV growth? I'm just curious, as you renew partnerships and sign new ones, if there's any change to the economics there between what you guys get in terms of fees and deposit benefit, and if you're seeing tighter spreads or better pricing as you renew.
On the 12% fee income growth year over year in that.
Is that a reasonable kind of translation rate going forward on 17%.
G D V growth because I was just curious as you renew partnerships and signed new ones. If theres any change to the economics, there between where you guys get in terms of.
Fees and deposit benefited and if youre seeing tighter spreads or better pricing is as you as you.
Renew and again signing new ones.
Speaker 3: No, we're not getting any pricing pressure.
No we're not we're not getting any pricing pressure.
Speaker 3: For our larger programs, so when we do negotiate because of the incremental expense differential between an older and newer program, we do give large volume discounts, but that's kind of falls more to the bottom line for us. That is a good relationship.
For.
Our larger program. So when we do negotiate because of the incremental expense differential between older and newer program. We do give large volume discounts, but thats kind of falls more to the bottom line for us that is a good relationship 17.
Speaker 3: to 12. I think that's if I know what's coming on there's several large new programs coming on so they will be higher fee in the beginning for the first couple years as they grow volume.
To 12, I think that's it I know whats coming on there's several large new programs coming on so they will be higher fee than the beginning for the first couple of years as they grow volume.
Speaker 3: But the thing to note is that we're, you know, we have 12% in there as kind of the base off a GDV of at least that range, 17, it might be more than 17% growth next year, but we're expecting 2 or 3% this year from more of the credit sponsorship fees.
But the thing to note is that work.
We have 12% in there as kind of the base of GDP of at least that range 17, it might be more than 17% growth next year, but we're expecting two or 3%. This year from more of the credit sponsorship fees. So we think total fees.
Speaker 3: So, we think total fees, you know, 12 is the low end. We think we might get to 15 next year for total fee growth in all FinTech activities, including new credit sponsorship activity. So, we think it's going to be a really great year. We've got great visibility. You know, our base is.
The low end, we think we might get to 15 next year for total fee growth and all fintech activities.
Operator: Good morning, ladies and gentlemen, and welcome to the Bancorp Inc Q3 2023 earning this conference call. At this time, all lines are in listen only 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. This call is being recorded on Friday, October the 27th, 2023.
Including new credit sponsorship activity. So we think it's going to be a really great year, we've got great visibility.
Base is.
Speaker 3: dramatically higher than it was even a few years ago. So growing at that rate.
Dramatically higher than it was even a few years ago. So growing at that rate is a challenge, but it is so exciting because they are large programs and we're adding.
Speaker 3: is a challenge, but it's so exciting because they're large programs and we're adding, you know, five or six a year. And they're exciting organizations with great volume. And they're early in their life cycle. So, you know, they haven't broken through those, those tears, like we've had for our very long relationships, like a Chime or a PayPal. So we're very excited about 2024 and 2025.
Five or six a year.
And they are exciting organizations with a great volume.
They're early in their lifecycle, so they havent broken through those those tiers like we've had for a very long relationships like a time or a paypal. So we're very excited about 2024 and 2025.
Andres Viroslav: I would now like to turn the conference over to Andres Viroslav. Please go ahead. Thank you, Jerry.
Andres Viroslav: Good morning, and thank you for joining us today for the Bancorp's third quarter 2023 financial results conference call. On the call of me today are Damian Kozlowski, Chief Executive Officer and Paul Frenkiel, our Chief Financial Officer. This morning's call is being broadcast on our website at www.bancorp.com. There will be a replay of the call available via a 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 0-4-3391.
Speaker 3: Great. And then just, um, just on, you know, obviously the interest rate picture is a little bit uncertain here, just in terms of margin dynamics from here, maybe even beyond the next couple of quarters. I mean, do you think, um, by design you're, you're sort of, um, getting close to peak here and that you can kind of lock in, uh, these levels on a go forward basis. What's your thoughts on margin? Yes. So, yes. So what'll happen, obviously it's a, there's a.
Okay, Great and then just just on you know obviously the interest rate picture is a little bit uncertain here just in terms of margin dynamics from here, maybe even beyond the next couple of quarters I mean do you think.
By design, you're sort of getting close to peak here in and that you can kind of lock in these levels on a go forward basis.
Thoughts on margin, yes, so yes, so what'll happen, obviously, it's a there's a.
Andres Viroslav: Before I turn the call over to Damian, I would like to remind everyone that when using this conference call, the word believes anticipates expects and similar expressions are intended to identify forward-looking statements within the meetings of the private security litigation reform act of 1995. That statements are subject to recent uncertainties, which could cause actual results, performance or achievements to different materially from those anticipated or suggested by such statements. For the discussion of these recent uncertainties, please see the Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Speaker 3: We have a quick, our duration of our portfolio is fairly short, and we did that on purpose.
We have a quick we are our duration of our portfolio is fairly short and we did that on purpose.
Speaker 3: So our NIM is not only because of the Fed funds increases, but also because the repricing of the credits that we have. So, you know, at one point we're at six and now we're eight and a half plus, and we're getting a new NIM of six and a half plus, right? So that's our NIM now is 507, but we're putting new loans on.
Our NIM is not only because of the fed funds increases, but also because of the repricing of the credits that we have so.
At one point were at six and our eight and a half plus and we're getting a new NIM of six and a half plus right. So that's our NIM now is $5 seven, but we're putting new loans on.
Speaker 3: um that are substantially higher than that so you'll see them continue to move up the inflection
That are substantially higher than that so you'll see the NIM continued to move up the inflection point is when we obviously buy long term concern.
Speaker 3: is when we obviously buy long-term securities and normalize the balance sheet. Obviously, they won't have the same, you'll get an impact on them, even though our net income will go up, obviously, this will get a spread over Fed Fund, and it definitely has spread over our, depending on much deposits we have at that time, you'll get a less impacted name.
Securities and normalize the balance sheet, obviously, they won't have the same you'll get an impact on NIM, even though our net income will go up obviously, because we will get a spread over fed funds and it definitely gets spread over our depending on much deposits we have.
Damian Kozlowski: I would like to turn the call over to the Bancorp's chief executive officer, Damian Kuzlowski. Thank you, Andreys. Good morning, everyone. The Bancorp earned 92 cents a share with revenue growth of 31 percent and expense growth of 6 percent. ROE was 26 percent. The NIM expanded to 507 from 483 quarter over quarter and 369 year-over-year. GDV increased 17 percent year-over-year and total fees from all of our Fintech activities increased 12 percent.
At that time, you'll get a less impacted NIM, we can't really predict that obviously, but we know generally that when there.
Speaker 3: We can't really predict that obviously, but we know generally that when there's a D inversion of the yield curve.
There is a D inversion of the yield curve.
Speaker 3: You know, you're going to get around 800 basis points on those longer term bonds.
Youre going to get around 80 to 100 basis points on those longer term bonds and we're going to buy a round to just normalize our balance sheet to our peer group, we still would have to buy.
Speaker 3: and we're going to buy a round to just normalize our balance sheet to our peer group, we still would have to buy at least a billion, if not a billion and five, of security. So we can't kind of model that out and see the impact. We just don't know when that's going to be.
Damian Kozlowski: The Bancorp continues to produce record core profitability and exemplar financial performance in a challenging industry and macro-environment for most financial institutions. We continue to invest heavily in the development of new products and services, especially in our Fintech Solutions ecosystem. These investments should have meaningful impact on performance in grow-style or volume, growth in 24 and beyond. As I stated in our last earnings call, we expect to have above-trend GDV growth in 2024 of more than 15 percent in increasing participation in providing credit sponsorships solutions to our business partners.
At least $1 billion, if not 1 billion $5 security. So we can kind of model that out and see the impact. We just don't know when that's going to be.
Speaker 3: In what our base case is, that happens in the middle of the year, and that's when we start our bond purchases, probably around $250 million a quarter, and that would add incremental, it might affect your NIM, depending on our deposit levels, but it's also going to impact, obviously, your net income. And with us returning so much capital, it'll obviously impact our ROA and ROE.
And what our base cases that happens in the middle of the year and that's when we start our bond purchases, probably around $250 million a quarter and that would add incremental it might affect your NIM, depending our deposit levels, but it's also going to impact obviously, your net income and with us.
Returning so much capital that'll, obviously impact our ROA and ROE in a positive way.
Damian Kozlowski: We also opened our new Fintech hub in Sioux Falls focused on collaborative space for our Bancorp team and business partners while providing best-in-class work space to innovate and create the future of packing solutions. As a result of our investments in growth and efficiency, our ROE is driving a continued increase in our regulatory capital ratios. With the REGEI Durban balance sheet limit of 10 billion, Bancorp is fast approaching the maximum equity capital needed to support our business growth into the future.
Great and then just lastly on I know there are several scenarios for next year to get to that $4 25.
Speaker 7: Great, then just lastly on, I know there's, you know, several scenarios for next year to get to that 420.
Speaker 7: But in terms of the most likely, you know, how do you see, obviously revenues are going to outpace expenses here. But do you think you're at a point of scale here where we're going to see, you know, low single-digit expense growth? Do you think we'll still see double-digit expense growth just given the amount of new partnerships you're putting on any sort of model?
But in terms of the most likely.
How do you see obviously revenues are going to outpace expenses here, but do you think you're at a point of scale here, where we're going to see low single digit expense growth do you think we'll still see double double digit expense growth just given the amount of new partnerships you are putting on any any sort of.
Damian Kozlowski: Therefore, we are significantly increasing our buy-back in 2024 by 100 million to 200 million or 50 million a quarter. Since the inception of our buy-back in 2021 through September 2023, we have purchased 6.4 million shares at an average cost of $27. We believe our stock continues to be significantly undervalued when considering our long-term equity returns and EPS growth prospects. Therefore, our capital return policy will remain focused on stock buy-backs rather than dividend.
Model guide on that front yet.
Speaker 3: Yeah, single, single. So we had an adjustment year due to inflation this year and a lot of investment in our ecosystem, you know, even new office space to have collaborative space.
Yes single single, so we had an adjustment year due to inflation this year and a lot of investment and our ecosystem, even new office space to have collaborative space. So that will be more normalized we're going to try to continue with the 10%.
Speaker 3: So that'll be more normalized. We're going to try to continue with the 10%.
Speaker 3: You know, we're at such a high profitability level that if you can get a 10% between revenue and expense growth, it has obviously a dramatic impact. And that's why we're fairly comfortable with that. 425 number. we'll still be able to do that. So we'll have low.
We're at such a high profitability level, but if you can get a 10% between revenue and expense growth. It has obviously a dramatic impact and that's why we're fairly comfortable with that 425 number will still be able to do that so we will have.
Low.
Damian Kozlowski: In addition, in our 2023 fourth quarter, full year conference call, we will announce our new strategic framework that will propel our company forward to 2030. We will outline how the Bancorp will continue to grow revenue, profitability and announce new long-term targets. Having already achieved exemplar bank performance with robust growth, with little need for new capital, the Bancorp can produce future performance that is truly extraordinary in the financial services industry. We are reiterating our guidance for 23 at 360 a share.
Speaker 3: in a conservative view, without the bond purchases and without the impact of buybacks again, we think we can maintain a mid to lower single digit expense growth with a low teens revenue growth. And that obviously will have a big impact on earnings per share. Great.
In a conservative view without the bond purchases and without the impact of buybacks again, we think we can maintain a mid to lower single digit expense growth with a low teens revenue growth and that obviously will have a big impact on earnings per share.
Great. Okay. Thanks for all the color.
Thank you Frank.
Speaker 1: Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed one to one.
Damian Kozlowski: We are also initiating 2024 preliminary guidance for 2025 a share without including the impact of share buybacks. And in addition, this does not include bond purchases where we would normalize our balance sheet similar to pure banks. This is approximately 18% earnings growth over 2023 three guidance. We expect the Bancorp to continue to meaningfully outperform our peers and deliver superior growth and continued improvements in ROE and RLA.
And there are no further questions at this time.
Speaker 1: And there are no further questions at this time. Damon Kostlowski, please.
Damian Kozlowski. Please proceed.
Speaker 3: Well, thank you so much operator. Thank you to everyone for joining us today operator. You can disconnect the call.
Well. Thank you so much operator, thank you.
To everyone for joining us today.
Operator, you can disconnect the call.
Ladies and gentlemen, this concludes your conference call for today, we thank you for your participating and we ask that you. Please disconnect your lines.
Speaker 1: We thank you for your participating and we ask that you please disconnect.
Paul Frenkiel: I now turn the call over to our CFO and my colleague Paul Frenkiel for more color on the third quarter. Paul, thank you, Damian. As a result of its variable rate loans and security, Bancorp continues to benefit from the cumulative impact of Federal Reserve rate increases. That factor was the primary driver in increases and return on assets and equity for Q3 2023, which were respectively 2.7% and 26% compared to 1.7% and 18% in Q3 2022.
Yes.
Speaker 8: The conference is no longer being recorded.
The conference is no longer being recorded.
Paul Frenkiel: These increases reflected a 37% in net interest income. In addition to direct sensitivity of the majority of our lending lines of business, management has struck to the balance sheet to benefit from a higher interest rate environment. Accordingly, over a period of years, it has largely allowed its fixed rates investment portfolio to pay down 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.
Paul Frenkiel: As a result, in Q3 2023, the yield on interest earning assets had increased to 7.4% from 4.8% in Q3 2022 were an increase of 2.6%. The cost of deposits in those respective periods increased by only 1.4% to 2.5%. Those factors reflected in the 5.1% NIM in Q3 2023, which represented another increase over prior periods. The provision for credit losses was $1.8 million in Q3 2023 compared to $822,000 in Q3 2022. Q3 2023 net charge amounted to $922,000 substantially all of which were in leasing.
Paul Frenkiel: Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income. Total fees and other payments income of $24 million in Q3 2023 increased 12% compared to Q3 2022. Non-interest expense for Q3 2023 was $47.5 million, which was 6% higher than Q3 2022. The majority of the increase resulted from salary expense, which increased 9%, and which reflected higher numbers of staff and financial crimes, compliance, and information technical knowledge.
Paul Frenkiel: Technology. Staffing increases reflected higher 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 and lower expense deferrals as a result of lower loan production. Book value per share a quarter end increased 22% to $14.36 compared to $11.81 a year earlier. Reflected the impact, reflecting the impact of retained earnings or at least fair repurchases will continue to reduce shares outstanding.
Damian Kozlowski: I will now turn the call back to Damian.
Operator: Operator, would you please open the line for questions? Thank you.
Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys.
Michael Perito: Our first question comes from the line of Michael Perrito of KBW. Please go ahead. Hey guys, good morning, Mike. Thanks for taking my question. Good morning. I wanted to start just kind of on the state of the kind of bank handset service environment here. Obviously, I think we've talked about this in prior quarters. You guys are well positioned and have a strong balance.
Damian Kozlowski: You just curious, though, if you can give us some flavor on what the kind of incremental growth opportunities that you're looking at, especially if you think about the earnings growth that you're expecting next year, are there new partnerships or new products with current partners? Are there any kind of growth assumptions embedded in that that we should be thinking of? Yeah, so we add around five or six big partners a year and we're continuing to do that.
Damian Kozlowski: There's been substantial regulatory pressure on the banking and service industry. People are migrating to more sophisticated platforms where safety and soundness is the focus. That is helping to maintain our pipeline. We continue to say no to most new businesses because of what in their own cycle where they are. Those programs we're taking only the most mature programs and so we don't we have great visibility 18 months in advance. So we know what those programs are.
Damian Kozlowski: We've in many cases already signed contracts and we know what their volume is because some of the newer programs obviously will have be growing volume. But if you're taking a mature program, you've got a really good idea of the economic. So we've seen only competitor intent to the lesson and the move, remember, we're very broad. We're just not at neo banks. We're in health care and we're in government cards and we're across all the sectors of payments across our entire economy.
Michael Perito: So there still continues to be a for us a robust pipeline where we're only dealing with the most mature and large programs. Perfect, that's helpful color.
Damian Kozlowski: And then just as we think about the loam portfolio here, are there any other levers that that you guys can or expect to pull in 24 to potentially offset the smaller S-block portfolio that might persist for a bit if rates stay higher, which obviously would be good for margin, and not a huge and eye problem, but I'm just wondering if there's any other levers to pull to replace that, or if you expect any rebound in that portfolio going forward. Yes, so it's definitely slow.
Damian Kozlowski: You know, the sticker shock, the most probably it's consumer basically, so the sticker shock obviously they're going to go from a zero rate environment to offend funds target of around 530, that's dramatic for some people, so the people that can deliver will, and that's lessening. So you can see that normalizing, the amount that has run off the portfolio has gone down in the last three quarters, and we see that normalizing. So what we expect across, and we see that in our other businesses too, we see that in Leasing, we dodged a bullet with the UAW strike, it looks like that will be resolved if that went on for a few more months, it could hurt our leasing business, and we're seeing our pipelines grow in our SBA and our real estate business.
Damian Kozlowski: So we're expecting across the portfolio around 12 to 15% growth in the loan book in our footings, more like 12 in the S block, I black area, and more 15 ish in the CRE multi-family business. Remember, we don't have the big roll loss in the portfolio anymore. We had that legacy portfolio, so our total footings didn't grow a lot even though our new footings did. So more like 15 in that area, and probably more in the middle for leasing an SBA around 13 and a half percent.
Damian Kozlowski: So we think we'll be able to do that. The big economic arrow in our quiver, though, is the fact that we still haven't bought any bonds, and that's not in the guidance. So when we play that out into our normal scenario, that could, if we don't hit those targets, and the interest rate environment is right, we'll buy more bonds. If in a normal scenario where we do get those footings, and we start buying bonds in the middle of the year, and we're getting about an aim-based point premium over Fed funds, I think you'd see an incremental impact to earnings for sure of another 15 cents.
Damian Kozlowski: So, you know, we've got an enormous amount of latitude in our earnings projection. So when we modeled it out, there's a lot of ways we can get to that 425. So we have a little less origination. Of course, it's a very ambiguous environment right now, and we've looked at a lot of scenarios, but we feel very comfortable on a preliminary basis, issuing this 425 guidance. Got it. That's helpful.
Michael Perito: And then just lastly for me and I'll let someone else jump in.
Michael Perito: Just on the credit side, Damien or Mark, whoever's on, just curious, you know, really the multi-family birds product, any updates on kind of the performance there. I know we've bifurcated that portfolio quite a bit, over the last nine months in terms of its makeup, geographic densities, etc. But which is curious, any updates on your end in terms of the performance of that book, or are you guys kind of altering any of the underwriting, and just as we kind of get deeper into this.
Damian Kozlowski: I guess we can call it any update there to be great. No, the market is definitely shrunk for these type of deals. There's no doubt that the market is smaller. But we haven't, we've been very, very careful. You know, we've had kind of an amazing event, the way we positioned our balance sheet, and we've taken advantage of it. So I've, we, myself and Mark Connelly, who you just mentioned, who's our chief credit officer, we've, you know, we've sat down with very commercial people lead our businesses and said, listen, this is not the year to stretch in any way.
Damian Kozlowski: We need to narrow our credit underwriting so it hasn't changed that much, but we made sure that we didn't push at all. And that's why you've seen maybe a little bit less than trend growth and some of the roll off. On the S block portfolio, we wouldn't match other companies price cuts. So we're very comfortable with that. We want to be set up for 2024 and 2025. We've got a lot of flexibility.
Damian Kozlowski: We haven't seen deterioration at all in the multi family, but once again, we're not, we're not underwriting where, where there were problems in the market. You know, we don't have supported Nate, uh, sport and they didn't deal. We have reserves. We have interest rate caps on our floating rate loans, and our cap rates are more like 8%. Some people have gone down the six. We don't do any of that stuff. And so we haven't seen any credit deterioration.
Michael Perito: Excellent.
Michael Perito: Thank you guys for, for taking my questions.
Michael Perito: Have a good week.
Michael Perito: Thank you so much, Mike.
Frank Schiraldi: Our next question comes from the line of Frank Shiraldi of pipe assembler. Please go ahead.
Frank Schiraldi: Good morning. Good morning, Frank. On the 12% fee income growth year over year. And that, um, is that a reasonable, you know, kind of translation rate going forward on on 17%. Uh, GDP growth, because, because just curious as you renew partnerships and sign new ones, if there's any change to the economics there between what you guys get in terms of fees and deposit benefit. And if you're seeing tighter spreads or better pricing as you, as you renew and, and again, sign new ones.
Frank Schiraldi: No, we're not getting any pricing pressure for our larger programs are when we do negotiate because of the incremental expense differential between an older and newer program. We do give large volume discounts, but that's, you know, kind of falls more to the bottom line for us. That is a good relationship, 17, um, to 12. I think that's if I know what's coming under several large new programs coming on. So they will be higher fee in the beginning for the first couple of years as they grow volume.
Frank Schiraldi: Uh, but the thing to note is that we're, you know, we have 12% in there as kind of the base off a GDP of at least that range, 17. It might be more than 17% growth next year. But we're expecting two or three percent this year from more of the credit sponsorship fees. So we think total fees, you know, 12 to low end. We think we might get the 15 next year for total fee growth and all Fintech activities and crit including news credit sponsorship activity.
Frank Schiraldi: So we think it's going to be a really great year. We've got great visibility. You know, our base is. It dramatically higher than it was even a few years ago. So growing at that rate is a challenge, but it's so exciting because they're large programs and we're adding five or six a year. And they're exciting organizations with great volume. And they're early in their life cycles. So, you know, they haven't broken through those those tears like we've had for a very long relationships like a time or a paypal.
Damian Kozlowski: So we're very excited about 2024 and 2025. Great. And then just just on, you know, obviously the industry pictures a little bit uncertain here, just in terms of margin dynamics from here, maybe even beyond the next couple of quarters. I mean, do you think by design, you're sort of getting close to peak here and and and that you can kind of lock in these levels on a go for basis. Yes, so yes, so what will happen, obviously, it's a there's a we have a quick we are duration of our portfolio is fairly short and we did that on purpose.
Damian Kozlowski: So our name is not only because of the fed funds increases, but also because the repricing of the credits that we have. So, you know, at one point we're at fix and hour eight and a half plus and we're getting a new name of six and a half plus. Right. So that's our name now is 507, but we're putting new loans on that are substantially higher than that. So you'll see them continue to move up.
Damian Kozlowski: The inflection point is when we obviously buy long term concern of securities and normalize the balance sheet. Obviously they won't have the same you'll get an impact on them. Even though our net income will go up obviously because we'll get a spread over fed funds and a definitely a spread over our depending on much deposits. We have our at that time you'll get a less impacted them. We can't really predict that obviously, but we know generally that when the there's a de inversion of the yield curve.
Damian Kozlowski: We, you know, you're going to get around 80, 100 basis points on those longer term bonds and we're going to buy around to just normalize our balance sheet to our peer group. We still would have to buy, you know, at least a billion. It's not a billion five of securities. So, you know, we can kind of model that out and see the impact. We just don't know when that's going to be.
Damian Kozlowski: In what our base cases that happens in the middle of the year and that's when we start our bond purchases probably around 250 million a quarter and that would add incremental. It might affect your name, depending on our deposit levels, but it's also going to impact obviously your net income and with us returning so much capital, it'll obviously impact our R O A and R O E in a positive way. Great, and then just lastly on I know there's, you know, several scenarios for next year to get to that 425.
Damian Kozlowski: But in terms of the most likely, you know, how do you see obviously revenues are going to outpace expenses here, but do you think you're at a point of scale here where we're going to see, you know, low single digit expense growth. You think we'll still see double single double digit expense growth just given the amount of new partnerships you're putting on any any sort of model guide on, from. He is single.
Damian Kozlowski: So we had an adjustment here due to inflation this year and a lot of investment in our ecosystem, you know, even new office space to have collaborative space. So that will be more normalized. We're going to try to continue with the 10%. You know, whereas such a high profitability level that if you can get a 10% between revenue and expense growth, it has obviously a dramatic impact. And that's why we're fairly comfortable with that 425 number.
Damian Kozlowski: We'll still be able to do that. So we'll have, you know, low in a conservative view without the bond purchases and without the impact of buybacks again, we think we can maintain a need to lower single digit expense growth with a low teens revenue growth. And that obviously will have a big impact on earnings per share. Great. Okay. Thanks for all the color. Thank you, Frank. Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. And there are no further questions at this time.
Damian Kozlowski: Damon Kozlowski, please proceed. Well, thank you so much, operator. Thank you to everyone for joining us today. Operator, you can disconnect the call.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you,