Bancorp Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 26, 2024

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Bancorp Inc. Q4 and Fiscal 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, January 26, 2024.

Operator

I would now like to turn the conference over to Mr. Andres Verozlov. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning and thank you for joining us today for The Bancorp's 4th quarter fiscal 2023 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer and Paul Frenkel, our Chief Financial Officer. This morning's call is being webcast on our website at www.dabank The dial in for the replay is 1-eight seventy seven-six seventy four-seven thousand and seventy with a confirmation code of 54 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 anticipated or suggested by such statements.

Speaker 1

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. Bancorp undertakes no obligation to publicly release the results and any revisions to forward looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Speaker 2

Thank you, Andres, and good morning, everyone. Excluding the tax affected impact of a one time write off, the company's only trust preferred security purchased in 2006, the Bancorp earned $0.95 a share with the year over year revenue growth of 16% and expense growth of 5. Excluding the trust preferred write off, ROE was $26,000,000 NIM expanded to $5.26 from $5.07 quarter over quarter and $4.21 year over year. GDV increased 13% year over year and total fees from all fintech activities increased 15%. For the full year 2023, the Bancorp generated $3.63 per share excluding the net of tax $0.14 impact of the trust preferred write off.

Speaker 2

1st and foremost, we have completed a major year long strategic review and built a new business plan for our company. We are pleased to announce Apex 2030. Details on this strategy appear in our investor presentation on our website. The strategic blueprint includes the monetization of our capabilities in middle office technology and infrastructure and the ability to keep our balance sheet under $10,000,000,000 by recycling both our assets and liabilities off balance sheet. These enhanced capabilities will create significant fee generation opportunities in services, credit sponsorship and asset distribution.

Speaker 2

As I discussed in our last earnings call, as a result of our investments in growth and efficiency, our ROE is driving a Continued increase in our regulatory capital ratios. With the Reg II Durbin balance sheet limit of $10,000,000,000 The Bancorp 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 100,000,000 to $200,000,000 or $50,000,000 a quarter. Since the inception of our buyback in 2019, we have created approximately $75,000,000 of value To our shareholders based on our December 31, 'twenty three share price, 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 dividends.

Speaker 2

We are also confirming 20 24 guidance of $4.25 a share without including the impact of share buybacks. This is approximately 17% earnings growth over 23 earnings per share excluding the impact of the trust preferred write off, And we expect The Bancorp to continue to meaningfully outperform our peers and deliver superior growth and continued improvements in ROE and ROA. I now turn the call over to Paul Frankel for more color on the 4th quarter and full year 23.

Speaker 3

Thank you, Damian. As a result of its variable rate loans and securities, Bancorp performance continues to benefit from the cumulative impact of Federal Reserve rate increases. While 2023 decreases in SBLOC and IBLOC balances offset The impact of other loan growth, total related net pay downs in the 4th quarter were significantly lower than in every other quarter of 2023. The impact of the Federal Reserve rate increases was reflected in the 20% 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.

Speaker 3

Accordingly, over a period of years, it has largely allowed its fixed rate 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. As a result, in Q4 2023, the yield on interest earning assets had increased to 7.5% from 5.9% in Q4 2022 or an increase of 1.6%. The Cost of deposits in those respective periods increased by only 0.8% to 2.5%. Those factors were reflected in the 5.26 percent NIM in Q4 2023, which represented another increase over prior periods.

Speaker 3

The provision for credit losses was $4,300,000 in Q4 2023 compared to $2,800,000 in Q4 2022. Of the total $4,300,000 approximately $1,000,000 resulted from growth in loan principal between the 3rd 4th quarters of 2023, against which cumulative CECL loss and qualitative percentages are applied. An additional $1,000,000 resulted from increasing the CECL economic factor on real estate bridge loans. The balance of the provision primarily reflected the impact of leasing related charges, approximately $900,000 of which were in long haul and local trucking. Total principal exposure in those and related categories was approximately $39,000,000 at December 31, 2023.

Speaker 3

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 $25,000,000 in Q4 2023 increased 15% compared to Q4 2022. Non interest expense for Q4 2023 was $45,600,000 which was 5% higher than Q4 2022. Dalies and benefits expense was flat year over year, reflecting reduction in incentive compensation expense. Book value per share at quarter end increased 22% to $15.17 compared to $12.46 a year earlier, reflecting the impact of retained earnings.

Speaker 3

Quarterly share repurchases should continue to reduce shares outstanding. I will now turn the call back to Damian.

Speaker 2

Thank you so much, Paul. Operator, could you open the line for questions?

Operator

Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Michael Perito from KBW. Please go ahead.

Speaker 4

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

Speaker 2

Good morning, Mike.

Speaker 4

A couple of short term shorter term questions, couple of longer term questions. But first, just start on the 24 guide. Paul, I was wondering if you can maybe provide a little bit more context around 2 things. 1, kind of how rates could maybe what kind of rate assumptions you have in the guide most recently And how maybe some variability on that could impact the guide ex buyback? And then also would love a little color too on just kind of Thoughts around OpEx growth for 2024 and if you guys are kind of in a net growth position here adding some headcount or just would love a little update there as well?

Speaker 2

Okay. So, Mike, before I turn it over to Paul, there's a couple of things. We do not our base case is not the Market's view of 6 interest rate cuts. We think there might be a couple, maybe starting in June, But our forecast of the $425,000,000 does not include any bond purchases. So we're expecting a normalization of the yield curve and Significant amount of bond purchase in order to mitigate our 60% deposit beta.

Speaker 2

We've already made a lot of progress on that by adding fixed rate exposure in our loan portfolio. So we're far less asset sensitivity than we were in the beginning of the year, I think about 14% less as a percentage of our balance sheet. And Our expense growth is going to be much less than this year. There was a big impact Across the entire economy, especially employee pay, we felt that also, but we're talking mid single digit type of expense growth this year, not double digit employee growth rates that we saw on base pay in 2023. Paul, would you like to add something?

Speaker 3

I think that's a good summary. I would also add that we're relatively conservative in terms of really every aspect of the budget. So we feel that even if we get a little bit more of the rate cuts and so forth that we have enough flexibility in some of our other categories to make up that shortfall. And again, we don't include the impact of share repurchases. We think that's another And if you look at the history of our budgetary projections on which Our guidance is based, we've been pretty accurate and fulsome and that sense of conservatism in the budget has really served us well in terms of meeting the expectations.

Speaker 2

That's helpful. Can we maybe just

Speaker 4

to spend another minute On the margin and rate stuff, do you have a sense of after the actions you've taken already, What kind of the immediate impact would be of a rate cut to NIM generally? And then secondly, what else do you plan to do in the next quarter or 2 here before rate cuts begin. I mean, is there something specific that you're kind of waiting for to buy some more bonds or just would love a little bit more color there if you guys are willing?

Speaker 2

The answer is we want to negate. We were remember, we opened Our balance sheet after buying bonds in 2018 and the pandemic getting interest rates at 0, we became Extremely asset sensitive, let the bond portfolio run off all the way down under $800,000,000 and we waited for the interest rate increase, the majority of it to be finished before we decided to put on fixed rate exposure. That's happened over the last year. We've closed that gap substantially. And with the purchase of bonds, anywhere between $1,000,000,000 $1,500,000,000 we'll close We might be a little asset sensitive, but we'll close the majority of the deposit beta.

Speaker 2

So, we believe that as we approach the real rate hike, probably in the June timeframe, you'll get a de inversion of the yield curve, at which time we'll add very low risk agency and mortgage backed security exposure, thus closing the majority of that asset sensitivity. Therefore, you will not see an impact, a substantial impact on our profitability. However, obviously, NIM will fall. And the NIM will fall because the bond purchases are likely to be have a lower coupon than some of our loan portfolio. However, our profitability will be intact on a run rate basis.

Speaker 2

But additive, If the yield curve disinverts, you'll get additional net income and additional ROE and ROA returns. Okay. That makes sense.

Speaker 4

So we should kind of so you guys are going to be patient on the bond side Until there's more clarity. Super clarity. Yes. Okay.

Speaker 2

We can either go by there. We can

Speaker 4

either go by there. Some margin downside on an absolute basis, but With the actions you've taken already and then the flexibility still to buy more bonds, you feel like you can neutralize a vast majority That asset sensitivity.

Speaker 2

Yes. As you know, the NIM is for banks, the NIM is very important if you're a traditional bank, Right? But in our weird situation, we can actually lower our NIM substantially increased our net income just by getting a spread on our bond purchases, right? So that usual correlation where you see the NIM drop, oh no, profitability is going to go No, ours will actually go up. So, we think we were being very cautious.

Speaker 2

We this is an hourly thing for us. We won. We're using history as a guide. There should be that inflection point where we start putting on that bond exposure where it will be a positive to the bank, it will lock in long term rates and then it will mitigate our deposit beta, which you know is only driven by our program management and are locked in long term contracts. So we know what our funding is.

Speaker 2

So I think we're in a very unique flexible position on the balance sheet. And this is a this has been a game that has played over 5 years, not just the last 5 months and we've been very careful and I think we're in the right position in order to close that gap and get incremental profitability to our shareholders.

Speaker 4

Thank you. And then I wanted to ask a question or 2 about the Apex 2030. My hunch is, and please correct me if I'm wrong, but my hunch is there's going to be quite a bit of ramp in kind of the fee contribution to hit these targets. Do you have a sense of what that is? Like by the time you get to $1,000,000,000 plus of revenue or fees over half of the revenue pool?

Speaker 4

And have you guys are you guys willing to kind of provide any guardrails around that? And is most of that fee ramp opportunity off balance sheet deposit earnings and kind of credit as a service gain on sale type earnings that are going to keep the balance sheet sub $10,000,000,000 Is there anything else We should be thinking of as you guys ramp the non interest income portion to hit that $1,000,000,000 number?

Speaker 2

Yes. So we'll be saying a lot more. There's a lot of work. We've decided which areas to play. We've given some very general guidance in our investor presentation that we redid and put on our website, And we'll be giving much more detail.

Speaker 2

Now in the near term, we have another $3,000,000,000 of room of credit on our balance sheet. So Even though our fees are growing very quickly, we will continue to get probably higher growth on the interest income side and then it will stop because we won't have any more balance sheet left. And then you'll get a situation where you'll have A stabilization of that interest income, generally much slower growth and then you'll get it all in fees. So, it's going to come from and you're exactly right from credit sponsorship, but it's going to be a mix of a very A diverse mix of different type of programs, some of them facilitated by the balance sheet and others extremely light and underwritten assets that are sold into the market. And we're talking about not 1 or 2 programs, we're talking in 5 years a diversified mix 2025 programs where in certain cases we're not taking any credit exposure at all.

Speaker 2

Part of our balance sheet will be for that. All the other Services that we will provide will be fee based. So, if you're talking about any of the Client services we do today and things like transaction monitoring, some of the middle office technology services we provide, those will all be fee based and we'll give much more guidance as we get more clarity ourselves. All we have done is put a structure and framework together to kind of look into the future and build a model and understand what we want our bank to be within the competitive end market environment. And we've done so much in the past to build our ecosystem.

Speaker 2

And we're trying to look forward to 2,030 and say, this is what our company is going to look like. And think about all the big trends that are happening right now like AI that we have to build into that vision. So, we're going to be saying a lot more. There's a this year is a lot of work. The area that you're going to see real fee generation and spread generation will be in the credit sponsorship area, but it will be a couple of years before you see meaningful parts of our balance sheet use for credit sponsorship or fees for other services.

Speaker 2

And we'll give you more guidance as we get through this year on what that might look like. Just a tremendous amount of resources and work will need to be done, but the opportunity is enormous. Because of our position In banking as a service and providing this middle office technology and services, we really do have a unique opportunity to sell those for fees broadly in financial services and to our other partners throughout the payments ecosystem. So we're I mean, we're just actually calling from Miami today where we had our senior management off-site going through all this. We are all very, very enthusiastic about the future and are really looking forward to continue to build on all the achievements we've made and going into a new future look that I think will be even more profitable, faster growth and much more fee based.

Speaker 4

Sweet. I appreciate all the color. Damian and Paul, thanks and congrats. 23 was really a great year. So kudos to you guys.

Speaker 4

Have a good weekend.

Speaker 2

Appreciate it, Mike. Thank you.

Operator

We have our next question coming from the line of Frank Schiraldi from Piper Sandler.

Speaker 5

Just looking at the Presentation and looking at some of the numbers here and the long term financial target of greater than 40% ROE, 4% ROA. Obviously, some pretty impressive numbers, I guess, in terms of the long term aspect, if you were to put a timing on it, I guess that 2030 year is when you think you could get to those sort of numbers. Is that reasonable?

Speaker 2

Yeah. To be honest, that's giving us a little bit more time. We're not that patient, to be honest. If you think of us only as a bank, you're going to miss the story. If you look just at this quarter, our efficiency ratio was 38% And we still have $3,000,000,000 of balance sheet to deploy building our business.

Speaker 2

So The ROE, it's not really a bank ROE in a lot of ways. It's a services and distribution ROE. I think we can get there sooner. I think the ramp time to Mike's point before It's going to be a couple of years to get a meaningful part. By that time, our balance sheet will be filled up.

Speaker 2

But I can see that happening within the next 3 to 5 years to get there and then it's we could be even better by 2,030. Now would I be happy in 2,030 to have those numbers? Which bank what other banker in the world won it? So we're very conservative. As you know, we're very rigorous.

Speaker 2

We think we've got some real niches and opportunities out there to build, But we're realistic. We know we need management time. We need investment, and we need patience. So, Yes, 2030, we'd be incredibly happy for that to happen, but I think we can do it sooner.

Speaker 5

Okay. And then just thinking about, again, the balance sheet staying below $10,000,000,000 and so No need for additional capital. I guess, next question is when you get to those numbers, I mean, what do you do with all that capital? It seems like you're going to run out of shares to buy, is it special dividends that you look at? I mean, any sort of thoughts on When you're generating that sort of capital and the balance sheet isn't growing.

Speaker 2

Okay. It's not our money. As you know our We're shareholder advocates. It's not our money. We're borrowing it from our shareholders.

Speaker 2

It's their money. We it's economically advantaged to our investors at our current PE to return it through buybacks. When the Stock gets adequately valued, considering high multiple for high performing banks plus a premium on our fee activities in the FinTech world, then we will return it. If the stock is fairly valued or overvalued, we will return it in big dividends. We'll just simply give it back.

Speaker 2

We're not going to. We've talked about this before. We're not looking to build a big institution that is not high performance or doing acquisitions that aren't accretive. We may do acquisitions, but they'll be smaller and they'll be accretive. So that's our mentality.

Speaker 2

We want to be very rigorous in doing that. And we just I'll take my opportunity to thank all the shareholders for temporarily using their money and I promise to return it.

Speaker 5

Okay. Fair enough. And then on just the GDV, just going back to the nearer term, 2024, in terms of GDV, is that sorry if I missed it, but is that something you're still expecting To outstrip historic levels, so still which I guess would be 15% plus, is that still reasonable expectation?

Speaker 2

Yes, for the full year. So as you know, it bounces around, but I think 15 plus looks very doable. And we think we're going to see higher fee growth than we have. That difference between GDV and fee growth, we saw it in the 4th quarter, 15% with 13%. And that's because we're getting other services like in that ACH line and push to card line, we'll see higher growth this year.

Speaker 2

So on an aggregate basis, we could see extremely good. Instead of the 9%, 10%, 11%, we could see more like 12%, 13%, 14% fee growth. So excited about those lines to it. And As you know, we've got great visibility and we've been adding partners and we'll make announcements. And there's been a lot of regulatory pressure within the banking as a service space, something that we've avoided by making all the investments we did over the last 5 years.

Speaker 2

So, we've got a great position. We've got a very broad rigorous ecosystem. We have a majority of the large players in the industry and all those things work together in order to add increasing amount of volumes from larger players that are established and are now working with other banks.

Speaker 5

And then additionally on fees, maybe I misread something in the release, but I thought you also had some You talked about moving deposits and loans off balance sheet over time to stay under that $10,000,000,000 I thought I read that you had $300,000,000 in deposits Off balance sheet then end of period. Is that right? And are those generating fees?

Speaker 2

Those are not We've moved those off with our partner. So those were higher cost deposits. So those are not generating fees. Okay. It would actually cost us money to have on the balance sheet because they're savings like deposits.

Speaker 2

So we and we As you know, we have a lot of liquidity right now in order to buy bonds. So we don't want to this is more of a management tenant rather than Maybe it's not totally economic at all times, but we try to match appropriately assets and liabilities and liquidity. We always are very liquid, so we do not want to keep a lot of excess deposits on the balance sheet if they're not necessary. So we try to match So sometimes there might be a little economic negative to it, but long term we believe in rigorous fiscal management and the matching of assets and liabilities as a general tenant of managing the bank.

Speaker 5

Yes. On that front, in terms of the asset sensitivity, you talked about being reduced by maybe 14 percent. Just trying to think through numbers here. So I think on the deposit side, you're basically 40 you're tied Fed funds moves, you get 40% of that move through deposit costs. Is it right now about 60% of the earnings assets move with Fed funds or what's the number on the asset side?

Speaker 2

On the deposit side, it's Yes, that's 40%. So, the inverse is 60%. So, if it We get 60% and our clients get 40%. So, for us, it's a 60% deposit beta. So, We got down to under 25% at one point of fixed rate assets that including our bonds and now we're approaching 40%.

Speaker 2

So that's how much we've closed the gap and we've got to get to 60%. So we have another 20% to go, of which almost all that can be closed by purchasing bonds. And every day, we get less asset sensitive because every day, we put on fixed rate instruments in loans. And as you can see, it also impacts our NIM. So, we've got a longer duration portfolio that's much more fixed now than a year ago.

Speaker 2

And we're I think we're on the precipice of closing it in its entirety, as you're seeing a narrowing obviously of the yield curve and the anticipation of the cut in rates. Okay. And do you still think you

Speaker 5

can lock in a 5% NIM In this environment, I know there's a lot of variables there, but is that kind of a target?

Speaker 2

That would be great, of course. It totally depends on how many bonds we buy at what price and how much origination we have on our other businesses that are going to be fixed rate longer maturity loans. So it's incredibly hard to predict. I'd be happy, once again, at 4.50, it's fine. At 4, it's fine because it's not going to We're not a traditional bank and it's not going to affect our profitability.

Speaker 2

When we get a de inversion of the yield curve, we buy the bonds, net income is going to go up and ROE is going to go up and ROA is going to go up because we don't have the same constraints. No, we don't have to grow the balance sheet. Yes, it doesn't it really if the NIM was 1%, our ROE would still be 28. It doesn't matter. The math is different than it would be for

Speaker 5

a traditional bank. Hopefully, you lock it in above 1%.

Speaker 2

Yes, I said well, it's going to be way above the market. So where is the market now? Some of the big banks are like 180 And the whole markets are just over 3 and we're we added another 20 plus basis points this quarter and that's going to continue to increase until we buy the bonds and it's this one is a real tough one to predict where it will be.

Speaker 5

And then just lastly, I know you get a lot of questions on the rebel loans. People Look at that industry, they've seen some pain elsewhere away from you guys. And you did see some migration into criticizing classified last quarter. Just wondering what you saw this quarter on that front and then any change To your general thoughts on that paper.

Speaker 2

It's, I think we have a more secure portfolio because There was a real lowering of cap rates and structure structurally in the multifamily market, things like subordinated debt, lower reserves, not buying The proper interest rate, we didn't do any of that. We strict we were very strict in the underwriting. Our portfolio has matured. So, it's we do have some deferments. This is very natural though.

Speaker 2

No write offs. No, we don't believe any substantial risk of default and loss. But as you mature that portfolio, it's hard to know whether it's just a maturing portfolio where you have some people who have finished the projects or it's more based on the economy. It's not abnormal. We're not seeing anything abnormal yet from ours.

Speaker 2

Now, you hear a lot of these stories in the market, but Those aren't our type of deals. Those aren't our type of structures in the markets that we, inhabit with the type of developers that we have. So, we haven't seen the same stress that you might have read about in other areas.

Speaker 5

Sure. I mean, just thinking about is it fair to assume that classified assets will increase in this business for you guys, but Just you won't see the losses. Is that kind

Speaker 2

of a reasonable expectation of coming quarters? Yes, that's an expectation just on The usual aging of a floating rate portfolio, that's transitional. So, we're very we work with our the sponsors of these deals and they're going to improve a property. And sometimes they can't get the refrigerators or they can't they take longer than they expect in order to finish their project, even though they might be leasing it up, They didn't finish 3 buildings. So this is common.

Speaker 2

Whether that's driven by economic, What's happening in the economy, we don't believe that's the major factor in it. It's impossible that I can't give you an answer because I don't there's really not an answer. We're not seeing there's once again still a significant need for the type of housing we do, which is workforce housing. The economy is robust. We just had 3.2 GDP and the vacancy rates are very, very high where we do business.

Speaker 2

We're not doing pickleball courts in the 10 new buildings in Philadelphia. We don't do that type of stuff. So we haven't seen those type of issues.

Speaker 5

Okay. All right. I appreciate all the color. Thank you.

Speaker 2

Thank you so much, Frank.

Operator

There are no further questions at this time. I'd now like to turn the call back over Mr. Kozlowski for final closing comments.

Speaker 2

Thank you, operator. It's a great year for The Bancorp.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely

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Key Takeaways

  • Strong Q4 performance: Excluding a one-time $0.14 trust-preferred write-off, The Bancorp earned $0.95 EPS with 16% revenue growth, 5% expense growth, a 26% ROE, NIM of 5.26%, 13% GDV increase and 15% fintech fee growth.
  • Apex 2030 strategic plan: Focuses on monetizing middle-office technology and keeping the balance sheet under $10 billion by recycling assets/liabilities off-balance-sheet to drive fee-based services, credit sponsorship and asset distribution.
  • Enhanced capital returns: 2024 share buyback authorization doubled to $200 million (up $50 million per quarter) amid belief the stock is undervalued, with dividend policy secondary and no need for new capital under balance-sheet limits.
  • Interest income tailwinds: Net interest income rose 20% in Q4 as variable-rate loans and securities captured Fed rate hikes—yield on earning assets was 7.5% vs. 2.5% cost of deposits—and management plans targeted bond purchases to neutralize deposit beta.
  • Fee growth and efficiency: Q4 non-interest income of $25 million was up 15%, non-interest expenses rose 5% with a 38% efficiency ratio, and book value per share climbed 22% to $15.17, underscoring scalable fintech and payment platform services.
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Earnings Conference Call
Bancorp Q4 2023
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