Bancorp (TBBK) Q4 2022 earnings call transcript

I would now like to turn the conference over to Andres Beroslav. Please go ahead. The dial-in for the replay is 1-877-674-7070 with a confirmation code of 735961. Before I turn the call over to Damien, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. Thank you. of unanticipated events.

Now I'd like to turn the call over to the Bancorp's Chief Executive Officer, Damian Kozlowski. Damian? Thank you, Andres. Good morning, everyone. The Bancorp earned 71 cents a share in the fourth quarter, driven by 28% revenue growth while expenses were approximately flat year-over-year. GDV, gross dollar volume, transaction growth accelerated to 30% year-over-year, driven by continued double-digit growth in most categories. Core loan growth, which excludes loans previously generated for securitization, was 4% quarter-over-quarter, led by floating-rate CRE multifamily with 12% growth. Year-over-year core loan growth was 45% with 168% growth in CRE multifamily, 22% growth in institutional, which includes S-block and I-block, plus IRA financing, and 14% growth in commercial, which includes fleet leasing and SBA loans, Excluding PPP loans.

Net interest margin grew dramatically quarter over quarter from 369 to 421 compared to 351 in the fourth quarter of 2021, driven by the impact of Federal Reserve rate hikes. Efficiency and productivity continues to be a key focus of management with expenses approximately flat year over year. ROE rose significantly over prior periods to 24%. 2022 is another year of strategic and financial progress for the Bancorp. We continue to improve our ecosystem for our fintech partners while investing across our platform to improve functionality and efficiency in all business lines.

2023 should show continued financial and operational improvement with a focus on continued rigorous risk management and credit oversight. In addition, our focus in 23 will be determining our next strategic steps as a company. After having established exemplar performance, we are now turning our attention to major initiatives which will sustain profitability and growth as we approach the regulation II Durban balance sheet limit of $10 billion. We believe that TBBK's unique capabilities can be monetized more broadly and that the $10 billion limit will not limit our ability to generate increased profitability. This incremental profitability will be generated from fees by distributing both assets and liabilities, GDV growth and the sale of unique technology services, and other platforms that will drive sustained EPS growth and ROE.

For 2023, we are confirming our guidance of $320 a share, not including the net impact of share buybacks of approximately $25 million a quarter or $100 million for full year. We will update our guidance as we learn more in the coming months. However, we believe our guidance is attainable even, even with significant economic ambiguity and potential stress in the macro environment. I now turn the call over to Paul Frankel, our CFO, for more details on the fourth quarter and full year 22.

Thank you, Damian. Return on assets and equity for Q4 2022 were respectively 2.1% and 24% compared to 1.7% and 17% in Q4 2021. These increases were significantly driven by a 47 increase in net interest income In addition to the rate sensitivity of the majority of our lending lines of business management has structured the balance sheet to benefit more from a normalized and higher interest rate environment Accordingly over a period of years it 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 Accordingly in Q4 2022 the yield on interest assets had increased to 5 while the cost of deposits had increased to 1 These factors were also reflected in the 4 NIM in Q4 2022 which represented a significant amount of returns The provision for credit losses was $2.8 million in Q4 2022, compared to $1.6 million in Q4 2021.

The $2.8 million included an upward adjustment of approximately $900,000 in the qualitative economic factor in our CECL model, which is forward-looking. To the extent that economic uncertainty is resolved in the future, a reversal of that provision component would result. Conversely, deterioration in the economy could result in additional forward-looking provisions. Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income. Total fees and other payments income of $22 million in Q4 2022 increased 10% compared to Q4 2021. Non-interest expense for Q4 2022 was $43 million, which was comparable to Q4 2021. A decrease in legal, reflecting the resolution of various matters, and a decrease in salary expense, offset increasing FDIC insurance and travel expense.

Book value per share at quarter end increased 10% to $12.47 compared to $11.30 a year earlier, reflecting retained earnings partially offset by fair value adjustments to the investment portfolio resulting from the higher rate environment. Quarterly share repurchases should continue to reduce shares outstanding. I will now turn the call back to Damian.

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

Morning, Frank. I wonder if you guys could, you know, good strong quarter on GDV growth year over year. I guess really you have been guiding to something along these lines, but just your thoughts on runway from here and how that, you know, how much of that translates through to card fee income growth. Yeah, I think this was a very good normalized quarter. You know, we had the stimulus, we never gapped down, and we've been building all year back to trend. So we had one, I think it was five, and now we're at 13. I think you're going to see this range, you know, 12 to 15% GDV growth going forward this year. I think you're going to see around 9, 10, maybe even 11% translation into fees year over year.

And, you know, that was before, that was kind of the trend before the big stimulus bump. So, very encouraging. When we look at our pipeline, you know, we've got some real successes in corporate payments that have ramped up very quickly. So, it looks like it's going to be, you know, at that level. Hopefully, we'll get a bit more, but it looks like it's going to be a strong year.

Yeah, that is what is likely to happen, what we've seen before. When you get this rapid, I mean, this is historic, but, I mean, you get a rapid change in, you know, on liquid borrowing so quickly that people get a little sticker shock. So it's a little bit encouraging that we were only down 1%, to be honest. And there were more payoffs, but we're offset by more origination. So that should, by the middle of the year, when interest rates stop, people normalize, and then you'll get people just not lending for needs rather than just lending for liquidity. So, you know, it won't be, and obviously we're coming closer to that balance sheet limit. It won't be, we won't have like historic 20% growth, but, you know, we'll have some growth, but it won't be as dramatic as we previously had until things really normalize.

Once they normalize, you know, we'll go back to the previous trend likely.

And you know what sort of margin reaction do you expect if we get a rate cut or two you know at the end of 2023 or into 2024 Yeah so as Paul was saying we totally opened our balance sheet to the variable side and you know we thought there would be this was more dramatic than we expected but we really thought there was going to be a rise ultimately a rise in interest rates But we've left and are pivoting very quickly. We have a project in place called Project Flex. So we're going to put on a lot of fixed rate exposure. We have a fixed rate program now in our CRE business. We're putting on more fixed rate exposure in our commercial business.

And then we, once again, we haven't bought a bond. One easy way to do it is simply to lock in forward rates through, you know, three, five, seven, and ten year agency securities. So we're very aware of the situation, and we're going to significantly lower the variable part of our balance sheet as we peak out at rates. You know, I think we came into this when we started this process, we were more like 55% variable, and with the growth of those variable rate businesses, it went up, and we didn't buy any fixed rate exposure. So now we just have to turn that around. And the good thing is rates drop, of course, balances will go up in things like the IBOC, S-block area.

So, you know, we run those models. We're going to soften the impact of those interest rate changes. And we're in a really great position because we've got plenty of room to do that. So we're forecasting that and we'll be able to lock in, I think, an increasing amount of fixed rate exposure. One thing to note, our financials today do not account for bond purchases. So one thing to note that we haven't even built that fixed rate exposure on the bond side into the 320 earnings per share estimates.

Not PERM, but there is a market because of, for the fixed rate side in the CRE transitional loans. So especially at lower dollar numbers, because interest rate caps have become very expensive. So we require interest rate caps on our loans to protect against the volatility and interest rate and usually have reserves. So there's not a lot of programs out there on the fixed rate side for these transitional loans, so we've already done over $50 million, and we just launched it just recently. So that'll give you a three-year cushion. And I also remind you that we have floors on all our – one of the great things about our portfolio, it's variable on the upside, but a lot of it is not variable on the downside.

So we have floors in all the loans on the CRE side. So even if we do get a significant downdraft on the Fed side, those rates won't be significantly affected.

Hey, Mike.

Yeah, well, it's almost a daily thing. We're watching everything, the yield curves, everything. We have so much flexibility in our balance sheet because we have plenty of ways to get deposits, and we have plenty of room up to the Durban limit. So we really are deciding exactly how much fixed-rate exposure we're going to take and when we're going to take it to lock in. We might give up a little margin, but we're not going to give up a lot. And we also have, like I said, floors on all the CRE loans, which protect us for three years. So we're really dealing with that S-block portfolio, which is the one without floors that really adjusts very quickly with interest rates.

And those are, if you recall, those are all demand loans on top of it. So not that we're going to demand loans, it's just that, you know, in every scenario, we've got an incredible amount of balance sheet flexibility to put on fixed rate exposure. So if you look at our loan yields, that's the lowest yielding portfolio. And in our higher coupon portfolios, we actually have fixed rate protection in there. So we're in a very good position and able to deflect the balance sheet in order to put on a lot more fixed rate exposure.

Yeah, well, we did have some catch-up, you're right, and that actually economically helps us. It wasn't purposeful, though. We're not stretching, though. I mean, we're not stretching at all in credit quality. So when you get in times like this where volumes get low, people get a little bit to, you know, there's been some announcements about people getting into commercial and stuff. That's not the time to do it, probably. We're just being very, very careful. We're underwriting to the standards we've always underwritten to. The market's being affected by rates, but we still have, we had strong growth in leasing because there's a big backlog in car delivery still for the commercial side. You're being very careful on, you know, while we have the government guarantees on the SBA, that has slowed down because the interest rates have jumped so much and people don't know if they want to invest in new businesses.

But even if we went through 2023 with even a flat or up 5%, 10%, that really will still meet our expectations of the earnings per share. So I think we're in a really, really – there's a lot of upside potential. If we get trend growth, obviously, there would be significant upside potential. We've been very careful with our guidance. We've scenario-planned it out and looked at a lot of, we've left a lot of things out, like historic growth, we've left out bonds. We're obviously getting, I mean, I talked a few earnings calls before, and we were kind of in the 4% range where we thought this would top out on our NIM, and we've flown right past that.

And during this quarter, we've had increasing, significantly increasing net interest income, while our GDV has restored the trend. So, you know, there's a lot of green lights here, and we're going to have a lot more information in January, and by the end of the first quarter, we're going to know a lot. And then if we have to adjust guidance and take a hard look at, we'll also know a little bit more about rates. So I think it's going to be an exciting quarter, and I want to know what it is, and I know you do too.

Well, we're always focused on efficiency and productivity, but there is core inflation, there's no doubt, and that will affect us next year. One of the areas is just employee costs. So, you know, we've been, I mean, we've gone now four, almost five years, basically with flat expenses. I mean, if you look on a historic basis, and that's all been the restructuring of different things that we've done on the operational side, I think you'll see, you know, from a historical perspective, we're not going to be at zero. We're not going to be at 2%. We really want to continue to invest in our people. And while the regulatory side isn't our issue because there's been so much investment in that side of our business, that's not where the cost is going to come from.

It's going to come from the embedded core inflation. Now, we're obviously benefiting from race price and inflation in our GDV and everything else. So I think this is the year that you'll still get a big differential. You know, you're going to have a big differential between revenue growth and expense growth. But you'll have above what our trend has been, which has been flat, above that trend, you know, we'll have at least 10% draws between revenue expense. It'll probably be significantly more than that, but you won't see flat expenses this year due to mostly due to employee costs and core inflation.

Thank you, operator. It was a really good quarter for us. We made a lot of progress. As I said, we're looking forward to the next quarter to really tell us a lot more about 2023. So as we get information, we will continue to talk with everyone on the phone. And when we get to the end of the first quarter, I think we'll have a lot more information to share about how 2023 might ultimately end on the metrics in which we measure this business. So thank you everyone and have a great day.