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spk07: Welcome to the Q2 2022 Bancorp Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 0, then 1 on your touch-tone phone. I will now turn the call over to Andres Vilslaff.
spk10: Thank you, Vanessa. Good morning, and thank you for joining us today for the Bancorp Second Quarter 2022 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p.m. Eastern Time today. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects, and similar expressions are 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. 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. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof 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?
spk02: Thank you, Andres. Good morning, everyone. The Bancorp generated 53 cents a share, earnings from 3% revenue growth and 2% year-over-year reduction in expense. Gross dollar volume, GDV, showed continued improvement with year-over-year growth of 5%. We expect this trend to continue in the coming quarters. Loan growth continues to be strong. All businesses grew balances quarter over quarter, led by real estate bridge lending with 38% growth and institutional, which includes S-block, I-block, and RIA financing with 10% quarter over quarter growth. Both businesses grew significantly year over year, with commercial real estate growing to $1.1 billion since its third quarter 2021 resumption and institutional growing 35%. Total loans of the Bancorp excluding loans at fair value grew 14% quarter per quarter and 61% year over year, excluding previously discontinued assets. Expenses decreased 2% year over year as we continue to manage expenses rigorously with a focus on scalability and platform productivity. Current economic conditions and the rise of interest rates should have a positive impact on earnings growth over the next two years. The Bancorp is asset sensitive due to its approximately 70% variable loan book and very stable deposit funding through its payments ecosystem that has spread over more than 50 payment program partners. We expect deposits to reprice to approximately 42% of Fed funds increases when rates are raised by the Federal Reserve. Loan rates repriced with a slight lag with significant amounts of repricing the following month. This lag was experienced in June as funding costs increased with a delayed increase in loan rates. However, starting in June, previous rate increases will begin to directly impact loan interest income, and net interest margin. We believe our loan book and securities portfolio is lower risk and in asset classes that have taken the losses throughout economic cycles. Significant amounts of liquid or cash collateral back both our S block and I black loans. SBA loans have partial to 75% guarantees or 50 to 60% loan to values. Car fleet leases have the credit worthiness of our borrowers, many of which are government institutional entities. with an established history of minimizing losses through appropriate residual values on vehicle collateral. And our floating rate transitional multifamily loans are supported by new money from sponsors and rising rents that we believe offset the impact of interest rate increases. Most of these loans are in states that have had high occupancy rates and economic growth with increasing populations. In addition, we have generally held purchasing government bonds and other fixed rate securities during the low interest rate environment experience over the last two and a half years. So we have substantial capacity to add that fixed rate exposures as interest rates rise. Lastly, the Bancorp is also somewhat insulated from inflation as our GDP base fees are contractually based on the total value of transactions. This helps support fee growth even in a recessionary environment where the total amount of goods sold stagnates or declines, but prices continue to rise. With a strong business pipeline and rising rates, we are raising our guidance for 2022 from $2.15 a share to the range of 225 to 230 per share. This range excludes the impact of 2022 share repurchases, but includes interest rate assumptions based on Fed funds' expectations. We expect to issue guidance for 2023 in our third quarter 2022 earnings release. I now turn over a call to Paul Frankel to give more details on the second quarter.
spk11: Thank you, Damian. Return on assets and equity for Q2 2022 were respectively 1.7% and 19% compared to 1.7% and 19% in Q2 2021. Q2 pre-tax income increased $4 million or 11% to $41 million in the second quarter compared to $37 million in Q2 2021. Additionally, the prior year quarter included $4.3 million of PPP-related interest and fees, substantially all of which was eliminated in the current year quarter. Also reflecting the $4.3 million PPP reduction was $55 million of Q2 2022 net interest income, which as a result was comparable to the prior year quarter. Additionally, in Q2 2022, funding costs contractually adjusted immediately to Federal Reserve rate hikes and increased to 44 basis points from 18 basis points during Q2 2021. The immediate funding expense increases and the lagged loan rate adjustments noted earlier were reflected in a decrease in our net interest margin to 3.17% for Q2 2022 from 3.19% in Q2 2021. While loan rates lag, they adjust more fully to rate changes. So as loans reprice, we expect that increases in loan yields in Q3 and Q4 will exceed the increase in funding costs and begin to positively impact margins and net interest income. The provision for credit losses was a credit of $1.5 million in Q2 2022, compared to a credit of $951,000 in Q2 2021. The credit in the current year reflected the impact of low reserves on credit-deteriorated loans and a greater proportion of government-guaranteed loans on our CECL loan pools. Those factors were partially offset by the impact of loan growth. The credit in 2021 reflected the reversal of pandemic-related provisions. Prepaid debit and other payment-related accounts are our largest funding source and the primary driver of non-interest income. Total fees and related payments income of $22.4 million in Q2 2022 increased 5% compared to Q2 2021. Non-interest expense for Q2 2022 was $43 million, reflecting a decrease of 2% from Q2 2021 notwithstanding a $1.2 million settlement related to the cascade matter in 2022. The decrease reflected lower FDIC expense resulting from the reclassification of certain deposits from brokered to non-brokered and lowered incentive compensation related expense. Book value per share at quarter end increased 7% to $1,155. compared to 1077 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 have continued to reduce shares outstanding. I will now turn the call back to Damian.
spk02: Thanks, Paul. Operator, could you please open up the line to questions?
spk07: Yes, sir. We will now begin our question and answer session. If you have a question, please press 0, then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 0, then 1 on your touchtone phone. And we have our first question from Frank Giraldi with Piper Sandler.
spk04: Good morning. Good morning, Frank.
spk06: Just wondering on the, Damian, you talked about the, obviously the GDV growth year over year is really strong given, you know, a really strong 2021. I know there's some headwinds to year over year growth in the first half of this year that will dissipate a bit in the back half. So just wondering if you can, you know, update us on your thoughts on year-over-year GDP growth in the back half of this year?
spk02: Yeah, so it's accelerating, it looks like. And that's because of the, you know, we expected the burn-off kind of of the stimulus, but it kind of gapped up and never gapped down again. So it's returning the trend. We're over the loss of the borrow program and the bump in stimulus. So now it's going to be much smoother. We're adding new programs. So You know, the volume is so much larger than it was a couple of years ago. So you're going to get, you know, high single, lower double digit growth. And we should we should nicely move into that as we go through the year and then the beginning of next year. You can't always predict this depending on what's happening with the economy. But it looks like we're returning to more of the double digit trend.
spk06: And are there any concerns in terms of the pipeline? You know, talk of neobank competition and higher cost of capital, maybe shaking some of those institutions, you know, out. What are your thoughts there in general?
spk02: We haven't seen it. We have an incredibly strong pipeline adding new products and new programs. You know, we're dealing with the much more mature, well-funded programs. And we're not only in the fintech space, we're across many verticals, corporate incentive areas. you know, state cards, uh, healthcare, all those things are doing well. So, uh, we haven't seen any deterioration in the more mature programs wanting to have a more complex platform in order to do business. So we're, we're in good shape right now. We haven't seen any deterioration.
spk06: Okay, great. And then, um, on the balance sheet, just wondering, just thinking about a growth from here, You know, can you continue to grow GDV at a greater pace than growing deposit balances? Just how are you managing balance sheet growth from here, and where do you expect to be in terms of footings, you know, by year end, say?
spk02: Well, we continue. If you looked at, we had extraordinary loan growth year over year, if you take out the discontinued. and you took out the securities portfolio and that was replacing assets that were that were running off. And, you know, we had if you look at the quarter over quarter annualized, we're in the 30 percent range. So that's going to obviously slow down because we're replacing a lot of the loans. But you'll see that continued. You know, we're targeting 15 overall portfolio, 15 or 20 percent portfolio growth until we max out the balance sheet. And You know, it's been, we've got some really great opportunities in the S block area. We had very strong growth and increasing spreads in the real estate portfolio. That should, you know, calm down a bit. So we're targeting that 15 to 20% growth going into the end of the year and hopefully in that range in 2023.
spk06: Okay. And in terms of like just thinking about deposit balances, we should generally just think about sort of matching that growth to GDV growth? Does that make the most sense?
spk02: Yes. As you know, we're very liquid. We have a lot of ways to increase our deposit base. We might have to do some short term. We never know going into the third and fourth, you know, the fourth quarter and then the first quarter of 2023 because of the seasonality, taxes, gift cards, those type of things. So we usually leave it fairly open during those two quarters to see where we're going to be at the end of the first quarter, so we'll know how to put in more permanent funding if necessary. We did see from the stimulus a big increase in deposits. Once again, we thought that would burn off. That has not burned off, and it's been replaced by other programs and growth in our current programs. So we expect the funding to mostly come as it has in the past, as a continued growth in the 50 or more programs that we have. We don't expect to, you know, radically change our funding structure. So mostly it will be based on the payments. There may be opportunities to grow a little bit more aggressively, and then we'll either have to borrow short-term or put in some more, you know, longer-term deposits, you know, at Fed funds plus, but that's, you know, that's not something we can predict. And that's only a result of faster than what we expect growth.
spk03: Gotcha.
spk06: Okay. And then just finally, in terms of interest rate hikes, just want to make sure I understand the math. So 70% of the loan book is variable rate. And now that you're through the floors on the CRE held for sale, I guess that's a variable rate as well. So that's within the 70% when you talk about, you know, the loan data's.
spk02: Yes, so what's happened is you had two things going on in the second quarter. You had some interest rate increases, and immediately we take the funding cost part of it. So it goes up, our funding cost goes up, but we have a lag. We had floors, which we're through, number one, but we also had a lag in the loan pricing. So it goes from the next month, things like S-block will reprice based on prime the next month, Right. So if it was at the end of the month, you'll get it in the beginning of. So for the recent 75 increase, things like guest block will reprice in the beginning of August. There are other things like the CRE portfolio that are based on SOFR. SOFR is an average that's kind of backward looking about 60 days. So that impact of the last interest rate increase in June is really only going to be felt in in August. or excuse me, in July. So you have this immediate funding impact, a lag in pricing. In fact, SBA, some of the SBA loans reprice quarterly. So as we go through the year and approach 2023, you're going to have this revenue, this NIM kick in as the loan price, the different schedule on loan repricing happens throughout the next six months.
spk05: Okay, great. Thank you.
spk07: Thank you. Our next question is from Michael Perito with KBW.
spk12: Hey, guys. Good morning. Thanks for taking my questions. Good morning, Mike. To just follow up on that last line of questioning, I mean, are you guys kind of willing to give any, like, range or indication of where you think the NIM might be able to settle in in the back half of the year based on the updated guide? I mean, are we talking something like north of 3.5% by the end of the year? Or how are you guys thinking about that?
spk02: So it will go up. It will go up, you know, now that we're through the floors, it should go up about... excuse me, 58% of whatever the increase is, right? So across our portfolio. So you can make the calculation now that we're through the floors, like for this recent one, we'll get 58% of that 75 basis points that just happened a day or two ago. That will lead into the NIM based on the fact that, and then you have to obviously realize that 70% is variable. You get this and it's lagged. So it will obviously increase. If we continue with the Fed funds past neutral and they're talking, you know, it changes maybe a 350 Fed rate by the end of the year. It could be less, could be more. That's obviously going to have a big impact on them. It'll go through the mid to the high threes. And when we do our modeling and you look at the Fed funds future. This is of course very variable. It could range depending on the assets that we hold and all the other calculations you need to do, but it'll be, it'll go from, if you continue with these interest rate increases, it'll go from the low threes to the high threes and potentially next year if you continued with this process in a, in a normalized, you know, more tightening through the two and a half percent range. So the three and a half or 4% fed funds, rate, you'd get close to 4% or around 4%. Helpful.
spk12: Thank you. Just a few more for me. Just on the card fees themselves, the sequential, the link quarter growth rate was, I think, a little ahead of GDV. Just wondering if there's anything in there that could kind of revert or normalize moving forward and that we should think about as we kind of forecast the back half of the year.
spk02: No, we're more normal now. Remember we had a period where general purpose reloadable was really declining and debit was taking over, and general purpose reloadable was generally higher spread, higher fee basis points than debit. So you had that going on, and we had the tiers for the big programs, and they're all through their tiers. So you're going to get a better match of GDB and fee growth. uh then you would have had you know a year and a half ago when you had massive growth in debit first general purpose reloadable especially energized by the stimulus payments so a lot of that went through debit didn't go through general purpose reloadable and so you saw a disproportionate gdv growth but not the same fee growth got it okay um and then on the uh just the
spk12: expense run rate, it took a step up sequentially here. Just wondering if you guys could talk through that increase and maybe provide some context of expectations for the back half of the year. Well, that's Paul's favorite subject, so I'll give that to Paul.
spk11: Sure. So we had, if you look link quarter, we did have an increase in salary expense and That was driven by incentive compensation. There is some variability. You have to pick up that expense when those decisions and the production implies that you're going to have that expense. I think using this quarter as a run rate is probably what we should be doing. You will see some inflationary increases. I think we're very automated and we've got a lot of scalability. We've made significant investments in that. So we're not looking at that as an extreme increase. So I think you'll have modest increases from here on in.
spk00: Okay.
spk12: And lastly, do you expect the tax rate for the remainder of the year to be more like similar to the first quarter or at the higher rate of the second quarter?
spk11: It'll be of the higher rate. It should be in the 26% range. That's what we're using for our internal planning. Got it. Great. Thank you guys for taking my questions.
spk07: And thank you. We have no further questions. I will now turn the call over to Damian Kozlowski for closing remarks.
spk02: Thank you, everyone, for joining us today. Appreciate your interest, and we'll talk soon. Operator, you can disconnect the call.
spk07: Thank you. And thank you, ladies and gentlemen. This concludes our conference. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk08: Thank you.
spk07: Welcome to the Q2 2022 Bancorp Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press 0, then 1 on your touch-tone phone. I will now turn the call over to Andres Vilslaff.
spk10: Thank you, Vanessa. Good morning, and thank you for joining us today for the Bancorp Second Quarter 2022 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p.m. Eastern Time today. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects, and similar expressions are 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. 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. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof 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?
spk02: Thank you, Andres. Good morning, everyone. The Bancorp generated 53 cents a share, earnings from 3% revenue growth and 2% year-over-year reduction in expense. Gross dollar volume, GDV, showed continued improvement with year-over-year growth of 5%. We expect this trend to continue in the coming quarters. Loan growth continues to be strong. All businesses grew balances quarter-over-quarter, led by real estate bridge lending with 38% growth in institutional, which includes S-block, I-block, and RIA financing with 10% quarter-over-quarter growth. Both businesses grew significantly year-over-year, with commercial real estate growing to $1.1 billion since its third quarter 2021 resumption and institutional growing 35%. Total loans of the Bancorp excluding loans at fair value grew 14% quarter per quarter and 61% year over year, excluding previously discontinued assets. Expenses decreased 2% year over year as we continue to manage expenses rigorously with a focus on scalability and platform productivity. Current economic conditions and the rise of interest rates should have a positive impact on earnings growth over the next two years. The Bancorp is asset sensitive due to its approximately 70% variable loan book and very stable deposit funding through its payments ecosystem that has spread over more than 50 payment program partners. We expect deposits to reprice to approximately 42% of Fed funds increases when rates are raised by the Federal Reserve. Loan rates repriced with a slight lag with significant amounts of repricing the following month. This lag was experienced in June as funding costs increased with a delayed increase in loan rates. However, starting in June, previous rate increases will begin to directly impact loan interest income, and net interest margin. We believe our loan book and securities portfolio is lower risk and in asset classes that have taken the losses throughout economic cycles. Significant amounts of liquid or cash collateral back both our S block and I black loans. SBA loans have partial to 75% guarantees or 50 to 60% loan to values. Car fleet leases have the credit worthiness of our borrowers, many of which are government institutional entities. with an established history of minimizing losses through appropriate residual values on vehicle collateral. And our floating rate transitional multifamily loans are supported by new money from sponsors and rising rents that we believe offset the impact of interest rate increases. Most of these loans are in states that have had high occupancy rates and economic growth with increasing populations. In addition, we have generally held purchasing government bonds and other fixed rate securities during the low interest rate environment experience over the last two and a half years. So we have substantial capacity to add that fixed rate exposures as interest rates rise. Lastly, the Bancorp is also somewhat insulated from inflation as our GDP base fees are contractually based on the total value of transactions. This helps support fee growth even in a recessionary environment where the total amount of goods sold stagnates or declines, but prices continue to rise. With a strong business pipeline and rising rates, we are raising our guidance for 2022 from 215 a share to the range of 225 to 230 per share. This range excludes the impact of 2022 share repurchases, but includes interest rate assumptions based on Fed funds' expectations. We expect to issue guidance for 2023 in our third quarter 2022 earnings release. I now turn over a call to Paul Frankel to give more details on the second quarter.
spk11: Thank you, Damian. Return on assets and equity for Q2 2022 were respectively 1.7% and 19% compared to 1.7% and 19% in Q2 2021. Q2 pre-tax income increased $4 million or 11% to $41 million in the second quarter compared to $37 million in Q2 2021. Additionally, the prior year quarter included $4.3 million of PPP-related interest and fees, substantially all of which was eliminated in the current year quarter. Also reflecting the $4.3 million PPP reduction was $55 million of Q2 2022 net interest income, which as a result was comparable to the prior year quarter. Additionally, in Q2 2022, funding costs contractually adjusted immediately to Federal Reserve rate hikes and increased to 44 basis points from 18 basis points during Q2 2021. The immediate funding expense increases and the lagged loan rate adjustments noted earlier were reflected in a decrease in our net interest margin to 3.17% for Q2 2022 from 3.19 percent in Q2 2021. While loan rates lag, they adjust more fully to rate changes. So, as loans reprice, we expect that increases in loan yields in Q3 and Q4 will exceed the increase in funding costs and begin to positively impact margins and net interest income. The provision for credit losses was a credit of $1.5 million in Q2 2022, compared to a credit of $951,000 in Q2 2021. The credit in the current year reflected the impact of low reserves on credit-deteriorated loans and a greater proportion of government-guaranteed loans on our CECL loan pools. Those factors were partially offset by the impact of loan growth. The credit in 2021 reflected the reversal of pandemic-related provisions. Prepaid debit and other payment-related accounts are our largest funding source and the primary driver of non-interest income. Total fees and related payments income of $22.4 million in Q2 2022 increased 5% compared to Q2 2021. Non-interest expense for Q2 2022 was $43 million, reflecting a decrease of 2% from Q2 2021 notwithstanding a $1.2 million settlement related to the cascade matter in 2022. The decrease reflected lower FDIC expense resulting from the reclassification of certain deposits from brokered to non-brokered and lowered incentive compensation-related expense. Book value per share at quarter end increased 7% to $1,155, compared to 1077 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 have continued to reduce shares outstanding. I will now turn the call back to Damian.
spk02: Thanks, Paul. Operator, could you please open up the line to questions?
spk07: Yes, sir. We will now begin our question and answer session. If you have a question, please press 0, then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 0, then 1 on your touchtone phone. And we have our first question from Frank Giraldi with Piper Sandler.
spk04: Good morning. Good morning, Frank.
spk06: Just wondering on the, Damian, you talked about the, obviously the GDV growth year over year is really strong given, you know, a really strong 2021. I know there's some headwinds to year over year growth in the first half of this year that will dissipate a bit in the back half. So just wondering if you can, you know, update us on your thoughts on year-over-year GDP growth in the back half of this year?
spk02: Yeah, so it's accelerating, it looks like. And that's because of the, you know, we expected the burn-off kind of of the stimulus, but it kind of gapped up and never gapped down again. So it's returning the trend. We're over the loss of the borrow program and the bump in stimulus. So now it's going to be much smoother. We're adding new programs. So You know, the volume is so much larger than it was a couple of years ago. So you're going to get, you know, high single, lower double digit growth. And we should we should nicely move into that as we go through the year and then the beginning of next year. You can't always predict this depending on what's happening with the economy. But it looks like we're returning to more of the double digit trend.
spk06: And are there any concerns in terms of the pipeline? You know, talk of neobank competition and higher cost of capital, maybe shaking some of those institutions, you know, out. What are your thoughts there in general?
spk02: We haven't seen it. We have an incredibly strong pipeline adding new products and new programs. You know, we're dealing with the much more mature, well-funded programs. And we're not only in the fintech space, we're across many verticals, corporate incentive areas. you know, state cards, uh, healthcare, all those things are doing well. So, uh, we haven't seen any deterioration in the more mature programs wanting to have a more complex platform in order to do business. So we're, we're in good shape right now. We haven't seen any deterioration.
spk06: Okay, great. And then, um, on the balance sheet, just wondering, just thinking about a growth from here, You know, can you continue to grow GDV at a greater pace than growing deposit balances? Just how are you managing balance sheet growth from here, and where do you expect to be in terms of footings, you know, by year end, say?
spk02: Well, we continue. If you looked at, we had extraordinary loan growth year over year, if you take out the discontinued. and you took out the securities portfolio and that was replacing assets that were that were running off. And, you know, we had if you look at the quarter over quarter annualized, we're in the 30 percent range. So that's going to obviously slow down because we're replacing a lot of the loans. But you'll see that continued. You know, we're targeting 15 overall portfolio, 15 or 20 percent portfolio growth until we max out the balance sheet. And You know, it's been, we've got some really great opportunities in the S block area. We had very strong growth and increasing spreads in the real estate portfolio. That should, you know, calm down a bit. So we're targeting that 15 to 20% growth going into the end of the year and hopefully in that range in 2023.
spk06: Okay. And in terms of like just thinking about deposit balances, we should generally just think about sort of matching that growth to GDV growth? Does that make the most sense?
spk02: Yes. As you know, we're very liquid. We have a lot of ways to increase our deposit base. We might have to do some short term. We never know going into the third and fourth, you know, the fourth quarter and then the first quarter of 2023 because of the seasonality, taxes, gift cards, those type of things. So we usually leave it fairly open during those two quarters to see where we're going to be at the end of the first quarter, so we'll know how to put in more permanent funding if necessary. We did see from the stimulus a big increase in deposits. Once again, we thought that would burn off. That has not burned off, and it's been replaced by other programs and growth in our current programs. So we expect the funding to mostly come as it has in the past, as a continued growth in the 50 or more programs that we have. We don't expect to, you know, radically change our funding structure, so mostly it will be based on the payments. There may be opportunities to grow a little bit more aggressively, and then we'll either have to borrow short-term or put in some more, you know, longer-term deposits, you know, at Fed funds plus, but that's, you know, that's not something we can predict. And that's only a result of faster than what we expect growth.
spk03: Gotcha.
spk06: Okay. And then just finally, in terms of interest rate hikes, just want to make sure I understand the math. So 70% of the loan book is variable rate. And now that you're through the floors on the CRE held for sale, I guess that's a variable rate as well. So that's within the 70% when you talk about, you know, the loan data's.
spk02: Yes, so what's happened is you had two things going on in the second quarter. You had some interest rate increases, and immediately we take the funding cost part of it. So it goes up, our funding cost goes up, but we have a lag. We had floors, which we're through, number one, but we also had a lag in the loan pricing. So it goes from the next month, things like S-Block will reprice based on prime the next month, Right. So if it was at the end of the month, you'll get it in the beginning of. So for the recent 75 increase, things like guest block will reprice in the beginning of August. There are other things like the CRE portfolio that are based on SOFR. SOFR is an average that's kind of backward looking about 60 days. So that impact of the last interest rate increase in June is really only going to be felt in in August. or excuse me, in July. So you have this immediate funding impact, a lag in pricing. In fact, SBA, some of the SBA loans reprice quarterly. So as we go through the year and approach 2023, you're going to have this revenue, this NIM kick in as the different schedule on loan repricing happens throughout the next six months.
spk05: Okay, great. Thank you.
spk07: Thank you. Our next question is from Michael Perito with KBW.
spk12: Hey, guys. Good morning. Thanks for taking my questions. Good morning, Mike. To just follow up on that last line of questioning, I mean, are you guys kind of willing to give any, like, range or indication of where you think the NIMH might be able to settle in in the back half of the year based on the updated guide? I mean, are we talking something like north of 3.5% by the end of the year or how are you guys thinking about that?
spk02: So it will go up. Uh, it will go up, you know, now that we're through the floors, it should go up about, um, 60, excuse me, 58% of whatever the increases, right? So, across our portfolio so it's you can make the calculation now that we're through the floors like for this recent one we'll get 58 of that 75 basis points that just uh happened a day or two ago that will bleed into the nym uh based on the fact that and then you have to obviously realize that 70 is variable so you you get this and it's lagged so is a it will obviously increase If we continue with the Fed funds past neutral and they're talking, you know, it changes maybe a 350 Fed rate by the end of the year, could be less, could be more. That's obviously going to have a big impact on them. It'll be in the, it'll go through the mid to the high threes. And when we do our modeling and you look at the Fed funds future, this is, of course, very variable. It could range. depending on the assets that we hold and all the other calculations you need to do. But it'll go from, if you continue with these interest rate increases, it'll go from the low threes to the high threes. And potentially next year, if you continued with this process in a normalized, you know, more tightening through the 2.5% range to the 3.5% or 4% Fed funds rate, you'd get close to 4% or around 4%.
spk12: Helpful. Thank you. Just a few more for me. Just on the card fees themselves, you know, the sequential, the link quarter growth rate was, I think, a little ahead of GDV. Just wondering if there's anything in there that could kind of revert or normalize moving forward and that we should think about as we kind of forecast the back half of the year.
spk02: No, we're more normal now. Remember we had a period where general purpose reloadable was really declining and debit was taking over, and general purpose reloadable was generally higher spread, higher fee basis points than debit. So you had that going on, and we had the tiers for the big programs, and they're all through their tiers. So you're going to get a better match of GDV and fee growth. uh then you would have had you know a year and a half ago when you had massive growth in debit first general purpose reloadable especially energized by the stimulus payments so a lot of that went through debit didn't go through general purpose reloadable and so you saw a disproportionate gdv growth but not the same fee growth got it okay um and then on the uh just the
spk12: expense run rate, it took a step up sequentially here. Just wondering if you guys could talk through that increase and maybe provide some context of expectations for the back half of the year. Well, that's Paul's favorite subject, so I'll give that to Paul.
spk11: Sure. So we had, if you look link quarter, we did have an increase in salary expense and That was driven by incentive compensation. There is some variability. You have to pick up that expense when those decisions and the production implies that you're going to have that expense. I think using this quarter as a run rate is probably what we should be doing. You will see some inflationary increases. I think we're very automated and we've got a lot of scalability. We've made significant investments in that. So we're not looking at that as an extreme increase. So I think you'll have modest increases from here on in.
spk00: Okay.
spk12: And lastly, do you expect the tax rate for the remainder of the year to be more similar to the first quarter or at the higher rate of the second quarter?
spk11: It'll be of the higher rate. It should be in the 26% range. That's what we're using for our internal planning. Got it. Great.
spk12: Thank you guys for taking my questions.
spk07: And thank you. We have no further questions. I will now turn the call over to Damian Kozlowski for closing remarks.
spk02: Thank you, everyone, for joining us today. Appreciate your interest, and we'll talk soon. Operator, you can disconnect the call.
spk07: Thank you. And thank you, ladies and gentlemen. This concludes our conference. Thank you for participating. You may now disconnect.
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