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spk00: star zero for the operator. This call is being recorded on Friday, October the 27th, 2023. I would now like to turn the conference over to Andres Virslav. Please go ahead.
spk04: 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. 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. The dial-in for the replay is 1-877-674-7070 with a confirmation code of 043391. 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 meanings 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. I think 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?
spk03: Thank you, Andres. Good morning, everyone. The Bancorp earned $0.92 a share with revenue growth of 31% and expense growth of 6%. ROE was 26%. The NIM expanded to 507 from 483 quarter over 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 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 industry. solutions ecosystem. These investments should have meaningful impact on performance and gross dollar 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% and increasing participation in providing credit sponsorship solutions to our business partners. 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 workspace to innovate and create the future of banking 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 Reggie II Durbin balance sheet limit of $10 billion, the 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. 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 dividends. 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 Blaine Corps will continue to grow revenue and 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. We are also initiating 2024 preliminary guidance of 425 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 peer banks. This is approximately 18% earnings growth over 2023 guidance. We expect the bank core 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 our CFO and my colleague, Paul Frankel, for more color on the third quarter.
spk02: 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 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. These increases reflected a 37% in net interest income. In addition to the rate sensitivity of the majority of our lending lines of business, management has structured the balance sheet to benefit from a higher interest rate environment. Accordingly, over a period of years, it has largely allowed its fixed rate investment portfolio to pay down 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 Q3 2023, the yield on interest-earning assets had 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%. Those factors were 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-offs amounted to $922,000, substantially all of which were in leasing. 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 in 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 a focus on stock ownership and lower expense deferrals as a result of lower loan production. Book value per share at quarter end increased 22% to $14.36 compared to $11.81 a year earlier, reflecting the impact of retained earnings. Quarterly share repurchases will continue to reduce shares outstanding. I will now turn the call back to Damian.
spk03: Operator, would you please open the lines for questions?
spk00: Thank you. 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 touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled 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 speakerphone, please lift the handset before pressing any keys. Our first question comes from the line of Michael Perito of KBW. Please go ahead.
spk05: Hey, guys. Good morning. Good morning, Mike. Thanks for taking my question. Good morning. David, I wanted to start just kind of on the state of the kind of bank as a service environment here. Obviously, I think we've talked about this in prior quarters. You guys are well-positioned and 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. 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?
spk03: Yeah, so we add... around five or six big partners a year. 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. uh, because of, of what, what, you know, in their own cycle, uh, where they are, uh, those programs were taking only the most mature programs. And so we, we don't, uh, we have great visibility 18 months in advance. So we, we know what those programs are. We've in many cases already signed contracts and we know what their volume is because some of the newer programs obviously will have big 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 competitor intensity lessen. And 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 economy. So there still continues to be, for us, a robust pipeline where we're only dealing with the most mature and large programs.
spk05: Perfect. That's helpful, Collar. And then just as we think about the loan portfolio here, are there any other levers 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 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.
spk03: Yes. So it's definitely slow. You know, the sticker shock, the most price it's consumer basically. So the sticker shock, obviously if you're going to go from a zero rate environment to a fed funds target of around five 30, that's, 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 the, 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. 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 block area, and more 15-ish in the CRE multifamily business. Remember, we don't have the big roll-offs 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 13.5%. 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, 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 eight basis point premium over fed funds, I think you'd see an incremental impact to earnings for sure of another 15 cents. 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.
spk05: That's helpful. And just lastly for me, and I'll let someone else jump in, just on the credit side, Damian or Mark, whoever's on, just curious, you know, really the multifamily 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, et cetera. But, 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 and just as we kind of get deeper into this kind of commercial real estate panic, I guess we can call it just, just any update there would be great.
spk03: No, we've, we've, uh, the market is definitely shrunk for these types of deals. There's no doubt that the market is smaller, but we haven't, we've been very, very careful. We've had an amazing event, the way we positioned our balance sheet, and we've taken advantage of it. Myself and Mark Conley, who you just mentioned, who's our chief credit officer, we've sat down with very commercial people who lead our businesses and said, listen, this is not the year to stretch in any way. We need to narrow our credit underwriting down. 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. So we're very comfortable with that. We want to 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 We're not underwriting where there was problems in the market. 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.
spk05: Excellent. Thank you guys for taking my questions. Have a good weekend.
spk00: Thank you so much, Mike. Our next question comes from the line of Frank Chiraldi of Piper Sandler. Please go ahead.
spk01: Good morning.
spk03: Good morning, Frank.
spk01: On the 12% fee income growth year over year, is that a reasonable kind of translation rate going forward on 17% GDV growth? 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 renew and again sign new ones.
spk03: No, we're not getting any pricing pressure. For our larger programs, when we do negotiate because of the incremental expense differential between an older and newer program, we do give large volume discounts. But that kind of falls more to the bottom line for us. That is a good relationship, 17 to 12. I think that's, 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 of years as they grow volume. 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 two or 3% this year from more of the credit sponsorship fees. 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 and crit, uh, including, uh, new, uh, 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 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, you know, uh, five or six a year. Uh, and they're exciting organizations with a great volume and, uh, they're early in their life cycles. So, you know, they haven't broken through those, those tiers. like we've had for our very long relationships, like a Chime or a PayPal. So we're very excited about 2024 and 2025. Great.
spk01: And then 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 and that you can kind of lock in these levels on a go-forward basis? What's your thoughts on margin? Yes.
spk03: So what will happen, obviously, we have a quick, our duration of our portfolio is fairly short, and we did that on purpose. 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 that are substantially higher than that. So you'll see the NIM continue to move up. The inflection point 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 NIM, even though our net income will go up, obviously, because we'll get a spread over Fed funds and definitely a spread over our, depending on how much deposits we have at that time, you'll get a less impacted NIM. We can't really predict that, obviously, but we know generally that when there's a de-inversion of the yield curve, 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, if not a billion five in security. 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. 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 costs. 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 in a positive way.
spk01: Great. And then just lastly, I know there's several scenarios for next year to get to that 425. 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-digit expense growth just given the amount of new partnerships you're putting on? Any sort of model guide on that front?
spk03: Yeah, single. Single. So, we had a 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. So that'll be more normalized. We're going to try to continue with the 10%. 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, you know, low 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.
spk01: Great. Okay. Thanks for all the color. Thank you, Frank.
spk00: 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. Damon Kozlowski, please proceed.
spk03: Well, thank you so much, operator. Thank you to everyone for joining us today. Operator, you can disconnect the call.
spk00: 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. The conference is no longer being recorded.
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