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spk01: 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 545154. 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. For further discussion of these risks and uncertainties, please see the bank course filings at 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 in 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, 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 95 cents a share with year-over-year revenue growth of 16% and expense growth of five. Excluding the trust preferred write-off, ROE was 26. NIM expanded to 526 from 507 quarter-over-quarter and 421 year-over-year. GDV increased 13% year-over-year and total fees from all FinTech activities increased 15%. For the full year of 23, the Bancorp generated $3.63 per share, excluding the net of tax $0.14 impact of the trust-preferred write-off. First 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 of 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 billion 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. 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 billion, 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 million to $200 million or $50 million a quarter. Since the inception of our buyback in 2019, we have created approximately $75 million of value to our shareholders based on our December 31-23 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. We are also confirming 24 guidance of 425 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 fourth quarter and full year 23.
spk02: 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 S-block and I-block balances offset the impact of other loan growth, total related net paydowns in the fourth 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. 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% NIM in Q4 2023, which represented another increase over prior periods. The provision for credit losses was $4.3 million in Q4 2023 compared to $2.8 million in Q4 2022. Of the total $4.3 million, approximately $1 million resulted from growth in loan principal between the third and fourth quarters of 2023, against which cumulative CESA loss and qualitative percentages are applied. An additional $1 million 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 million at December 31, 2023. 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 million in Q4 2023 increased 15% compared to Q4 2022. Non-interest expense for Q4 2023 was $45.6 million, which was 5% higher than Q4 2022. Values 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. Quarterly share repurchases should continue to reduce shares outstanding. I will now turn the call back to Damien.
spk03: Thank you so much, Paul. Operator, could you open the line for questions?
spk00: Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. One moment, please, for your first question. Our first question comes from the line of Michael Torito from KBW. Please go ahead.
spk05: Hey, guys. Good morning. Thanks for taking my questions. Good morning, Mike. A couple short-term, shorter-term questions, a couple longer-term questions. But first, to start on the 24 guide, Paul was wondering if you could maybe provide a little bit more context around two things. One, kind of how rates could maybe, you know, what kind of rate assumptions you have in the, in the guide most recently and, and, and how, you know, maybe some variability on that could impact the guide X buyback. And then also would love a little color too, on just kind of thoughts around OpEx growth for, for 24. And if you guys are kind of in a net growth position here, adding some head count or, or just would love a little update there as well.
spk03: Okay. So Mike, before I turn it over to Paul, there's a couple of things. Um, We do not, our base case is not the market's view of six interest rate cuts. You know, we think there might be a couple, maybe starting in June. But our forecast of the 425 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. 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, you know, the entire economy, especially employee pay. We felt that also, but we're talking mid single digit type of expense growth this year, not a double digit employee growth rates that we saw on base pay in 2023. Paul, would you like to add something?
spk02: 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.
spk05: That's helpful. Maybe just to spend another minute on the margin and rate stuff. Do you have a sense of after the... 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 to 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?
spk03: The answer is we want to negate. Remember, we opened... our balance sheet after buying bonds in 2018. Uh, and you know, the pandemic getting interest rates at zero, we became extremely asset sensitive, let the bond portfolio run off all the way down under 800 million. Uh, and we waited for the interest rate increase, uh, the majority of it to be finished before, uh, 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 a billion and a billion and a half, we'll close. We might be a little asset sensitive, but we'll close the majority of the deposit beta. 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 at 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 of a lower coupon. than some of our loan portfolio. However, our profitability will be intact on a run rate basis, but additive, if the yield curve disinverts, you'll get additional net income and additional ROE and ROA returns. Okay, that makes sense.
spk05: So we should kind of, so you guys are going to be patient on the bond side until there's more clarity.
spk00: Super patient.
spk05: Yeah, okay. But either way, there's 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 of that asset sensitivity.
spk03: Yeah. As you know, 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 and uh substantially increase their net income just by getting a spread on our bond purchases right so that that usual correlation where you see the nim drop oh no profitability is going to go down no ours will actually go up so we think we we're being very cautious we you know this is a hourly thing for us we want we're using history as a guide uh there should be that inflection point where we start putting on the bond exposure will be a positive spread to the bank It'll lock in long-term rates, and then it will mitigate our deposit beta, which you know is only driven by our program management and our locked-in long-term contracts, so we know what our funding is. So I think we're in a very unique, flexible position on the balance sheet, and this has been a game that has played over five years, not just the last five 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.
spk05: Agreed. That's all very helpful. Thank you. And then I wanted to ask a question or two 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? By the time you get to a billion plus of revenue, are fees over half of the revenue pool? And 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 billion? Is there anything else we should be thinking of as you guys ramp the non-interest income portion to hit that billion dollar number?
spk03: Yes. So we'll be saying a lot more. There's a lot of work. So 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. Now, in the near term, we have another $3 billion a 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 the interest income side and then it'll stop because we won't have any more balance sheet left and then you'll get a situation where you'll you'll you'll have a stabilization of that 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 one or two programs. We're talking in five years, a diversified mix of 20, 25 programs where in certain cases, we're not taking any credit exposure at all. 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 uh any of the compliance services we do today and things like transaction monitoring uh some of the middle office technology services we provide those will all be fee based and we'll give much more guidance uh as we get more clarity ourselves all we have done is put a structure and framework together to to kind of look into the future and build a model and understand what we want our bank to be within the competitive and market environment And we've done so much in the past to build our ecosystem. And we're trying to look forward to 2030 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. 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'll be a couple years before you see meaningful parts of our balance sheet used for credit sponsorship or fees for other services, 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 you know, uh, 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 and financial services and to our other partners throughout the payments ecosystem. So we're, I, I mean, we're just, I'm actually calling, uh, from Miami today where we had our, uh, our senior management offsite going through all this, uh, 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.
spk05: Sweet. I appreciate all the color. Damian, Paul, thanks, and congrats. 23 was really a great year, so kudos to you guys. Have a good weekend.
spk03: We appreciate it, Mike. Thank you.
spk00: Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. We have our next question coming from the line of Frank Chiraldi from Piper Sandler. Please go ahead.
spk04: Good morning. Good morning, Frank. 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?
spk03: Yeah. To be honest, that's giving us a little bit more time. We're not that patient to be honest. You know, it's, If you think of us only as a bank, you're going to miss the story. You know, if you look just at this quarter, our efficiency ratio was 38%, and we still have $3 billion of balance sheet to deploy building our business. 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, is going to be a couple of years to get a meaningful part. By that time, our balance sheet will be filled up. But I can see that happening within the next three to five years to get there. And then we could be even better by 2030. Now, would I be happy in 2030 to have those numbers? What other banker in the world wouldn't? So we're very conservative. As you know, we're very rigorous. 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.
spk04: Okay. And then just thinking about, again, the balance sheet, staying below $10 billion. And so no need for additional capital. I guess the 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, you know, 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?
spk03: It's not our money. As you know, our perspective, we're shareholder advocates. It's not our money. We're borrowing it from our shareholders. It's their money. 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. 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. 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.
spk04: 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, you know, still, you know, which I guess would be 15% plus, is that still, reasonable expectations?
spk03: 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. You know, that difference between GDV and fee growth, we saw it in the fourth quarter, 15% with 13%. And that's because we're getting Other services, like in that ACH line and push-to-card line, will see higher growth this year. So on an aggregate basis, we could see extremely good. You know, instead of the 9%, 10%, 11%, we could see more like 12%, 13%, 14% fee growth. So excited about those lines, too. 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 five years. 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.
spk04: 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 billion. I thought I read that you had $300 million in deposits off balance sheet at the end of the period. Is that right? And are those generating fees?
spk03: Those are not. We've moved those off with our partner. So those were higher. uh, cost deposits. So those are not generating fees. They would actually cost us money to have on the balance sheet because they're savings like deposits. So we, we, and we, as you know, we have a lot of liquidity right now in order to buy bonds. So we, we, we don't want to, this is a, 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 those. 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 tenet of managing the bank.
spk04: Yeah, on that front, in terms of the asset sensitivity, you talked about being reduced by maybe 14%. Um, just trying to think through numbers here. So I think on the deposit side, um, you basically 40, you know, you're, you're tied fed funds moves. Um, you get 40% of that move through deposit costs. Um, is it right now about, you know, 60% of the earnings assets move with fed funds or what's the number on the asset side?
spk03: On the, on the deposit side, it's six, it's, um, Yeah, that's 40%. So the inverse is 60. So if 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. including our bonds, and now we're approaching 40. 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 a bond. And every day we get less assets. It's 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. And 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.
spk04: And do you still think you can lock in a 5% NIM in this environment? I know, you know, there's a lot of variables there, but is that kind of a target?
spk03: That would be great, of course. It totally depends on how many bonds we buy and what, at what price and, uh, how much, uh, origination we have on our other businesses that are going to be fixed rate, longer maturity loans. So it's, it's incredibly hard to predict. I'd be happy. Uh, once again, at four 50, it's fine at four. It's fine because it's not going to, we're not a traditional bank and it's not going to affect our profitability. When we get a de-inversion of the OCA, we buy the bonds, our 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.
spk04: No, we don't have to grow the balance sheet.
spk03: Yeah, it doesn't, it really, if the NIM was 1%, ROE would still be 28%. You know, it doesn't matter. You know, the math is different than it would be for a traditional bank.
spk04: Hopefully you lock it in above 1%.
spk03: Yeah, well, it's going to be way above the market. So where's the market now? You know, some of the big banks are like 180. And, you know, the whole markets are just over three. And we're, you know, we added another 20 plus basis points this quarter. And that's going to continue to increase until... We buy the bonds, and this one is a real tough one to predict where it will be.
spk04: 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?
spk03: 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 were very strict in the underwriting. Our portfolio has matured, so we do have some deferments. This is very natural, though. No write-offs. We don't believe any substantial risk of default and loss. But as you mature that port, it's hard to know whether it's just a maturing portfolio where you have some people who haven't finished their projects or it's more based on the economy. It's not abnormal. We're not seeing anything abnormal yet from ours. 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.
spk04: Sure. I mean, just thinking about, is it fair to assume that classified assets will increase in this business for you guys, but you won't see the losses? Is that kind of a reasonable expectation of coming quarters?
spk03: Yeah, that's an expectation just on a the usual aging of a floating rate portfolio that's transitional. So we're very, you know, we work with 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, you know, they take longer than they expect in order to finish their project, even though they might be leasing it up. They didn't finish three buildings. So this is common. Whether that's driven by economic, what's happening in the economy, we don't believe that's the major factor. It's impossible, I can't give you an answer because there's really not an answer. We're not saying, 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. 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. Okay.
spk04: All right. I appreciate all the color. Thank you.
spk03: Thank you so much, Frank.
spk00: There are no further questions at this time. I'd now like to turn the call back over to Mr. Kozlowski for final closing comments.
spk03: Thank you, operators. Great year for the Bancorp. We're going to be focused on delivering in 2024. Thank you so much for your time. Operator, you can disconnect the call.
spk00: 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 day.
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