The Bancorp, Inc. (NASDAQ:TBBK) Q3 2023 Earnings Call Transcript

The Bancorp, Inc. (NASDAQ:TBBK) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning ladies and gentlemen and welcome to The Bancorp Inc. Q3 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, October 27, 2023. I would now like to turn the conference over to Andres Viroslav. Please go ahead.

Andres Viroslav: 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 Frenkiel, 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 12:00 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 1 used in 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. 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?

Damian Kozlowski: 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 5.07% from 4.83% quarter-over-quarter and 3.69% 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 exempt our financial performance and 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 Solutions Ecosystem. These investments should have meaningful impact on performance in gross dollar volume growth in ’24 and beyond.

As I stated in our last earnings call, we expect to have above-trend GDD 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 [indiscernible] focused on collaborative space for our Bancorp team and business partners, while providing best-in-class workspace to innovate and create the future of backing 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 [indiscernible] 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 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 4th 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 Bancorp will continue to grow revenue and profitability and announce new long-term targets. Have already achieved example of 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 $3.60 a share. We are also initiating 2024 preliminary guidance of $4.25 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 [indiscernible] earnings growth over 2023 guidance, 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 our CFO and my colleague, Paul Frenkiel, for more color on the third quarter. Paul?

Paul Frenkiel: Thank you, Damian. As a result of its variable rate loans and securities, 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 is 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 has 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 noninterest income. Total fees and other payments income and $24 million in Q3 2023 increased 12% compared to Q3 2022.

Noninterest 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% which reflected higher numbers of staff and 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.

Damian Kozlowski: Operator, would you please open the lines for questions.

Operator: [Operator Instructions] Our first question comes from the line of Michael Perito of KBW.

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Q&A Session

Michael Perito: I wanted to start just kind of on the state of the kind of banking 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 sheet. Just curious, though, if you can give us some flavor on what the kind of incremental growth opportunities that you’re looking at, especially if you think about the earnings growth that you’re expecting next year? Are there new partnerships? Are there new products with current partners? Or are there any kind of growth assumptions embedded in that, that we should be thinking of?

Damian Kozlowski: Yes. So we add around 5 or 6 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 is the focus. So that is helping to maintain our pipeline. We continue to say no to most new businesses because of what — in their own cycle where they are those programs. We’re taking only the most mature programs. And so we have great visibility 18 months in advance. So 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 the 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 intend to lessen and the move — remember, we’re very broad. We’re just not at neo banks. We’re in health care and we’re in 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, we’re only dealing with the most mature and large programs.

Michael Perito: Perfect. That’s helpful color. 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 SBLOC portfolio that might persist for a bit if rates stay higher which obviously would be good for margin. And not kind of 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?

Damian Kozlowski: Yes. So it’s definitely slow. The sticker shock, the most — 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 530 [ph], that’s dramatic for some people. So the people that can delever 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 3 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 SBLOC and IBLOC area and more than 15%-ish in the CRE multifamily business. Remember, we don’t have the big roll-off 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 in 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, that could — if we don’t hit those targets and the interest rate environment is right, we’ll buy more bonds.