The Bancorp, Inc. (NASDAQ:TBBK) Q4 2023 Earnings Call Transcript

The Bancorp, Inc. (NASDAQ:TBBK) Q4 2023 Earnings Call Transcript January 26, 2024

The Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning ladies and gentlemen and welcome to the Bancorp Inc. Q4 and Fiscal 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, January 26, 2024. I would now like to turn the conference over to Mr. Andres Viroslav. Please go ahead, sir.

Andres Viroslav: Thank you, operator. Good morning and thank you for joining us today for the Bancorp’s fourth quarter and fiscal 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 545154. Before I turn the call over to Damian, I would like to remind everyone that one 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 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. And good morning, everyone. Excluding the tax affected impact of a onetime write-off of the company’s only trust preferred security purchased in 2006. The Bancorp earned $0.95 a share with the year-over-year revenue growth of 16% and expense growth of 5%. Excluding the trust preferred write-off, ROE was 26%. NIM expanded to 5.26% from 5.07% quarter-over-quarter and 4.21% year-over-year. GDV increased 13% year-over-year and total fees from all fintech activities increased 15%. For the full year ’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 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 ’24 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 $4.25 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’ll now turn the call over to Paul Frenkiel for more color on the fourth quarter and full year ’23.

Paul Frenkiel: 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 SBLOC and IBLOC 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 for an increase of 1.6%. The cost of deposits in those respective periods increased by only 0.8% to 2.5%. Those factors 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 principle between the third and fourth quarters of 2023 against which cumulative CECL 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 noninterest income. Total fees and other payments income of $25 million in Q4 2023 increased 15% compared to Q4 2022. Noninterest expense for Q4 2023 was $45.6 million which was 5% higher than Q4 2022. Salaries and benefits expense was flat year-over-year, reflecting a 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 Damian.

Damian Kozlowski: Thank you so much, Paul. Operator, could you open the line for questions?

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Q&A Session

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

Michael Perito: A couple of shorter-term questions, a couple of longer-term questions. But first, just start on the ’24 guide. Paul, I was wondering if you could maybe provide a little bit more context around 2 things. One, kind of how rates could maybe — what kind of rate assumptions you have in the guide most recently and how maybe some variability on that could impact the guide, ex buyback? And then also, would love a little color too, on just kind of thoughts around OpEx growth for ’24 and if you guys are kind of in a net growth position here adding some head count or just would love a little update there as well.

Damian Kozlowski: Okay. So Mike, before I turn it over to Paul, there’s a couple of things. We do not — our base case is not the market’s view of 6 interest rate cuts. We may — we think there might be a couple maybe starting in June. But our forecast of the $4.25 [ph] 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 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?

Paul Frenkiel: 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 cushion. 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.

Michael Perito: That’s helpful. Can we — maybe just to spend another minute on the margin and rate stuff. Do you have a sense of after 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 or two 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.

Damian Kozlowski: The answer is we want to negate — we were — remember, we opened our balance sheet after buying bonds in 2018 and the pandemic getting interest rates at 0, we became extremely asset sensitive. Let the bond portfolio run off all the way down under $800 million. And we waited for the interest rate increase, the majority of it to be finished before 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 $1 billion to $1.5 billion will 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 time frame, you’ll get a dis-inversion Of the yield curve at which time we’ll add 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.

Michael Perito: Okay, that makes sense. So we should kind of — so you guys are going to be patient on the bond side until there’s more clarity.

Damian Kozlowski: Super patient. We can only go ahead by…

Michael Perito: 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?

Damian Kozlowski: Yes. As you know, the NIM is 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 substantially increase our net income just by getting a spread on our bond purchases; right? So that usual correlation where you see the NIM drop, no profitability is going to go down. Now ours will actually go up. So we think we’re being very cautious. This is an hourly thing for us. We want — we’re using history as a guide. There should be that inflection point where we start putting on that bond exposure where it will be a positive spread to the bank, they will 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.