The Bancorp, Inc. (NASDAQ:TBBK) Q2 2023 Earnings Call Transcript

The Bancorp, Inc. (NASDAQ:TBBK) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, ladies and gentlemen and welcome to The Bancorp Second Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded today, Friday, July 28, 2023. I would now like to turn the conference over to Andres Viroslav. Please go ahead, sir.

Andres Viroslav: Thank you, operator. Good morning and thank you for joining us today for The Bancorp’s second 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 p.m. Eastern Time today. The dial-in for the replay is 1-877-674-7070, with a confirmation code of 720317. 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 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 maybe 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 made $0.89 a share, 41% revenue growth and 17% expense growth. ROE was 27% and ROA was 2.6%. Core loan growth quarter-over-quarter reflected a reduction of 8% in institutional lending and respective increases of 2% and 4% for our small business, commercial and real estate bridge lending businesses, which also showed 10% and 65% growth year-over-year, respectively. NIM increased to 4.83% from 4.67% quarter-over-quarter and 3.17% year-over-year. Gross dollar volume growth in our fintech solutions payments business was 15%, continued strong growth across verticals with only general purpose reloadable showing a decline. New corporate payment programs continue to show growth significantly above expectations.

The Bancorp continues to be well positioned in the current environment. Our balance sheet flexibility, lower credit risk and high level of core insured deposits support continued improvements in profitability regardless of potential dislocations or weakening economic conditions. While the sharp increase in the Fed Funds rate affected our growth in loans, this impact was mostly following our institutional business, which is comprised of our SBLOC and IBLOC variable rate consumer loans. Long-term historical growth trends seem to be normalizing and pipelines across our businesses are increasing. Our fintech solutions business continues to show strength, supported by current programs, the addition of new products and the implementation of new partners.

Due to significant implementation times that can last 18 to 24 months, we have good visibility on the potential growth in 2024. Our current estimate is that we will have above trend GDV growth in 2024 of more than 15%. Key areas of growth are neobanks, healthcare and new corporate payment programs. In addition, we continued to strengthen our relationships with our key members of our ecosystem and recently signed a long-term extension and expansion of our partnership with Chime. We continue to invest a lot of time and energy across our company in the development of new products and services, especially expansion of fee businesses and the monetization of our core capabilities. As we approach the Reg II Durbin Amendment, restriction on our balance sheet size of $10 billion.

We believe we consistently grow the business without needing additional balance sheet above that limit. Lastly, with continued strong business momentum and a favorable balance sheet position, we are confirming our ‘23 guidance of $3.60 a share without the impact of anticipated stock buybacks of approximately $25 million per quarter. In the third quarter earnings release, we will give both preliminary guidance for 2024 and indications of our buybacks for next year. I will now turn the call over to Paul Frenkiel, our CFO, for more color on the second quarter.

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 Q2 2023, which were respectively 2.6% and 27% compared to 1.7% and 19% in Q2 2022. These increases reflected a 60% 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 Q2 2023, the yield on interest-earning assets, have increased to 7% from 3.6% in Q2 2022 or an increase of 3.4%. The cost of deposits in those respective periods increased by only 2% to 2.3%. Those factors were also reflected in the 4.8% NIM in Q2 2023, which represented another increase over prior periods. The provision for credit losses was $361,000 in Q2 2023 compared to a credit of $1.5 million in Q2 2022. Q2 2023 net charge-offs amounted to $938,000. 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 Q2 2023, increased 10% compared to Q2 2022.

Non-interest expense for Q2 2023 was $49.9 million, which was 17% higher than Q2 2022. The majority of the increase resulted from salary expense, which increased 28% and 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 employee incentive and stock compensation expense as a result of a focus on stock ownership. Book value per share at quarter end increased 19% to $13.74 compared to $11.55 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, Paul. Operator, could you open the lines for questions?

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Q&A Session

Operator: Thank you, sir. [Operator Instructions] Your first question will come from Frank Schiraldi at Piper Sandler. Please go ahead.

Frank Schiraldi: Good morning.

Damian Kozlowski: Good morning, Frank.

Frank Schiraldi: On the – on GDV growth, another strong quarter. And I think, Damian, you said that we should expect above 15% going forward. I am not sure if I heard that right, but if I did, anymore color just in terms of – if you could put some sort of guardrails around that statement?

Damian Kozlowski: Okay. I did say that and I said that for 2024. So we have a very good understanding of the projects under implementation and new product expansions. So, these implementations, we have discussed this before, can take 18 to 24 months to fully implement into our ecosystem. So looking at that pipeline, we are fairly confident that we will get above trend growth for ‘24. So above that 15% level which has been kind of a historic breaking point between slower and kind of the trend line for the last 7 years, which is actually 16%, but above 15% to make it easy.

Frank Schiraldi: And then in terms of just the new partnerships, new programs you are signing, is there any pressure on margins there? Just wondering what sort of a take rate is from 15% or above in terms of the revenue stream that provides through fee income?

Damian Kozlowski: No, the – it actually – for the new programs and stuff, it usually is more profitable in the early years, because there is minimums and then there is tiers. For our larger clients, yes, they have so much volume that the incremental volume doesn’t take a lot of cost. So we do get price breaks on tiers for our larger programs that are growing. But we have a lot of new products and services, the relationship that we have had to GDV and fee growth should be maintained over the next couple of years, but I can’t guarantee that. It totally depends on who is growing and when. And the outlook on this business has really never been brighter. It seems that we have a lot of very good business opportunities, a lot in new partnerships, but also the expansion of partnerships across the – all of our verticals. So we are in a very good position on the fintech solutions business.

Frank Schiraldi: Okay. Great. And then on the SBLOC contraction balances this quarter, you talked about sort of normalization. So do you expect to see more run-off here? Can you offset that with other loan sources? Or what are your thoughts about both total – SBLOC and total loan growth here in the near-term?

Damian Kozlowski: Okay. So they are – our pipelines are increasing, so we should see less runoff on the institutional side. That was obviously with the historic rise in interest rates, the price-sensitive clients who are borrowing against their securities insurance kind of fell out of the loop. And there is been some pricing pressure from industry players that we haven’t chased. So – but we do see our pipeline growing and some competitors have raised their prices. So we should have less runoff in the third quarter. And that also depends, obviously, how aggressive the Fed is too. The other pipelines are fine. They continue to grow those books of business. And remember, we have two concerns. One is those – if we do get paid back on those loans to go and the Fed funds obviously at 5.25, which the – we don’t get hurt that much on the spread.