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The Bancorp (TBBK 3.10%)
Q2 2022 Earnings Call
Jul 29, 2022, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the Q2 2022 Bancorp Inc. earnings conference call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session. [Operator instruction] I will now turn the call over to Andres Viroslav.

Andres Viroslav -- Investor Relations

Thank you, Vanessa. Good morning, and thank you for joining us today for the Bancorp's second-quarter 2022 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. Before I turn the call over to Damien, 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 that could cause actual results performance, or achievements to different materially from those anticipated, or suggested by such statements.

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For further discussion of these risks 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 released 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 would like to turn the call over to the Bancorp's chief executive officer, Damian Kozlowski.

Damien.

Damian Kozlowski -- Chief Executive Officer

Thank you, Andres. Good morning, everyone. The Bancorp generated $0.53 a share, earnings from 3% revenue growth, and 2% year-over-year reduction in expense. Gross dollar volume, GDV, shows continue improvement with year-over-year growth of 5%.

We expect this trend to continue in the coming quarters. Loan growth continue to be strong. All businesses grew balances quarter-over-quarter led by real estate bridge lending with 38% growth and institutional, which includes SBLOC, IBLOC, and RIA financing with 10% quarter-over-quarter growth. Both businesses grew significantly year-over-year, with commercial real estate growing to $1.1 billion since it's third quarter 2021 resumption, and institutional growing 35%.

Total loans of the Bancorp's, excluding loans at fair value grew 14% quarter-over-quarter, and 61% year-over-year, excluding previously discontinued assets. Expenses decreased 2% year-over-year as we continue to manage expenses rigorously with the focus on scaleability and platform productivity. Current economic conditions and the rise of interest rates should have a positive impact on earnings growth over the next 2 years. The Bancorp's asset sensitive due to its approximately 70% variable loan book, and very stable deposit funding through its payments ecosystem that is spread over more than 50 payment program partners.

We expect deposits to reprise to approximately 42% of Fed funds increases when rates are raised by the Federal Reserve. Low rates reprice with a slight lag with significant amounts of repricing the following month. This lag was experienced in June, as funding costs increased with the delayed increase in loan rates. However, starting in June, previous rate increases will begin to directly impact loan interest income and net interest margin.

We believe our loan book and securities portfolio is lower risk, and in asset classes that have taken the losses throughout economic cycles. Significant amounts of liquid or cash collateral, backed both SBLOC and IBLOC loans, SBA loans have partial to 75% guarantees or 50% to 60% loan to value. Car fleet leases have the credit worthiness of our borrowers, many of which are government and institutional entities, with an established history of minimizing losses through appropriate residual values on vehicle collateral. And our floating rate transitional multifamily loans are supported by new money from sponsors, and rising rents that we believe offset the impact of interest rate increases.

Most of these loans are in states that have had high occupancy rates, and economic growth with increasing populations. In addition, we have generally held purchasing government bonds, and other fixed-rate securities during the low-interest rate environment experienced over the last two and a half years. So we have substantial capacity to add that fixed rate exposures as interest rates rise. Lastly, the Bancorp was also somewhat insulated from inflation as our GDV base fees are contractually based on the total value of transactions.

This helps support fee growth even in a recessionary environment where the total amount of goods sold, stagnates, or declines but prices continue to rise. With a strong business pipeline and rising rates, we are raising our guidance for 2022 from 215 a share to the range of 225 to 230 per share. This range excludes the impact of 2022 share repurchases, but includes interest rate assumptions based on Fed funds expectations. We expect to issue guidance for 2023 in our third quarter 2022 earnings release.

I now turn over a call to Paul Frenkiel, to give more details on the second quarter.

Paul Frenkiel -- Chief Financial Officer

Thank you, Damian. Return on assets and equity for Q2 2022 were respectively 1.7% and 19%, compared to 1.7% and 19% in Q2 2021. Q2 pre-tax income increased $4 million or 11% to $41 million in the second quarter, compared to $37 million in Q2 2021. Additionally, the prior year quarter included $4.3 million of PPP-related interest and fees substantially, all of which was eliminated in the current year quarter.

Also reflecting the $4.3 million PPP reduction was $55 million of Q2 2022 net interest income, which as a result was comparable to the prior year quarter. Additionally, in Q2 2022, funding costs contractually adjusted immediately to Federal Reserve rate hikes, and increased of 44 basis points from 18 basis points during Q2 2021. Immediate funding expense increases and the lagged loan rate adjustments noted earlier, were reflected in a decrease in net interest margin to 3.17% for Q2 2022 from 3.19% in Q2 2021. While loan rates lag, they adjust more fully to rate changes.

So, as loans reprice, we expect that increases in loan yields in Q3 and Q4 will exceed the increase in funding costs, and begin to positively impact margins and net interest income. The provision for credit losses was a credit of $1.5 million in Q2 2022, compared to a credit of $951 thousand in Q2 2021. The credit in the current year reflected the impact of low reserves on credit deteriorated loans, and a greater proportion of government guaranteed loans on our CECL loan pools. Those factors were partially offset by the impact of loan growth.

The credit in 2021 reflected the reversal of pandemic related provisions. Prepaid debit and other payment related accounts are our largest funding source, and the primary driver of non-interest income. Total fees and related payments income of $22.4 million in Q2 2022 increased 5% compared to Q2 2021. Non-interest expense for Q2 2022 was $43 million, reflecting a decrease of 2% from Q2 2021, notwithstanding a $1.2 million settlement related to the cascade matter in 2022.

The decrease reflected lower FDIC expense, resulting from the reclassification of certain deposits from broker to non-brokered and lowered incentive compensation related expense. Book value per share at quarter end increased 7% to $11.55, compared to $10.77 a year earlier, reflecting retained earnings partially offset by fair value adjustments to the investment portfolio resulting from the higher rate environment. Quarterly share repurchases have continued to reduce shares outstanding. I will now turn the call back to Damian.

Damian Kozlowski -- Chief Executive Officer

Thanks, Paul. Operator, could you please open up the line to questions?

Questions & Answers:


Operator

Yes, sir. We will now begin our question-and-answer session. [Operator instruction] And we have our first question from Frank Schiraldi with Piper Sandler.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning. Still wondering on the day you talked about the obviously the GDV growth year-over-year is really strong and given a really strong 2021. I know there are some headwinds to year-over-year growth in the first half of this year that will dissipate a bit in the back half. So just wondering if you can update us on your thoughts on year-over-year GDV growth in the back half of this year.

Damian Kozlowski -- Chief Executive Officer

Yeah. So it's. It's. Accelerating, it looks like.

And that's because of we expected the burn off kind of the stimulus. But it kind of gapped up and never gapped down again. So, it's returning the trend, we're over the loss of the borrow program and the bump in stimulus. So now it's going to be much smoother when adding new programs.

So, the volume is so much larger than it was a couple of years ago. So, you're going to get high single, lower double-digit growth, and we should nicely move into that as we go through the year-end then the beginning of next year. You can't always predict this depending on what's happening with the economy, but it looks like we're returning to more of the double-digit trend.

Frank Schiraldi -- Piper Sandler -- Analyst

And are there any concerns in terms of the pipeline?  Talk of Neobank competition and higher cost of capital may be shaking some of those institutions out. What are your thoughts there in general?

Damian Kozlowski -- Chief Executive Officer

We haven't seen it. We have a incredibly strong pipeline adding new products and new programs. We're dealing with the much more mature, well-funded programs. And we're not only in the fintech space, we're across many verticals corporate incentives, state cards, healthcare, all those things are doing well.

So we haven't seen any deterioration in the more mature programs wanting to have a more complex platform in order to do business. So, we're in good shape right now. We haven't seen any deterioration.

Frank Schiraldi -- Piper Sandler -- Analyst

OK. Great. And then on the balance sheet, I was wondering just thinking about growth from here, can you continue to grow GDV at a greater pace than growing deposit balances? Just how are you managing balance sheet growth from here, and where do you expect to be in terms of footing by the year end?

Damian Kozlowski -- Chief Executive Officer

Well, we continued, if you looked at we had extraordinary loan growth year-over-year. If you take out the discontinued, and you took out the securities portfolio, and that was replacing assets that were running off. And we had, if you look at the quarter-over-quarter annualized, were in the 30% range. So that's going to obviously slow down because we're replacing a lot of the loans.

But you'll see that continued. We're targeting 15 overall portfolio, 15% or 20% portfolio growth until we maxed out the balance sheet. And it's been disproportionate. We've got some really great opportunities, in the SBLOC area, we had very strong growth and increasing spreads in the real estate portfolio, that should calm down a bit.

So we're targeting that 15% to 20% growth going into the end of the year and hopefully in that range in 2023.

Frank Schiraldi -- Piper Sandler -- Analyst

OK. And in terms of like just thinking about deposit balances, we should generally just think about sort of matching that growth to GDV growth. Does that make more sense?

Damian Kozlowski -- Chief Executive Officer

Yes, as you know, we're very liquid. We have a lot of ways to increase our deposit base. We might have to do some short term. We never know going into the third and fourth, the fourth quarter and then the first quarter of 2023 because of the seasonality, taxes, gift cards, those type of things.

So we usually leave it fairly open during those two quarters, to see where we're going to be at the end of the first quarter. So we'll know how to put in more permanent funding if necessary. We did see from the stimulus a big increase in deposits. Once again, we thought that would burn off.

That has not burned off and it's been replaced by other programs and growth in our current programs. So we expect the funding to mostly come as it has in the past as a continued growth in the 50 or more programs that we have, we don't expect to radically change our funding structure. So mostly it will be based on the payments. There may be opportunities grow a little bit more aggressively, and then we'll either have to borrow short term or put in some more longer term deposits at Fed funds plus.

But that's not something we can predict. And that's only a result of faster than what we expect a growth.

Frank Schiraldi -- Piper Sandler -- Analyst

Got it. OK.  And then just finally, in terms of interest rate hikes, just want to make sure I understand the math. So 70% of the loan book is, is variable rate. And now that you're through the floors on the the CRE held for sale, I guess that's a variable rate as well.

So that's within the 70% when you talk about, you know, the loan balance.

Damian Kozlowski -- Chief Executive Officer

Yes. So what's happened is you've got two things going on in the second quarter. You had some interest rate increases, and immediately we take the funding costs part of it. So it goes up, our funding cost goes up, but we have a lag.

We had floors which were through number one, but we also had a lag in the loan pricing. So it goes from the next month. Things like SBLOC will reprice based on prime the next month. Right.

So, if it was at the end of the month, you'll get it in the beginning. So, for the recent 75 increase. Things like SBLOC will reprice in the beginning of August. There are other things like the CRV portfolio that were based on Sofr.

Sofr is an average that's kind of backward looking, about 60 days. So that impact of the last interest rate increase in June is really only going to be felt in August, excuse me in July. So you have this immediate funding impact, a lag in pricing. In fact, SBA, some of the SBA loans reprice quarterly.

So as we go through the year and approach 2023, you're going to have this revenue, this [inaudible] as the loan, the different schedule on loan repricing happens throughout the next six months.

Frank Schiraldi -- Piper Sandler -- Analyst

OK. Great. Thank you.

Operator

Thank you. Our next question is from Michael Perito with KBW.

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

Hey, guys. Good morning. Thanks for taking my questions. To follow-up on that last line of questioning.

I mean, are you guys kind of willing to give any like range or indication of where you think the NIM might be able to settle in in the back half of the year based on the updated guide? I mean, are we talking something like north of 3.5% by the end of the year? Or how are you guys thinking about that?

Damian Kozlowski -- Chief Executive Officer

So, it will go up. It will go up. Now that we're through the floor, is it should go up about 60% excuse me, 58% of whatever the increase is. Right.

So, of course, our portfolio. So you can make the calculation now that we're through the floor is like for this recent one, we'll get 58% of that 75 basis points that just happened a day or two ago. That will bleed into the NIM based on the fact that and then you have to obviously realize that 70% is variable. So you get this and it's lag.

So, it will obviously increase if we continue with the Fed funds past neutral, and they're talking it changes maybe a 350 Fed rate by the end of the year, could be less, could be more. That's obviously going to have a big impact on NIM. it'll go through the mid, to the high three. And when we do our modeling, and you look at the Fed funds future, this is of course very variable, it could range depending on the assets that we hold, and all the other calculations you need to do.

But it will be it'll go from, if you continue with these interest rate increases that will go from the low threes to the high threes. And potentially next year, if you continued with this process and in a normalized, more tightening through the two and a half percent range so the 3.5% or 4% Fed funds rate, you get close to 4% or around 4%.

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

Helpful. Thank you. Just a few more from me. Just on the card fees themselves.

The sequential delinquent growth rate was, I think, a little ahead of GDP. Just wondering if there's anything in there that that could kind of revert and normalize moving forward and that we should think about as we kind of forecast the back half of the year.

Damian Kozlowski -- Chief Executive Officer

No, it's we're more normal now. Remember, we had a period where general purpose reloadable was really declining, and debit was taking over, and general purpose reload was generally higher spread, higher fee basis points than debit. So you had that going on, and we had the tiers for the big programs and they're all through their tiers. So you're going to get a better match of GDV and fee growth.

Then you would have had a year and a half ago when you had a massive growth in debit for general purpose reloadable especially energized by the stimulus payments. So a lot of that went through debit didn't go to general purpose reloadable. And so you saw a disproportionate GDV growth, but not the same fee growth.

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

Got it. OK. Just, the expense run rate, it took a step up sequentially here. Just wondering if you guys could talk to that increase, and maybe provide some context of expectations for the back half of the year.

Damian Kozlowski -- Chief Executive Officer

Well, that's Paul's favorite subject, so I'll give that to Paul.

Paul Frenkiel -- Chief Financial Officer

Yeah. So we had, if you look linked quarter, we did have an increase in salary expense, and that was driven by incentive compensation. There is some variability. You have to pick up that expense when those decisions and the production implies that you're going to have that expense.

So I think using this quarter as a run rate is probably what we should be doing. And you will see some inflationary increases. I think where we're very automated, and we've got a lot of scalability, we've made significant investments in that. So we're not looking  that as an extreme increase.

So I think you'll have modest increases from here on in.

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

OK. Unless we expect the tax rate for the remainder of the year to be more like similar to the first quarter or at the higher rate of the second quarter.

Paul Frenkiel -- Chief Financial Officer

It'll be of the higher rate in the 20. It should be in the 26% range. That's  what we're using for our internal planning.

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

Got it. Great. Thank you, guys for taking my questions.

Operator

And thank you. We have no further questions. I will now turn the call over to Damian Koslowski for closing remarks.

Damian Kozlowski -- Chief Executive Officer

Thank you, everyone, for joining us today. Appreciate your interest. And we'll talk soon. Operator You can disconnect the call.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Andres Viroslav -- Investor Relations

Damian Kozlowski -- Chief Executive Officer

Paul Frenkiel -- Chief Financial Officer

Frank Schiraldi -- Piper Sandler -- Analyst

Michael Perito -- Keefe, Bruyette and Woods -- Analyst

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