Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Q4 and fiscal 2022 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, January 27, 2023. I would now like to turn the conference over to Andres Viroslav. Please go ahead.
Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's fourth quarter and fiscal 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 12:00 P.M. Eastern Time today. The dial-in for the replay is 1-877-674-7070 with a confirmation code of 735961.
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 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?
Thank you, Andres. Good morning, everyone. The Bancorp earned $0.71 a share in the fourth quarter, driven by 28% revenue growth, while expenses were approximately flat year-over-year. GDV, gross dollar volume transaction growth accelerated to 13% year-over-year, driven by continued double-digit growth in most categories. Core loan growth, which excludes loans previously generated for securitization, was 4% quarter-over-quarter, led by floating rate CRE multifamily with 12% growth. Year-over-year core loan growth was 45% with 168% growth in CRE multifamily, 22% growth in institutional, which includes SBLOC and IBLOC plus IRA financing, and 14% growth in commercial, which includes fleet leasing and SBA loans excluding PPP loans.
Net interest margin grew dramatically quarter-over-quarter from 3.69% to 4.21%, compared to 3.51% in the fourth quarter of 2021, driven by the impact of Federal Reserve rate hikes. Efficiency and productivity continues to be a key focus of management, with expenses approximately flat year-over-year. ROE rose significantly over prior periods to 24%. 2022 was another year of strategic and financial progress for The Bancorp. We continue to improve our ecosystem for our fintech partners while investing across our platform to improve functionality and efficiency in all business lines. 2023 should show continued financial and operational improvement with a focus on continued rigorous risk management and credit oversight. In addition, our focus in 2023 will be determining our next strategic steps as a company.
After having established exemplar performance, we are now turning our attention to major initiatives which will sustain profitability and growth as we approach the Regulation II Durbin balance sheet limit of $10 billion. We believe that TBBK's unique capabilities can be monetized more broadly and that the $10 billion limit will not limit our ability to generate increased profitability. This incremental profitability will be generated from fees by distributing both assets and liabilities, GeV growth, and the sale of unique technology services and other platforms that will drive sustained EPS growth and ROE. For 2023, we are confirming our guidance of $3.20 a share, not including the net impact of share buybacks of approximately $25 million a quarter or $100 million for full year. We will update our guidance as we learn more in the coming months.
We believe our guidance is attainable even with significant economic ambiguity and potential stress in the macro environment. I now turn the call over to Paul Frenkiel, our CFO, for more details on the fourth quarter and full year 2022.
Thank you, Damian. Return on assets and equity for Q4 2022 were respectively 2.1% and 24%, compared to 1.7% and 17% in Q4 2021. These increases were significantly driven by a 47% 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 more from a normalized and 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.
Accordingly, in Q4 2022, the yield on interest earning assets had increased to 5.9%, while the cost of deposits had increased to 1.7%. These factors were also reflected in the 4.2% NIM in Q4 2022 which represented a significant increase over prior periods. The provision for credit losses was $2.8 million in Q4 2022 compared to $1.6 million in Q4 2021. The $2.8 million included an upward adjustment of approximately $900,000 in the qualitative economic factor in our CECL model, which is forward-looking. To the extent that economic uncertainty is resolved in the future, a reversal of that provision component would result. Conversely, deterioration in the economy could result in additional forward-looking provisions.
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 $22 million in Q4 2022 increased 10% compared to Q4 2021. Non-interest expense for Q4 2022 was $43 million which was comparable to Q4 2021. A decrease in legal reflecting the resolution of various matters and a decrease in salary expense offset increasing FDIC insurance and travel expense. Book value per share at quarter end increased 10% to $12.47 compared to $11.30 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 should continue to reduce shares outstanding.
I will now turn the call back to Damian.
Thank you, Paul. Operator, could you open the line for questions?
Will do. Ladies and gentlemen, if you wish to ask a question, please press the star followed by the number one on your touch tone phone. You will hear a 3-tone prompt acknowledging your request. If you would like to withdraw your request, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Frank Schiraldi. Please go ahead.
Morning.
Morning, Frank.
Wondering if you guys could, you know, good strong quarter on GDV growth year-over-year. I guess really you had been guiding to something along these lines, but just your thoughts on runway from here and how that, you know, how much of that translates through to card fee income growth?
I think this was a very good normalized quarter. You know, we had the stimulus, we never gapped down, and we've been building all year back to trend. We had one, I think it was five and now we're at 13. I think you're gonna see this range, you know, 12%-15% GDV growth going forward this year. I think you're gonna see around 9%, 10%, maybe even 11% translation into fees year-over-year. You know, that was kind of the trend before the big stimulus bump. Very encouraging. When we look at our pipeline, you know, we've got some real successes in corporate payments that have ramped up very quickly. It looks like it's going to be at, you know, at that level.
Hopefully, we'll get a bit more, but it looks like it's gonna be a strong year.
Great. Then, just on loan growth, the SBLOC/IBLOC portfolio growth has slowed a little bit, certainly over the last couple of quarters. Just wondered if you could talk about your outlook for growth in that portfolio.
Yeah. That is what is likely to happen, what we've seen in before. When you get this rapid, I mean, this is historic, but I mean, you get a rapid change in, you know, on liquid borrowing so quickly that people get a little sticker shock. It's a little bit encouraging that we were only down 1%, to be honest. There were more payoffs, but it were offset by more origination. That should by the middle of the year, when interest rates stop, people normalize, and then you'll get people just not lending for needs rather than just lending for liquidity. You know, it won't be, and obviously, we're coming closer to that balance sheet limit.
We won't have like historic 20% growth. You know, we'll have some growth. It won't be, it won't be as dramatic as we previously had until things really normalize. Once they normalize, you know, we'll go back to the previous trend, likely.
Yeah. Finally, just wondering if you could talk about, you know, things that you're doing to protect margin here as we perhaps come to the peak of this rate cycle. You know, what sort of margin reaction do you expect if we get a rate cut or two, you know, at the end of 2023 or into 2024?
Yeah. As Paul was saying, we've totally opened our balance sheet to the variable side. You know, this was more dramatic than we expected, but we really thought there was going to be a rise, ultimately a rise in interest rates. We've left and are pivoting very quickly. We have a project in place called Project Flex. We're gonna put out a lot of fixed rate exposure. We have a fixed rate program now in our CRE business. Putting on more fixed rate exposure in our commercial business. Once again, we haven't bought a bond. One easy way to do it is simply to lock in forward rates through, you know, 3-, 5-, 7-, and 10-year agency securities.
We're very aware of the situation, and we're gonna significantly lower the variable part of our balance sheet as we peak out at rates. You know, I think we came into this when we started this process, we were more like 55% variable, and with the growth of those variable rate businesses, it went up, and we didn't buy any a fixed rate exposure. Now we just have to turn that around. And the good thing is rates drop, of course, balances will go up in things like the IBLOC, SBLOC area. You know, we run those models. We're going to soften the impact of those interest rate changes, and we're in a really great position because we got plenty of room to do that.
We're forecasting that, and we'll be able to lock in, I think, an increasing amount of fixed rate exposure. One thing to note, our financials today do not account for bond purchases. One thing to note that we haven't even built that fixed rate exposure on the bond side into the 3.20 earnings per share estimates.
Okay. All right. That's helpful. Just as you're thinking about fixed rate exposure in the, in the loan book, or, you know, can you talk about what sort of products are you looking at? Are you thinking about permanent financing on the multifamily side?
Not perm, but there is a market because of for the fixed rate side in the CRE transitional loans. Especially at lower dollar numbers, because interest rate caps have become very expensive. We require interest rate caps on our loans to protect against the volatility and interest rate, and usually have reserves. We've, there's not a lot of programs out there on the fixed rate side for these transitional loans, so it's been, you know, we've already done over $50 million, and we just launched it just recently. There, you know, that'll give you a 3-year cushion. I also remind you that we have floors on all our. One of the great things about our portfolio, it's variable on the upside, but a lot of it is not variable on the downside.
We have floors on all the loans on the CRE side. Even if we do get a significant downdraft on the Fed side, those rates won't be significantly affected.
Okay. I appreciate all the color. Thanks.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the number one. Your next question comes from Michael Perito with KBW. Please go ahead.
Hey, guys. Good morning. Thanks for taking my questions.
Hey, Mike.
I wanted to follow up on that kind of margin line of questioning a little bit and maybe drill down on the liquidity position a bit more specifically. David, I know you mentioned some high-level stuff, would you guys say it's fair for us to assume that over the next 6 months or so, the excess cash position, you guys will probably start putting to work a bit more on the bond book side? I mean, I think it's been what? Like, three years since you bought a bond, which obviously looks really good now. Just curious, kind of functionally how we should think about the investment portfolio. Does it, does it kind of trough out here the next quarter or two and then start growing, or what you guys are thinking there?
Yeah. Well, we're really. It's almost a daily thing, we're watching everything. The yield curves, everything. We have so much flexibility in our balance sheet, because we have plenty of ways to get deposits, and we have plenty of room up to the Durbin limit. We really are deciding exactly how much fixed rate exposure we're gonna take and when we're gonna take it, to lock in. We might give up a little margin, but we're not gonna give up a lot. We also have, like I said, floors on all the CRE loans, which protect us for three years. We're really dealing with that SBLOC portfolio, which is the one without floors that really adjusts very quickly with interest rates.
Those are, if you recall, those are all demand loans on top of it. Not that we're gonna demand loans, it's just that, you know, in every scenario, we've got an incredible amount of balance sheet flexibility to put on fixed rate exposure. If you look at our loan yields, that's the lowest yielding portfolio. In our higher coupon portfolios, we actually have fixed rate protection in there. We're in a very good position and able to deflect the balance sheet in order to put on a lot more fixed rate exposure.
Thanks. That's very helpful. Then on just on loan growth, where are the pipelines kind of at today in the various business lines? Was any of the slowdown this quarter, I don't want to say intentional, but, you know, I think there was some good catch-up on the deposit side? You know, the balance sheet looks a little bit better positioned here to support some growth in 2023. Just curious kind of what some of the dynamics were there and your near-term expectations around loan growth.
Yeah. Well, we did have some catch-up. You're right. That's actually economically helps us. It wasn't purposeful, though. We're not stretching, though. I mean, we're not stretching at all on credit quality. When you get in times like this where volumes get low, people get a little bit too, you know, there's been some announcements about people getting into commercial and stuff. That's not the time to do it, probably. We're just being very, very careful. We're underwriting to the standards we've always underwritten to. The market's being affected by rates, but We had strong growth in leasing because there's a big backlog in car delivery still.
For the commercial side, you're being very careful on, you know, while we have the government guarantees on the SBA, that's has slowed down because the interest rates have jumped so much and people don't know if they want to invest in new businesses. Even if we went through 2023 with even a flat or up 5%-10%, that really will still meet our expectations, the earnings per share. I think we're in a really... There's a lot of upside potential. If we get trend growth, obviously there'd be significant upside potential. We've been very careful with our guidance. We've scenario planned it out and looked at a lot of. We've left a lot of things out, like historic growth. We've left out bonds. We're obviously getting...
I mean, I talked a few earnings calls before, and we were kind of in the 4% range where we thought this would top out on our NIM, and we've flown right past that. During this quarter, we've had increasing, significantly increasing net interest income while our GDV has restored to trend. You know, there's a lot of green lights here, and we're gonna have a lot more information in January, and by the end of the first quarter, we're gonna know a lot. If we have to adjust guidance and take a hard look at, we'll also know a little bit more about rates. I think it's gonna be an exciting quarter and, I wanna know what it is, and I know you do too.
Yeah. Just lastly for me, I mean, you guys have held expenses flat for almost 2+ years now. Obviously you guys kind of have a structurally higher profitability, out, outlook with this NIM north of 4%. I know you have initiatives you're working on. You know, I think there has been a little disruption on the customer side because of some regulatory actions to competitors. Just curious, is there any. As we think about the rate of investment and the OpEx growth, I mean, is there room for that to grow a bit more this year than it has in the past two years? Did you guys see some opportunities, or how should we think about that?
Well, we're always focused on efficiency and productivity, but, you know, there is core inflation, there's no doubt, that will affect us next year. One of the areas is just employee costs. You know, we've gone now four, almost five years, basically with flat expenses. I mean, if you look on a historic basis, that's all been the restructuring of different things that we've done on the operational side. I think you'll see, you know, from a historical perspective, we're not gonna be to zero. We're not gonna be at 2%. We really wanna continue to invest in our people. While the regulatory side isn't our issue because there's been so much investment in that side of our business.
That's not where the cost is gonna come from. It's gonna come from the embedded core inflation. We're obviously benefiting from rates rise and inflation in our GDV and everything else. I think this is the year that you'll still get a big differential. It's, you know, you're gonna have a big differential between revenue growth and expense growth. You'll have above what our trend has been, which has been flat, above that trend. You know, we'll have at least 10% draws between revenue expense. It'll probably be significantly more than that, but you won't see flat expenses this year mostly due to employee costs and core inflation.
Got it. Very helpful color. Thank you guys for taking my questions.
Again, ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the number one. There are no further questions at this time. I will now turn the call over to Damian Kozlowski for closing remarks.
Thank you, operator. It was a really good quarter for us. We made a lot of progress. As I said, we're looking forward to the next quarter to really tell us a lot more about 2023. As we get information, we will continue to talk with everyone on the phone. When we get to the end of the first quarter, I think we'll have a lot more information to share about how 2023 might ultimately end on the metrics in which we measure this business. Thank you, everyone, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.