Participants

Andres Viroslav; Director of IR; The Bancorp, Inc.

Damian M. Kozlowski; CEO, President & Director; The Bancorp, Inc.

Paul Frenkiel; Executive VP of Strategy, Secretary, CFO & Principal Accounting Officer; The Bancorp, Inc.

Frank Joseph Schiraldi; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Michael Anthony Perito; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Presentation

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 when using 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 M. 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 exemplar 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 GDV 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 hub in Sioux Falls, focused on collaborative space for our Bancorp team and business partners, while providing best-in-class workspace to innovate and create the future of banking 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 reg ii 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 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. Having already achieved examplar 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 18% 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 of $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% 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 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 to 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 M. Kozlowski

Operator, would you please open the lines for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Perito of KBW.

Michael Anthony 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 M. 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 Anthony 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 M. 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 [5 30], 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, 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. If in a normal scenario where we do get those footings and we start buying bonds in the middle of the year, and we're getting about a 80 basis point premium over Fed funds, I think you'd see an incremental impact to earnings per share of another $0.15. So we've got an enormous amount of latitude in our earnings projection. So when we modeled it out, there's a lot of ways we can get to that $4.25 so we have a little less origination. Of course, it's a very ambiguous environment right now, and we've looked at a lot of scenarios, but we feel very comfortable on a preliminary basis issuing this $4.25 guidance.

Michael Anthony Perito

Got it. That's helpful. And then just lastly for me, and I'll let someone else jump in. Just on the credit side, Damian or Mark, whoever is on, just curious, really, the multifamily bridge product. Any updates on kind of the performance there? I know we've bifurcated that portfolio quite a bit over the last 9 months in terms of its makeup, geographic entities, et cetera. But just curious, any updates on your end in terms of the performance of that book? Or are you guys kind of altering any of the underwriting and just as we kind of get deeper into this kind of commercial real estate [organic], I guess, we can call it. Just any update there would be great.

Damian M. Kozlowski

No, we've -- the market is definitely shrunk for these type of deals. There's no doubt that the market is smaller. But we've been very, very careful. We've had a kind of an amazing event, the way we positioned our balance sheet, and we've taken advantage of it. So myself and Mark Connolly, who you just mentioned, who is our Chief Credit Officer, we sat down with very commercial people, who lead our businesses, and said, listen, this is not the year to stretch in any way. We need to narrow our credit underwriting.
So it hasn't changed that much, but we made sure that we didn't push at all. And that's why you've seen maybe a little bit less than trend growth in some of the roll-off on the SBLOC portfolio, where we would have matched other companies' price cuts. So we're very comfortable with that. We want to be set up for 2024 and 2025. We've got a lot of flexibility. We haven't seen deterioration at all in the multifamily. But once again, we're not underwriting where there was problems in the market. We don't have subordinate debt and deals. We have reserves. We have interest rate caps in our floating rate loans, and our cap rates are more like 8%, and some people have gone down to 6%. We don't do any of that stuff. And so we haven't seen any credit deterioration.

Operator

Our next question comes from the line of Frank Schiraldi of Piper Sandler. Please go ahead.

Frank Joseph Schiraldi

Just on the 12% fee income growth year-over-year and that -- is that a reasonable kind of translation rate going forward on 17% GDV growth because just curious as you renew partnerships and sign new ones, if there's any change to the economics there between what you guys get in terms of fees and deposit benefit? And if you're seeing tighter spreads or better pricing as you renew and again sign new ones?

Damian M. Kozlowski

No, we're not getting any pricing pressure for our larger programs or when we do negotiate because of the incremental expense differential between an older and newer program, we do give large volume discounts, but that kind of falls more to the bottom line for us. That is a good relationship, 17 to 12. I think that's -- I know what's coming, and there's several large new programs coming on. So they will be higher fee in the beginning for the first couple of years as they grow volume. But the thing to note is that we have 12% in there as kind of the base of GDV of that lease that range, 17%, it might be more than 17% growth next year. But we're expecting 2% or 3% this year from more of the credit sponsorship fees.
So we think total fees 12% to low end, we think we might get to 15% next year for total fee growth in all fintech activities, including new credit sponsorship activity. So we think it's going to be a really great year. We've got great visibility. Our base is dramatically higher than it was even a few years ago. So growing at that rate is a challenge, but it's so exciting because they're large programs, and we're adding 5 or 6 a year. And they're exciting organizations with great volume, and they're early in their life cycle, so they haven't broken through those tiers like we've had for a very long relationships like a Chime or a PayPal. So we're very excited about 2024 and 2025.

Frank Joseph Schiraldi

Great. And then just on -- obviously, the interest rate picture is a little bit uncertain here. Just in terms of margin dynamics from here, maybe even beyond the next couple of quarters? I mean, do you think by design, you're sort of getting close to peak here and that you can kind of lock in these levels on a go-forward basis? What's your thoughts on margin...

Damian M. Kozlowski

Yes. So yes. So what will happen, obviously, there's a -- we have a quick -- our duration of our portfolio is fairly short, and we did that on purpose. So our NIM is not only because of the Fed funds increases, but also because of the repricing of the credits that we have. So at one point, we're at 6% and now we're 8.5%-plus, and we're getting a new NIM of 6.5% plus, right? So that's our NIM now is 5% or 7%, but we're putting new loans on that are substantially higher than that. So you'll see the NIM continue to move up.
The inflection point is when we obviously buy long-term securities and normalize the balance sheet. Obviously, they won't have the same -- you'll get an impact on NIM, even though our net income will go up, obviously, because we'll get it spread over Fed funds, and it's definitely a spread over our depending how much deposits we have at that time, you'll get a less impact in NIM. We can't really predict that, obviously. But we know generally that when there's a deinversion of the yield curve, you're going to get around 80, 100 basis points on those longer-term bonds, and we're going to buy around to just normalize our balance sheet to our peer group. We still would have to buy at least $1 billion, if not $1.5 billion of securities.
So we can't kind of model that out and see the impact. We just don't know when that's going to be. And what our base case is that happens in the middle of the year, and that's when we start our bond purchases, probably around $250 million a quarter, and that would add incremental -- it might affect your NIM depending on our deposit levels, but it's also going to impact, obviously, your net income. And with us returning so much capital, it will obviously impact our ROA and ROE in a positive way.

Frank Joseph Schiraldi

Great. And then just lastly on -- I know there's several scenarios for next year to get to that $4.25. But in terms of the most likely, how do you see -- obviously, revenues are going to outpace expenses here. But do you think you're at a point of scale here where we're going to see low single-digit expense growth. Do you think we'll still see double-digit expense growth just given the amount of new partnerships you're putting on? Any sort of model guide on that front?

Damian M. Kozlowski

Yes, single. So we had an adjustment year due to inflation this year and a lot of investment in our ecosystem, even new office space to have collaborative space. So that will be more normalized. We're going to try to continue with the 10%. We're at such a high profitability level that if you can get a 10% between revenue and expense growth, it has obviously a dramatic impact. And that's why we're fairly comfortable with that $4.25 number, and we'll still be able to do that. So we'll have low in a conservative view without the bond purchases and without the impact of buybacks again, we think we can maintain a mid to lower single-digit expense growth with a low teens revenue growth. And that obviously will have a big impact on earnings per share.

Operator

(Operator Instructions) And there are no further questions at this time. Damian Kozlowski, please proceed.

Damian M. Kozlowski

Well, thank you so much, operator. Thank you to everyone for joining us today. Operator, you can disconnect the call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participating, and we ask that you please disconnect your lines.