Bancorp Inc (TBBK) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Bancorp, Incorporated, earnings conference call.

I name is Keisha, and I will be your operator forth today.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr.

Andres Viroslav, Director of Corporate Communications.

Please proceed.

Thank you, Keisha.

Good morning and thank you for joining us today to review The Bancorp's first-quarter 2011 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer; Frank Mastrangelo, President; 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 beginning at approximately 12 p.m.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 97477604.

Before I turn the call over to Betsy 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 risk and uncertainties which could cause actual results 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 would like to turn the call over to Betsy Cohen.

Betsy?

Thank you, Andres, and thank you all for joining us today.

We would like to talk today about certain progress and improvement in the first quarter which we think represents a trend.

The first is in the area of interest income, and the increase over the prior year was 12%.

This is as a result not only of increases in loans, in securities made and purchased, but also as a result of the good cost of funds.

As you may remember from prior calls, we have been pursuing a strategy during this low interest rate environment of increasing income by focusing our attention on businesses that, in addition to generating deposits, generate significant noninterest income.

For this period, backing out one-time events, interest income increased by 55% over the prior year, which we think represents a significant reflection of our efforts, and in the prepaid division increased by 69%.

All of these increases resulted in a decrease in the efficiency ratio both over the year as a whole for 2010, from approximately 70% to 66%, and indeed also from the first quarter of 2010, from roughly 67.5% to roughly 66%.

So both of those are as a result of increasing operating income, and we hope to be able to carry that forward.

Frank is going to detail for you in just a minute the lines of business represented by the significant increase in noninterest income.

But before doing that I would like to talk for a minute about the balance sheet.

On the deposit side, we added not a new line of business but a line of business that had been in beta during the first quarter -- or had just launched during the first quarter of 2010.

Which is represented by the collection on behalf of tax preparers of refunds which are due to -- not loans, but deposit refunds that are due to their clients.

This quarter of 2011, those deposits represented on average $155 million, in comparison to $47 million in 2010.

And we continue to build out the business.

As we have been doing over the course of our management of the deposit portfolio, we try always to be pruning higher-cost deposits, and be highlighting and bringing in lower-cost deposits.

So you will see a decrease in our HSA balances, primarily from third parties, as a result of that strategy.

On the loan side, we did in fact achieve loan growth of 7%.

Our SBA program that we have been talking with you about in terms of franchise fees and on behalf of underwritten franchisors, is expanding.

It made a contribution this quarter in terms of the growth.

But we had even a more significant event occur, which was the naming of the Bank or the approval of the Bank as a preferred lender.

That will certainly speed up the process.

It is more or less a chicken-and-egg event that you have to underwrite the SBA loans before you get named as a preferred lender; but once you are a preferred lender those loans go more quickly.

During this quarter we launched about 15 new relationships and had significant impact in terms of innovation and additional products within the insurance area.

Again, Frank is going to speak to that.

If you take a look at the margin you will see that it decreased for this quarter from 3.06% at the 2010 quarter to 2.72%.

You look at the average balance sheet, you will see that there is approximately $830 million which was excess funds during this quarter, earning 25 basis points.

Then I have to you tell you, that is the [whole] story.

We are trying to manage the portfolio to less seasonality, or less dramatic seasonality; and hopefully you'll see the benefit of that over the course of the next 12 months.

That was responsible though in great measure for the reduction from 70 basis points to 41 of the cost of funds.

So it comes with a cost, but also a benefit.

All of this gets reflected in the core earnings.

Core earnings for the Bank increased from about $6.8 million to about $8.9 million for the quarter, which we think is a very significant indicator of earnings progress.

On the loan -- on the asset side, among the loans there was an increase in delinquencies under 90 days, represented by relationship that is a fully collateralized relationship.

It was the first time in March that that loan became delinquent in its history.

On the positive side, NPAs decreased slightly on a quarter-to-quarter basis and on a year-to-year basis.

So with that I would like to ask Frank to expand both on the definition of the increases in noninterest income and a couple of new relationships that were launched in the insurance area during the first quarter.

Thanks, Betsy.

As Betsy mentioned, we had quite a number of programs that launched in the first quarter of 2011.

A couple of the more exciting programs, more exciting and innovative programs, the ACE USA disaster card we expect to be a very, very nice program whereby ACE will use that in disaster areas to provide insurance proceeds out to individuals to utilize to recoup losses, etc.

Also our Genworth program, which is an SEI-like program whereby we are integrating cash management services into Genworth's non-bank wealth management platform available to RIAs across the nation.

We have big expectations for both of those programs.

But importantly, as we have talked about before, we sign a number of groups every quarter.

And it is usually somewhere between 6 to 9 months before those programs go live, and then it is another 6 to 9 months before those programs begin to make impact.

So the impact we are seeing today both from noninterest income and on deposit growth is really driven from programs we signed in previous quarters.

Just for example, we signed both of those programs, ACE and Genworth, somewhat early in 2010.

Both of those were signed in the first half of 2010 and are just beginning to make some impact now.

From a noninterest income standpoint, noninterest income has grown significantly year-over-year, as Betsy mentioned.

The prepaid group is up 69% year-over-year, $1.9 million comparing Q1 2011 to Q1 2010.

Very significant increase.

Our health savings account fees are also up substantially.

We spent a long time building market share there in that particular area, as Betsy has mentioned.

We have more recently pared off some higher-cost HSA deposits, implemented fee schedule, and ultimately grew noninterest income generation 120% year-over-year from calendar year 2010.

Merchant income continues to be very strong as noninterest income is across the board.

Great.

Thanks, Frank.

I think that the picture that Frank just (technical difficulty) is an answer to a question that we get from time to time, in fact quite often.

And really revolves around -- what is a barrier to entry within your field?

One of them, obviously, is the length of the contracts that we sign, which are 5 years.

But the second is really the amount of upfront work that goes into not only the negotiation of these contracts but into the implementation of the contracts.

So we think both of those are good barriers to entry and have resulted in our having inbound inquiries of a significant number, because we continue to evolve a greater and greater presence.

With that, we will open the floor to questions.

(Operator Instructions) John Hecht, JMP Securities.

Morning, guys.

Thanks for taking my questions.

Just the first question is really related to margins.

You had a slight decrease in the loan yield.

I am wondering, was any of that related to the mix shift?

As the franchise, franchisee loans ramp up, is the yield composition of that similar to the other types of loans on your book?

Then the second is related to the deposits.

The second part of the question would be related to deposits.

You had a nice decrease in the cost of deposits for a while now.

I am wondering, have you guys assessed a potential floor?

Or do you continue to think there are some benefits on the cost of funds side going forward?

Well, we thought we would be innovative and ask depositors to pay us, but we haven't quite gotten there, John.

Well, if you get there, let me know.

I'll let you know.

Paul will answer both of those questions.

Thank you.

Sure.

To answer your first question in terms of the loan yields, one of the things that should improve those loan yields to offset some reductions in fixed-rate loans, which have been pricing -- so we had 5-year averages maturities and so forth.

And slowly as those pay down, there is a little bit of -- there can be a little bit of interest rate loss there.

But now I think -- so we are somewhat subject to the market in that.

But it is fairly modest, and for the most part we have been actually been able to maintain rate floors even on the variable-rate loans.

One of the things that should help this is the SBA loans that we have targeted.

So we are looking at that to reverse that trend.

Excuse me.

I would add to what Paul said, John, that we also have been seeing increases in our direct leasing portfolio.

That, as you know, is a high-yield portfolio.

So that will, in addition to the SBA loans, help the averages.

Okay.

On the deposit category, adding to Betsy's comment, where obviously you can't go below 0%, we still have $2.6 million in the first quarter, or annualized about $9 million of interest expense.

So as we alluded to before, in addition to managing deposits for seasonality, we also are managing deposits to the lowest cost of funds.

That relates back to Betsy's comment that we actually reduced health savings deposits intentionally because even though they were fairly modest in rate they were still much higher than what we have now and what we -- the lower rates we expect to have in the future.

So we have so many new programs in the pipeline, we continue to be able to progress and bring them in at lower rates.

Sorry.

The third-party HSA, the higher-cost average deposits that you have been allowing to roll off or be a lower portion of the overall deposit base, how much of that do you have remaining to continue with the mix shift there?

Well, I think that next -- we took a slug, I mean to use a technical term; and we have another slug to take.

But it is not available to us for about 12 months.

Okay.

Then on the new deposit affiliations I guess with Genworth and the insurance, I guess particularly the insurance side.

If I take that -- does that only occur, the type of inflows would occur with insurable events; and so therefore the seasonality and the things that we have become accustomed to with your deposit business are a little bit less visible with the insurance relationships?

Are there some sort of escrow desposits associated with these relationships?

There aren't any escrow deposits, and the insurance business across the board should be actually pretty stable.

There are some unique programs like the ACE program that does have the potential to be slightly more seasonal, since that is solely focused on disaster-type situations.

The majority of our insurance programs where we really innovated a lot in payments is stable, primarily because of the focus on workman's compensation and disability, where the payments are much more predictable.

You know, occur every week, every other week, whatever it may be in the particular state where the individual lives, by state mandate.

So the majority of that business should actually be very stable and even keel.

Okay.

Then last question is related to the growth in noninterest income.

You talked about the pre-paid component growing I think 65% or $1.9 million; a 120% pickup in HSA fees.

Any other big line item increases that you guys can provide details on for us?

Yes, I don't know whether you want to get into this much detail, John, but normal debit card fees are up.

This is -- interchanging comes up 120% year-over-year; leasing income is up about 20.

Our merchant income is up about 18, which is still pretty nice, on the base that we --

And that wonderful category called Other is up 242%.

Did that include the one-time in that?

Yes.

Yes.

That does include the one-time.

Okay.

Hey, thanks very much, guys.

Frank Schiraldi, Sandler O'Neill.

Good morning.

I wanted to ask about the strategy on the securities book.

It is part of the reason for not building that more in the quarter -- I mean, I know that some of it is due, I would think, to potential deposit outflows in 2Q.

But also is it sort of a wait-and-see approach on interest rates?

I guess if I may clarify for us, so we answer appropriately your question, you are referring now to the excess funds we had and why did those not find their way into securities purchases?

Is that what you are asking?

Exactly.

Yes, okay.

Well, one -- and I will let Paul answer more detail.

But one, they come in; it is almost impossible to turn it around that fast.

If we see that they extend beyond the first quarter, we will be investing them.

But it is very hard to build prudently more quickly than we are because there is a 63% increase over the last year.

But, Paul, maybe you have more to add.

Right.

We actually have a few purchases in process that settle and will settle after March 31.

So we are pursuing what you are advocating.

There are a couple things that we did.

One, even though we only increased about $40 million, we had about $50 million of very short-term money markets.

So we replaced those with $50 million of 5-year paper at between 3.25% and 3.5%.

So what we are trying to do is get as much yield as we can, but limit the overall amount invested in securities.

So that when rates begin to increase -- and it appears that, as the dollar continues to devalue and the rest of the world puts a lot of pressure on the Fed, that it seems that it is going to happen sooner rather than later.

We don't want to overdo it now.

But you're right, clearly we have the capacity to build the balance sheet with securities.

But I think it's going to take several quarters until the Fed starts raising that we will do that fully.

And I think, one, you might also remember, Frank, that we did a capital raise of $55 million that came in like the first of March.

So that is in those numbers as well, where it is only yielding maybe 25 basis points.

But on the other hand, it just does take time to invest it.

Okay.

I mean in thinking about modeling, do you think it is possible -- could we see an increase in the securities portfolio -- now talking about averages -- in the average securities portfolio linked quarter of $100 million?

Or is that way too aggressive?

I don't think it will be quite that.

I don't think it will be that high.

Our current discussions aren't that high, but it is possible.

We are considering it.

We are considering what we are going to do.

We actually put -- as I said before, we added about $100 million net in the -- I'm sorry, not net.

But we bought $100 million of 5-year paper.

That is a lot to buy in a period, and we are debating whether we should buy more.

But we also have $50 million in orders that you don't see on this at this moment.

So the growth will be someplace north of $50 million, but maybe not $100 million.

Okay, great.

Thank you.

And I guess the other component there is -- maybe, for a moment, Paul, if you would just talk to what would a normalized, quote unquote, net interest margin have looked like if we backed out the excess funds, compared to where we were.

Maybe that is a helpful modeling tool as well, Frank.

Yes, if you exclude the seasonality that we have, we continue to be in the 3.40%, 3.50% range.

And that is actually if you look on average for last year, eliminating the seasonality, that is where we ended up.

As I said before, we are -- between the leases and the SBA loans and continued reductions in deposit rates, we have those tools to try to improve that.

Okay, great.

And then in looking at deposit growth in the second quarter, I know it is always very difficult to gauge these things.

But is the best way to look at it for modeling purposes to take a look at what happened last year from 1Q to Q2?

Or is it that you have made enough progress getting some of these seasonally -- what would be in the summer deposits that we are not going to see as much?

Or we wouldn't think we would see as much of a outflow.

No, Frank, Q2 continues to be the bane of our existence.

We have no strong business in Q2.

I think looking at what occurred from Q1 to Q2 last year, you see what our average growth rates look like.

Deposits are up about 40% year-over-year.

That will give you a ballpark as to where Q2 deposits are likely to land.

Okay, great.

Then finally, I just wanted to ask about on the fee income side.

Prepaid card revenues were up obviously very significantly year-over-year and quite significantly quarter-over-quarter as well.

I would think that that is going to follow.

There is going to be some seasonality there as well.

But is the growth you are putting on enough to trump the seasonality of the deposits, do you think?

No, that is definitely a seasonal number also.

There are ebbs and flows and spikes of the revenue in noninterest income.

Q1 was particularly really strong with the lot of the tax processing that Betsy had mentioned in her opening comments, so that is a seasonal business.

Some of that will trickle into Q2, but not enough into Q2 to stave off a slide down of the noninterest income in revenue.

I think as a template, Frank, we think that comparing the first quarter of a year to the first quarter of another year, second-quarter/second-quarter, is in fact the best way to gauge the growth in the business.

We continue to have significant increases which I think are markers for the growth.

But if there is a 40% growth, Q1 '10 to Q1 '11, one could assume that kind of growth Q2 '10 to Q2 '11.

But on that basis, because it is just in the nature of the business.

We are always asking if anybody knows the businesses that are strong in the second quarter, because we have been fighting this.

We think that we have the first, third, and fourth quarters under control, but the second quarter -- it is a tricky one.

Right, okay.

Thank you.

Matthew Kelley, Sterne, Agee.

Yes, hi.

I just wanted to get back to the margins, just so I am clear and I understand exactly what your thoughts are there.

If you look at the first quarter of last year, it was down 75 basis points then snapped back 35 basis points in the second quarter.

So roughly half of the first-quarter decline.

Is that the magnitude of up and down we can anticipate, do you think, this year as well, to get you back above 3% for Q2?

In Q2, because we won't have the seasonality in Q1 we will go up.

But we will have -- we will go approach -- we will start getting back on an increasing mode.

Okay.

I guess the question would be, if you exclude the seasonality which you referenced earlier, and yet you see a margin of 3.40% to 3.50%; that's what you had for 2010.

What do you anticipate that new run rate is going to be?

Because it sounds like you are not deploying as much of the liquidity.

It is difficult to say because we are growing so much in deposits and in excess deposits.

As Betsy said we are actually looking at decreasing certain relationships which we did with the HSA and so forth.

Which was difficult for us to do before, because we didn't want to do anything that was negative in any sense, in terms of turning down deposit.

But it seems to make sense to do that.

But even with those efforts it is difficult within one quarter to say that we can actually manage -- in 90 days, manage it down.

Even to this day, deposits are still high, so it is really difficult to say.

Matt, if I might just suggest a way to look at it, although I can't fill in the numbers, it is really a product of what the excess deposits are.

We showed you that number of $800-million-and whatever in the first quarter.

Will it be $400 million in the second quarter?

If it is, then we have one result; you can figure out the arithmetic.

If it is $300 million or $500 million it is a slightly different result; and that is not something we can manage to.

Okay, all right.

Do you think the full-year margin can hold above 3%?

Oh, yes.

That is what Paul was saying, but -- yes.

We'll be within 10 basis points of where we were last year.

Okay.

Okay?

But how exactly temporally it will roll out is a little bit harder to predict.

All right.

Got you.

Second area I wanted to discuss was expenses.

On the conference call we had back in January I asked about that, and some of the guidance and commentary was trying to hold the line on expenses around the annualized rates that we saw in Q3 and Q4 of last year.

It came in a little bit higher this quarter.

What are you anticipating for expense growth rate for the full year?

Or changes relative to Q1?

We are going to have some increases -- some increased compliance costs.

We are trying to basically continue to build infrastructure that is scalable, and one of the spots we need to do it is in that area.

And in other areas, very honestly, where we have seen growth because we continue to book, to add these programs that we know are going to generate very significant amounts of noninterest income, it is a judgment call.

Where we know that we can build long-term value and long-term income streams, it seems worth it to make those investments.

So we continue to do that.

I think that we may get some benefit from a downtick and the FDIC rate -- based on our analysis of our sales.

But if you compare the FDIC costs in the first quarter of 2011 with that in 2010 there was a significant increase.

There was an increase, as Paul was saying, in salaries, one.

And I think we gave you some clue that this might be coming, because we said we wanted to be able to capture the business that was in the marketplace as a result of certain disruptions.

And you can't do that without having some investment in personnel.

Right.

And it's front-end loaded.

And there were -- there is a third one that I am just losing (inaudible).

Looking desperately at Paul.

It's -- we have -- the FDIC insurance was a big one.

We had data processing insurance.

Oh, data processing.

But we are also looking at ways to reduce that in the long-term.

But as Betsy was saying, in terms of the front-end loading if costs, if you look at our expense base, a significant portion of the salaries and other expenses, they are required to generate new business.

And there is a significant lag between the time we generate that business and we actually board it and enjoy the noninterest income.

If we were pursuing a branch model you wouldn't see this, because most of the costs associated with a new branch would be taken over a 10- or 20-year period.

But we expense them all, and so you are -- in a growing environment, that is a current earnings impact.

Okay.

So again off of an annualized rate that we saw in Q3 and Q4 of call it $65 million, do we think we are on track for 10% to 15% expense growth?

Or what type of percent increase do you anticipate for the full year '11 versus let's call it $55 million.

That may not be unrealistic, although we are using our best efforts to manage the growth and manage the expenses.

But I think we are going to have some expense, some expense increase; and it can be in that range.

Okay.

Last question for you, Betsy.

How do you think we are tracking on an ROA goal of 75 to 100 basis points versus where you are guys are, at 30 or 40 basis points right now?

What type of time frame do you think is realistic to get into that more desirable overall profitability range?

It is a hard question because again you are in a growing business where the opportunity is today to gain market share.

We would hope that within a 12- to 24-month period we would be meeting those goals.

Okay.

All right.

Thank you very much.

With no further questions in the queue I would now like to turn the call back over to Betsy Cohen for closing remarks.

Please proceed.

Thank you all for joining the call and again for as always your very good and penetrating questions.

We look forward to reporting even greater progress to you next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.