Bancorp Inc (TBBK) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Bancorp, Inc.

earnings conference call.

My name is Greta and I'll be your coordinator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's conference, Andres Viroslav, Director of Corporate Communications.

Please proceed, sir.

Thank you, Greta.

Good morning, and thank you for joining us today to review The Bancorp's third-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 11.30 a.m.

Eastern time today.

The dial in for the replay is 888-286-8010 with a confirmation code of 919-08919.

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 risks 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 of 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 very much, Andres, and thank you all for joining us today.

During the third quarter, we continued to pursue vigorously our existing business model.

On the assets, we not only increased loans on a year-over-year basis by 8%, but within that category saw growth both in balance-sheet impact and in pipeline from our SBA business and our direct leasing business, which grew year over year from about $100 million to about $130 million.

And we foresee further increases.

Again, pursuing the path that we have discussed before, we continue to buy securities to broaden our net interest margin.

And so, total assets grew, securities and loans grew by 16% on a year-over-year basis.

If one were to back out what we consider to be excess deposits on a seasonal basis, the net interest margin for the third quarter was approximately 3.62% compared to the linked quarter at 3.54%, and on a comparable year-over-year basis for the quarter ending 12/31/10 at approximately 3.75%.

On the deposit side, we feel that we have -- not only do we have a significant pipeline of very significant partners with whom we will be launching -- we have and we will be launching projects, but the Dodd-Frank Act has really been a help to us in that it has identified an opportunity within the market for us to pursue clients who are eager to not have the restrictions imposed by their relationships with banks $10 billion and above.

Some of these large clients take longer to launch than the smaller members or potential partners within the pipeline, and I think Frank is going to talk about that in a little bit in the context of linked quarter noninterest income in the prepaid area.

On the deposit side, however, we continue to have very significant growth, and it is as a result not only of new relationships, but of the volume increases in old relationships.

If we were to compare our noninterest income on a third quarter to third quarter basis, and remembering the seasonality of our business, we think that's the appropriate approach, prepaid card fees increased 62% from the same quarter 2010, a 45% increase in third quarter -- excuse me, year to date and a 45% increase in third-quarter 2011 over third-quarter 2010.

Both of those are very good numbers, we feel.

We think we have been -- we have achieved some operating leverage during this quarter that is expressed both in core earnings, a 40% increase year over year, and also in the efficiency ratio, which has improved from -- excuse me, to approximately 67% from approximately 73%.

And that, of course, is a result of increased revenues.

And so, given the increases that we've just reported, we would hope that you would see further improvement in net efficiency ratio as the quarters go forward.

This was a quarter in which credit losses were stable, but credit allocations and provisions were reduced from the linked quarter on a year-to-date basis, 2011 over 2010.

The aggregate provision was up by about $1.6 million.

We have experienced during this quarter, on a linked-quarter basis, a downtick in expenses.

We caution you that not all of that is from efficiencies in operation, although some portion of it is, but primarily due to the absence this quarter of any -- or a reduction in OREO expenses and other credit-related expenses.

Not bad news, but not totally from the operating side.

Frank, would you like to talk a little bit about the noninterest income and our position in the marketplace with respect to prepaid?

Absolutely, Betsy.

So as Betsy mentioned, our prepaid pipeline continues to be extremely robust, but as we're engaged with ever-larger partners with existing volume and a significant program, there are more complexities surrounding the signing and conversion of those programs over to Bancorp, and I think that's one of the things that certainly affects it quarter to quarter, noninterest income and prepaid.

Q3 tends to be a relatively flat quarter from a noninterest income standpoint and an extremely strong quarter from a deposit generation standpoint.

This quarter, noninterest income was slightly weaker than normal, primarily impacted by some of those conversions where expense was being allocated but ultimately the programs might have been delayed because of the size and complexity by a quarter.

So, there's a little bit of a timing differential there.

Nonetheless, stored-value income was up 45% year over year; noninterest income, excluding securities, up 35% year over year for the organization, with stored value being a very meaningful driver of that.

Thank you, Frank.

I'm sorry, did you want to go on?

No.

I think that we saw growth in many of our lines of business.

Merchant has a big pipeline of potential new customers, as well as having growth within its existing portfolio.

Our wealth management group signed up and launched within the third quarter several very important programs which had little or no impact during this quarter.

And we would hope to see impact both on the security-backed lines of credit side, as well as deposits from that program during the following quarters.

The programs are just too new.

I think with that, I'm going to ask for questions.

And if, Greta, you could ask if anyone has a question, I would appreciate it.

(Operator Instructions).

John Hecht, JMP Securities.

Thanks for taking my questions.

First, with respect to noninterest income, Frank, I'm wondering, do you have the actual dollar income from the stored-value processing fee segment handy?

And then, the second is, you mentioned it's taking longer because you have the larger affiliations to convert to actual deals.

Have you made any of these conversions in Q4 at this point, or can you tell us where those -- we'd expect these in the Q4 to show growth from Q3 in that line item?

John, are you asking do we propose to make -- to launch programs in Q4?

Is that (multiple speakers)

I'm wondering if you -- it sounded like -- you're always proposing you wanted to have a pipeline, but Frank was suggesting that some of them were just taking longer to convert or to finalize to make them actual programs that were yielding dollars.

I'm wondering if some of those had converted in Q4.

I see.

Well, Q4 is pretty new, okay.

But the answer is yes, John.

We have at least one large client that will be boarded and processing volume with us in Q4.

And would you do -- on a seasonal basis and with this client, would you expect that line item to increase in Q4?

Yes, without a doubt.

And then, can use guys give us some information about the inflows and outflows in the REO account?

Sure.

I'm just reaching for that information, John, sorry.

We have during this quarter brought into the OREO accounts a residential property that I've described to you before where the foreclosure was begun in 2008.

That property finally came into OREO on September 26.

And so, although we have significant interest in the sale of that property, it hasn't yet been sold in the last couple of weeks.

So that's brand new.

We do anticipate, however, that within this fourth quarter or the first quarter, that that will be under agreement of sale.

There were other small ins and outs, but I think that that's the most significant one.

And then, Betsy, you mentioned, I think, your core NIM, excluding the excess deposit flows, was up nicely quarter to quarter.

Is that really just a factor of increasing the loan portfolio as a composition of earning assets?

Or are there other measures you could take to increase that on the deposit side?

And can you give us a sense where you'd expect that to go in the next couple quarters?

Sure.

I'm going to ask Paul to start the answer to that question.

And then, I retain my right to interrupt.

Paul?

Sure.

The seasonality -- the easiest way to measure the seasonality, first of all, is to look at our interest-bearing deposits because we deposit our excess seasonality into the Federal Reserve Bank and we don't really use it for liquidity purposes.

But aside from that, the core growth is invested, obviously, in loans and in the other categories in the balance sheet.

I'd be happy to give you more detail and follow up with more detail if you'd like, but that measurement actually, I believe, is the information you're looking for.

I think you might also be thinking about the fact that during this quarter on the loan side, we had about $120 million in new originations, not all of which can hit the balance sheet.

For example, the SBA loans are all -- have six-month draw periods, so that they will be coming on, and whatever we originated and closed in this quarter will be coming on to the balance sheet in segments over the next two quarters.

And there are other loans that have those characteristics as well.

But I think that is about a 20% uptick in terms of originations from the past several quarters.

So I think it's a combination, John, of our focus on loan origination within the categories that we're comfortable with; an increase in the securities portfolio; our keeping a watchful eye on expenses; and the reduction, where possible, of the rate of interest payable on deposits.

So I think it's really a combination of all those things.

And then, just the final matter on that, based on your relationships and affiliations on the deposit side, is there much opportunity to take that total cost of deposits down?

Well, I think Paul will say yes, and he's been very successful at doing that.

And so, we continue to work at that.

You know, we are very focused on having our relationships yield more noninterest income than deposits, so I think that that has been a focus of ours.

And you can see that in the noninterest income growth.

The cost of deposits on a year-over-year basis, Paul, help me, went down from --

It went down from 68 to 45 bps.

And on a linked quarter, it was down slightly as well.

And so, it's hard to think of it going down significantly more, but we really, from a forecasting point of view, which we don't do generally, but we think -- try to think about it in terms of the value of deposits over the next several quarters, we're looking for rates to remain low, given the macroeconomic events of the world, as well as the United States, domestic as well as international.

And so, we're very focused on bringing those interest rates down, but also having new relationships reflect an overemphasis, so to speak, on noninterest income.

Okay.

Thank you, guys.

Frank Schiraldi, Sandler O'Neill.

Just a few questions, if I could.

I wondered if, first, you could -- maybe a question for Paul, if you could talk about the additions to the securities book in the quarter, and what sort of product you're putting on it and what the yields are on those.

We're primarily purchasing two categories of securities.

One is the mortgage-backed securities, and on average, they were -- and we started those purchases actually last quarter and I think we touched on that on the last call as well.

And so, they're the very shortest terms because we bought before the most recent rate decreases; they were in the 2% range.

But the majority of what we purchased was above 3%.

And I would like to say around 3.25% on average.

And additionally, we have been continuing purchases in mortgage-backed securities and we actually have an opportunity to continue to do that.

If you look at our balance sheet, as long as we don't go too long, we still have the opportunity to leverage additional purchases and we're continuing to do that.

The other category is very short-term municipals, for which we have an advisor.

And we're able to get a little bit of yield out of shorter-term -- out of those shorter-term municipals.

So the new stuff you're putting on the MBS side is still yielding over 3%?

Is that --

No, we had made those purchases so we're not really buying those particular securities.

Right now, we're more focused on the shorter-term municipals.

But you purchased those in the quarter, the MBS (multiple speakers)

Yes, we purchased those in the quarter.

We purchased some in the last quarter, and so you saw the impact in this quarter and you'll continue to see it.

So what's different about the MBS -- agency MBS that I see generally come onto the books in the 2% range or maybe slightly below in terms of what you're putting on?

Is it the duration?

I mean, what's the (multiple speakers)

The average size of what we bought, and obviously the yield isn't directly related to that, so on the shorter-terms, it might have had an average life in the two-year range, and on the longer end, it would have an average life in the four-year range or so.

But as Betsy said, because we expect rates to be low, we think that's -- that those investments were well timed because we'll have a significant amount of amortization back by the time interest rates go up.

But in that bucket, that is all agency MBSes is what you're buying there?

In the agency MBS bucket, yes.

And on the -- and do you expect, I mean, in terms of purchases going forward -- I guess maybe a better question to ask is given how the seasonal nature of the deposits, and I know that is probably becoming a little less seasonal, actually, but what sort of liquidity in the form of basically Fed funds, cash, and cash equivalents do you have to keep on the books?

Can you go much lower than where you sit now or you keep this level on -- in Fed funds?

We clearly can go much lower.

The regulators want to see maybe 15% on balance-sheet liquidity.

So we're above that.

And the other part of your question is that it's true, we do have seasonality, but the vast majority of our deposits are extremely stable, and we can invest in securities.

And that's been looked at in every possible way by every possible entity, and the conclusion has always been that those deposits are extremely stable.

Okay.

And just on the deposit side, most of it is tied to Fed funds, right?

And that just reprices off of Fed funds, basically?

A substantial portion is, but at a relatively modest percentage of Fed funds.

So it's --

I think, Frank, that the average for the whole portfolio, the average is about 50% of Fed funds.

And then, Betsy, maybe -- I know you had talked a little bit about the SBA lending initiative and getting more of that on the balance sheet going forward, so it sounds like -- is it possible to sort of look forward to 4Q and think about what sort of growth we might see come onto the balance sheet in that quarter?

From the SBA component?

Yes.

Yes, we think that we should approximately double -- it's not a big number, Frank, but approximately double what we have on the balance sheet now.

Part of that is the drawdown of existing commitments that get taken down over time that are on the balance sheet now, and the balance of that is new commitments, of which a portion will be on the balance sheet.

Okay, so what, in dollar terms, what would be a doubling of -- I'm not sure where it is, so (multiple speakers)

Yes, I think that we have approximately $30 million on the books.

And we think that we can approximately -- and it's all a matter of the timing of the takedowns -- approximately double that within the next quarter to quarter and a half.

We have that in the pipeline.

Our pipeline reflects that within the next 90 days.

And in terms of other growth in the loan book, I saw in construction, commercial construction, it looked like there was a tick up.

I don't know if you can maybe just give us a little color there and --

Sure, there are selective opportunities.

I think we've talked before about the fact that we're not pursuing it as a significant line of business for growth, but there are selective opportunities with clients that we know very, very well who have market opportunities that arise from the volatility or the downtick or whatever you want to call it in the marketplace itself.

Some of it comes from other lender distress or whatever have you -- not the properties are distressed, the lenders are distressed.

And so, there are selective opportunities.

Most often, those are short term.

We have a lot of turnover in that, so it may have ticked up this quarter and we will replace it, but it's not -- it shouldn't be projected on a linear basis in terms of that kind of growth.

We're seeing growth in the commercial portfolio.

There are a lot of opportunities out there in community banking.

We do also see, as a result of new relationships, and maybe I'll ask Frank just to chronicle them for a moment those that we've launched within the last 90 days, a significant opportunity to grow the security-backed lines of credit over the next several quarters as well.

We've had a lot of interest from our traditional sheriff office kind of base recently in terms of inbound requests for small fleet leasing.

So as I said earlier in the call, that portfolio grew from about $100 million to about $130 million, and we foresee continued growth there with very good rates.

Frank, do you want to just talk a little bit about the wealth management launches in the last 180 days?

Sure, absolutely, Betsy.

So as Betsy mentioned, we truly believe that there is nice embedded growth in the S-block portfolio, primarily due to bringing on a number of new clients in the last six months or so.

In the last six months, we have launched Hilliard Lyons, which actually just launched last quarter.

We're very high on this relationship; believe that it will generate nice deal flow for the institution.

But we also introduced Genworth earlier in the year, National Advisors Trust, and Reliance Trust this year, all of which are new relationships to the institution and are all in the process of upscaling.

It's a slow start with each of these large relationships, but once we get the ball rolling, we get continued predictable volume from each of these channels.

And that's what we're seeing beginning to occur in each of them.

And I think you might just touch on the growth of deposits from wealth management as well.

Sure, absolutely.

So year over year, deposits are up 23% in the wealth management segment to sitting just shy of $500 million in total deposits at the end of the quarter.

It continues to be a very nice driver of stable, sticky, low-cost deposits for the institution.

Great.

And then, just finally, just wanted to see if I can get your updates on maybe interchange, on where interchange income is as a total of revenues.

And I know, Betsy, you talked about some relationships coming over because of the under $10 billion asset level of the bank.

And in the past, you've talked about pricing pressures outside Durbin.

So just any updates you're thinking on where interchange revenues go from here (multiple speakers)

Sure.

Frank, do you want to take --

Frank, you're asking specifically about the percentage of The Bancorp's prepaid income that is driven from interchange?

Yes, I mean, total inside prepaid or outside, just the total interchange income.

And then, your thoughts on where that goes year over year.

Sure.

So today -- so in this past quarter, it was about 32% of total prepaid income was driven through interchange.

That continues to come down quarter to quarter, year to year.

If we go back to two years ago or so, that number was in excess of 80%.

So we do continue to decrease our exposure to interchange as a method to drive our prepaid revenue.

At the same time, we don't intend to drive that to zero.

We continue to believe that we should have some exposure to interchange rates.

And I'll give you a perfect example why.

When Visa launched their new interchange tables that actually go into effect, I believe, at the end of this month, and they just published those in August, prepaid -- the interchange rate for card-present consumer transactions actually ticked up.

So it actually increased for banks under $10 billion in total assets.

So that will be -- it's nominal enough that it's a nominal positive from an interchange standpoint, but we believe that we should continue to leave ourselves having some exposure to interchange rates in case we call the global winds wrong there.

At the same time, we think it was a prudent thing to do to lock in noninterest income in the prepaid segment by shifting to the trans-based pricing for a significant portion of the portfolio, which is what we've done.

The other component, of course, of interchange-based income is our debit card income, which was in Q3 about $134,000.

That is interchange income driven from debit cards we issue on those wealth management accounts, those HSA accounts, et cetera, that are used to spend from just normal DDA accounts in the institution.

Okay, so it runs, I guess, total interchange maybe related around 1.5 (multiple speakers) in the quarter?

Yes, probably -- yes, 1.25, I'd say.

Matthew Kelley, Sterne, Agee.

Yes, a question for Frank.

Can you give us a little bit of an update on relationships that you entered into, say, 12, 18 months ago, or just over the last year?

And where they are in terms of actually generating revenues in the next couple of quarters, the next two to three quarters?

And then, talk about just the pipeline for new opportunities, things you haven't announced yet.

Just give us a sense of the nature of those relationships, which industries, and maybe a little help on sizing.

Sure.

Well, you know, Matt, we typically don't talk about individual clients.

Certainly what I can tell you is that we signed some larger clients earlier in the year.

And because of the complexity of those clients and relationships who had existing volume in other spots that the intent was to convert that, or at least a portion of that, to Bancorp, it has taken a bit longer than we anticipated.

We will see some of those relationships board in Q4 and begin to make impact, as we noted earlier.

There are really three primary themes that are driving what is an extremely robust pipeline.

Betsy mentioned one, and that, of course, is Durbin.

So there are large programs sitting inside of large banks that are looking to convert, obviously, the Durbin-related interchange caps went into effect on October 1.

So, some of those programs are scrambling now, attempting to get as quick of a conversion as they possibly can.

We have a lot of focus around that.

There is a significant amount of business tied to that conversion.

It's possible that some of that makes impact in Q4.

I would say certainly Q1, Q2.

Beyond that, we've talked in the past that there's been some disruptions in the market through regulatory issues at other competitors of ours that certainly kicked a fair amount of business into play.

We have a significant pipeline related to that.

And again, these are programs with existing volume where at least a portion would look to convert to Bancorp.

I would say that's more late Q1, Q2, possibly even Q3 impact in 2012.

The third category that's really driving the very robust pipeline today is a focus of new entrants into the alternative-payments space, either mobile wallet or alt-payment space where firms might need bank sponsorship of some sort for their alternative-payments plan.

So those firms typically don't have existing volume, but some of them have very, very wide distribution in their core business and have the potential to be very, very attractive programs.

I would just like to add to that, if I could, that, Matt, some of the programs we put on, such as mobile wallet programs, we don't put on because we expect large volume tomorrow.

We put them on because we expect those to be growing sectors and we want to stake out our place.

And we try to balance that with conversions such as those that are generated by Durbin, where a portfolio exists and you can have immediate impact.

But this is an art and not a science.

So we're trying both to penetrate market presence in new areas, as well as bring on business that will have instant impact.

So, that's the balancing act.

And just getting back to point one, the direct Durbin impact, I think that we're all aware of the potential issues for someone like a Green Dot with GE and Synovus, but talk about the opportunities you're seeing from other large banks who are impacted by Durbin who -- the program managers in those types of products are looking for new partners on the bank side.

What types of areas or product lines or maybe a little bit of help, outside of GPR, on who is being impacted by Durbin?

Sure.

Debit-reward programs at large institutions are being impacted.

There's a series of healthcare products that were issued by large institutions that were originally thought to be exempt, but after some said clarification within the last two months or so, it became evident that those healthcare products were not exempted on a product basis, meaning they had to qualify for either the GPR exemption or the under $10 billion bank exemption, folks who couldn't qualify on a product basis.

So there was a scrambling effect that occurred, trying to get those programs over to different issuers.

I think that, also, this is sort of a shock -- we're in the midst of not only in this area, but in every financial area that I can think of, in responses being in shock waves.

So you have shock waves associated with the attention that added fees get in large institutions from the consumer protection finance bureau -- I may have that backwards, and then that generates a response.

There are many dynamics in the marketplace, and they keep coming in in waves.

Got it.

Just switching gears to the expense side, we've got two quarters now where, annualized, you're running around $72 million in operating expense.

Do you have a better sense today, compared to when we talked in July, on the growth rate off of that $72 million base (multiple speakers)

I think that over the last year, it has been about 11%.

We'd talked, I think, in July about it being 10%.

We're continuing to look at efficiencies, and part of it is credit-driven expenses.

So all of those things come into play.

I think we're not far off.

And I know there's a lot of seasonality in your business, particularly in the first and the third quarters when balances tend to be larger.

Do you think that over the next several quarters you can hold above 3% margins, even in some of those more volatile, high liquidity quarters?

Well, I think we've taken steps to, over the course of the next -- or beginning in the middle of the second quarter of next year, to reduce the volatility in the excess funds quarter to quarter.

So I think you'll see -- and part of the reason that we're focused on that is because we want to really communicate to the market what the value of the deposits within this business are or may be.

And of course, that varies with rate scenario.

But I think it will become clearer over the next couple of quarters.

Okay.

And then, last question, do you think that the securities portfolio -- it looks like it could go above 50% of assets just over the next couple of quarters while you're still ramping up loan growth.

How high could that securities to asset ratio go, given the fact that you've got this massive pipeline of deposits and liquidity coming in and there's no way that loan growth can keep track with that?

I think, we, again, try to balance -- this is a management judgment issue.

And what we try to do is to manage risk across all portfolios.

So while we're purchasing securities, which, as you pointed out, are easier to purchase within areas that we understand and we can evaluate and have separate credit judgment about, we're not generating those same kinds of loans within the portfolio.

What we see, and therefore we've identified three areas that we would like to focus on in terms of growth within the loan portfolio, but they have small bases and it will take a couple of quarters for them to ramp up to the point where we'll pull back on the securities purchases.

Those being SBA, S-block, and leasing?

Yes.

All right.

Thank you very much.

Andy Stapp, B.

Riley & Co.

I understand what Frank was saying about certain new businesses being delayed, but just trying to get a better understanding why net interest income -- or noninterest income was down linked quarter.

I know your business is seasonal, but I think last year noninterest income was stable, linked quarter.

As Frank said, it's generally stable and deposits tick up during that quarter.

And then, there is growth in the noninterest income in the fourth quarter and onward.

I think we identify as the culprit the fact that it took us a quarter or two longer than it might otherwise to launch new relationships, which we anticipated would add to the growth of the noninterest income, and the complexity that comes from size, the complexity that we actually view as a competitive advantage that comes from the regulatory side.

And so, we want to make sure that these clients are scrubbed from a regulatory compliance side and no oversight point of view before they're brought in because it's always easier to do it before, have contributed to the delay for a quarter or two in what we think -- it's a judgment about whether you want to bring that client on earlier to satisfy the noninterest growth component or expectation, or should we be doing just a little bit more work before we actually launch.

And we decided to do a little bit more work before we actually launched.

And so, we have had a delay of a quarter or two.

I think that will work itself through in the next year, Andy, so stay tuned.

And could you talk about other credit-quality metrics, how they fared during the quarters, such as early-stage delinquencies and classified assets?

Sure, I certainly can.

And I thought no one would ever ask.

I'm just getting to the information, sorry.

During the quarter on a linked-quarter basis, nonaccruals were down by about $2.5 million.

90 days-plus was just about flat, maybe up -- I'm sorry, just up about $1 million.

Early-stage delinquencies, again, were cut in half.

So we've had a couple of quarters in which that was the trend.

Okay, great.

Thank you.

This concludes the question-and-answer portion of the call.

I would now like to turn the call over to Betsy Cohen for closing remarks.

Thank you, Greta, and thank you all for, as always, your good questions in which you make us not only share information with you, but think about our business as well.

And so, we look forward to continuing the success of this quarter and increasing operating leverage over the next several quarters.

And thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.