Bancorp Inc (TBBK) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 The Bancorp's earnings conference call.

My name is Lacey and I will be your coordinator for today.

At this time, all participants are in listen only mode.

Later we will facilitate a question and answer session toward the end of the presentation.

(Operator instructions).

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

I would now like to turn the presentation over to your house for today's call, Andreas Viroslav, Director of Corporate Communications.

Please proceed.

Thank you, Lacey.

Good morning and thank you for joining us today to review The Bancorp's fourth quarter and fiscal 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 10 AM Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 45116921.

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 here off.

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, and thank you all for joining us today for the fourth quarter and fiscal year-end financial results for The Bancorp.

This quarter in a very dramatic way showed not only the continuation, but the success of the strategy which we began some three years ago in shifting, during a low interest rate environment, our pricing and emphasis on non-interest income in contrast to the gathering of deposits, quad deposits.

And so, noninterest income on a total basis increased by 54%.

And again, we invite you to look at this not on a linked quarter basis, but rather on a quarter to quarter because there is seasonality in all of the businesses that we facilitate.

And that seasonality gets reflected not only in deposit spurts and spikes, but also in the production of non-interest income during that quarter.

So, based on that quarterly basis, the 90% increase we think shows significant progress in the increase in prepaid non-interest income.

And 54% is a significant increase in total non-interest income.

That total noninterest income not only includes prepaid, but several other major lines of business such as merchant processing and our HSA portfolio.

All of those contribute significantly to the non-interest income line.

You'll hear from Frank in just a few moments about the pairing of that non-interest income growth in merchant processing with a growth in deposits in that area as well.

However, we did grow on a dollar basis of net income on -- measured year over year, measured fourth quarter to fourth quarter.

If we take a look at the aggregate of noninterest income and net interest income 2011 over 2010, the growth was 32%.

If we focus on net interest income without a reference to our exiting affinity group, the net interest margin -- or excluding that, the net interest margin was 3.59% versus 3.62% on a linked quarter basis.

I think it's important to look at the Company and its growth without that component, because in a way it's like a discontinued operations line, which is very -- is less visible because it's not broken out.

As of December 31, 2011, assets continued to grow.

And I think that was a contributor to the growth in net interest income, and again, our deposit growth was significant.

You saw in the core earnings, or as we're calling them, adjusted operating earnings -- it's hard to find the right word for this configuration, non-GAAP configuration.

But for December 31, 2011 grew to approximately $9,400,000 from $7,200,000.

That 30% growth (inaudible) in a 71% increase in net income for the year, and if done on a quarterly basis, a 61% increase in net income for the quarter.

All of the initiatives, the asset initiatives that we've discussed in the past continue to make progress.

And total, therefore, we had a total growth in assets of some 18%.

On the expense side, we've been building what we hope will be a competitive advantage in our compliance group -- a best in class compliance group, which is critical in the business in which we are.

Some of the expense that is attributable to this department was reflected in the third quarter.

But we think that the fourth quarter has captured all of that increased expense, so it's a good quarter to use as a baseline.

But we're continuing to exploit the market, both from the standpoint of the benefit that we have gotten as a bank under $10 billion from the Durbin Amendment, and from the general disruption in the marketplace on the prepaid -- in the prepaid line of business.

The launching of some of the individual programs within our very robust pipeline have not yet hit the balance sheet or the P&L, and therefore what you see again are some expenses attributable to garnering that business head of the impact of the income from having that business on the books.

And Frank is going to talk about the opportunities that we have recognized over the course of this last quarter and the impact that we hope they will -- both announced, and of course we can't talk about those that are as yet unannounced, but in general terms.

I'm going to ask Paul just to talk a little bit more about the expense component and share with you the various elements that made up the increase.

Paul?

Sure.

As Betsy said, the single most -- the single problem and increase in expense was in the salaries and expense line.

But we were actually able to fully staff all of our compliance, new compliance infrastructure, so that happened more quickly than we had expected.

But as Betsy said, that staff is fully in place and fully reflected in the fourth quarter.

So that compliance won't show any the further increases in future quarters.

Additionally, we did have some one-time expenses, but they were for our resolving some of the loans -- some of the loan issues, so that is actually a good thing.

And we expect those expenses to decline next quarter.

Looking forward, we are very focused on scrutinizing all of the staffing.

But if you look at the different areas where we added, it was -- one area was prepaid.

And in that area, we have to add the people in advance of the contracts and in advance of the production of income.

So, again, I know it's hard to conceive of expense increases as a positive thing, but it is actually a precursor to significant revenue in the future.

Thank you, Paul.

Another way to look at that relationship is to share with you that of the increases in prepaid noninterest income, roughly 83%, 85% of them were due to organic growth and new entrants into the market.

And only 8% of that growth was due to what we call disruption or the Durbin-related customers coming on board.

So we yet have a lot of prepaid non-interest income expansion attributable to the current expense that you'll see rolling out over the next several quarters, some of which we've talked about in the past and some we haven't.

Frank, would you like to provide more color on the non-interest income and on the growth of the various lines of business?

Sure.

Absolutely.

Thank you, Betsy.

As Betsy mentioned, you know, prepaid noninterest income up 90% year-over-year.

Of that growth, year-over-year growth, 17% was related to Durbin and disruption at competitors.

That 83% really focused on organic growth at current programs and Bancorp just continuing to take its share of new entrants into the market, underscoring that, as Paul suggested, there's still a very healthy opportunity for forward revenue growth related to Durbin and disruption of competitors that really hasn't hit the P&L yet.

The expense certainly has, but not the revenue.

Beyond the prepaid business, our HSA business, you know as we talked about earlier in the year, where we reformed some of the fee structures related to those accounts is up almost 69% year-over-year.

And our merchant business continues to perform very strongly; about 25% year-over-year being propelled by a very, very strong growth in our ACH origination and card acquiring businesses.

Hand in hand with that, merchant deposits are actually up 99% year-over-year.

So as we look to strategize on how to replace some volatile deposits we might be exiting, we have business lines like Wealth Management up 27.5% year-over-year, merchant 99%, prepaid generating 45% year-over-year deposit growth, essentially to replace those other low-cost deposits.

One of the reasons, of course, the NIM was squeezed a little harder in this particular quarter was in preparation for that exit.

So as you heard earlier, I think from both Betsy and Paul, and on a linked quarter basis normalized without the third-party relationship, NIM was essentially flat.

Thank you.

I'd like to underscore something that Frank said, which is that we have been preparing for the exiting of our most volatile customer with the generation of additional low-cost deposits.

So you will see over the course of the next perhaps three to four months as we prepare for that final exit at the beginning of May or the end of April, I don't remember, of a bit of a surge which will compress the NIM temporarily but then a rectifying of it thereafter.

One way to look at that, and look at it from a liquidity point of view as well as a NIM point of view, is to take -- what is that, the -- well, it is in cash and cash equivalents.

What's it, the Federal Reserve, essentially, and deduct it from the total resources and then compute the NIM on that basis.

So, because there is zero income attributable to that component.

And it also will give you a sense for the liquidity, which is in fact not only available on demand, and we look at liquidity every day, but also being built over time so that we can smoothly make the transition.

With that, I would like to invite questions.

Lacey, if you would?

(Operator instructions) John Hecht, JMP Securities.

Thanks very much.

Thanks for taking my questions.

First question is, Betsy, in conjunction with some of your discussions about the organic growth and the income from store processing fees relative to where you might benefit from some of the disruption of the Dodd-Frank Act, where are we in the cycle?

And when do you think some of those benefits will come in?

And how long will it take before that cycle concludes?

Well, I think you've seen some of it come in, John, because 8% of the increase for the fourth quarter was attributable to that kind of new contract.

So you begin to see it in the fourth quarter.

I think one of the things that we feel very strongly about will benefit the back end our customers, so over a long period of time is doing a significant amount of upfront work so that compliance and reporting and attention, proper attention to regulation will go more smoothly on an ongoing basis.

I would predict since we have a very significant pipeline of signed contracts that you will be seeing the impact of those over the next two quarters in an important way.

You know, we have been planning not only the increase in new business because that is a very healthy element and we can benefit from various external factors at this time.

But also as part of our transition out of the volatile affinity group, and so makes the bank more understandable to all of you.

And as we evolve here, is the composition of reloadable versus non-reloadable versus benefit cards shifting at all or is it pretty consistent with where it has been historically?

I'll let Frank answer that.

Yes, John, so I think we talked about it in the past where back in 2007, a large portion of the business was comprised of benefit and non-reloadable programs.

Only a very small portion of the overall portfolio was reloadable, general purpose and payroll, cards of that nature.

So that is the fastest-growing segment of The Bancorp's prepaid business today, and now comprises I think in excess of 45% of our non-interest income in that line item.

Okay.

Thanks very much.

Second question is just in terms of Q1.

I know you mentioned there's the disruption with the affinity relationship.

In addition, though, you tend to have seasonally a lot of inflows of deposits.

Where should -- just from a margin perspective we -- what types of securities, and what kind of yields in those securities should we think about you guys deploying that into?

Paul, do you want to respond?

Sure.

The biggest growth this year has been in MDS, in residential mortgage-backed securities.

That's yielding close to 3%.

We can't get those -- we can't get quite those yields with the short maturities, but we may be in that range but somewhat less than 3%.

The other thing we've been purchasing is some commercial mortgage-backed securities -- only the very best, the top-quality, and we actually underwrite those just as we would commercial loans.

You can get stronger yields on those, and in fact yields that are very supportive if not accretive to our NIM.

But we're only doing those in measured amounts, and as I said before, only the very, very best quality which are not easily found, so it will take a while to build those.

What types of yields (multiple speakers)

Let me answer it in a little different way, John, and I think it's the underlying question that you're asking, which is will any compression due to this buildup of deposits and the short-term/midterm of it and then the exit, be a continuing trend or we should we look at it as a onetime event.

And I think if you look in that regard, I believe that we will find that NIM on an adjusted basis will remain constant as we adjust it now for excess liquidity due to volatility, but may not be on a nominal basis what you want to project.

Okay, got it.

Thanks very much.

I understand where you're coming from.

Okay.

Matthew Kelley, Sterne Agee.

Hi.

Just getting back to the expense first, what was the one-time expense related to the credit issues there?

I think there was a buildup of disposition costs, legal and other disposition costs related to exiting credits.

Okay.

What did that amount to?

$300,000, Paul, is that what you said?

That's approximately right, correct.

Okay, got you.

So, I mean, if you take a look at that annualized level of, call it $76 million, what type of growth on that should we anticipate going forward?

In the last quarter you guys talked about 10% type growth.

I guess that would get us to call it 82, 83.

Is that what we're looking at for full year expenses or --?

I don't -- Paul go ahead and answer and then I'll --

Again, we were over -- we had underestimated the growth for this quarter.

A chunk of that was compliance.

The largest chunk of that in fact was compliance this year.

However, the other additions were to prepaid group and related expenses that are necessary to grow the revenues and to finalize the structure to add these -- the new contracts and the new customers.

So, I think we're still targeting that level.

And we're going to try to live into it.

But obviously, if we see opportunities and we have even more growth on the revenue side or potential growth, we'll make those investments.

I think it's important, Matt, to underscore the fact that we really do separate expenses into the category of ongoing costs necessary to do the business and do it well, and do it safely and in a risk managed way, and those that we consider to be investments in future income production.

Okay, all right.

So I mean on the revenue side, then, on the stored value income, what type -- 2011 that was up 70%.

I think it was up 40% in 2010.

Are we looking at similar types of growth rates or accelerated in 2012?

We don't generally project those items with you.

All right, on the margin and exiting, those businesses, what was the balance of the affinity business that you're exiting on a period end and average basis of deposits?

(multiple speakers)

Paul, do you have those figures?

If not we'll give them to you off-line.

We can do that off-line, okay.

But I would reference that these comments, if you want to see the excess impact, you go to the average of balance sheet and you look at the interest-earning deposits in the Federal Reserve Bank.

90% of that is attributable to that third party.

Yes.

That is your line.

It's the easy way, Matt, to take a look at it.

Look at it on average, look at the interest bearing deposits line and just deduct it.

Okay.

Right.

If you take that number -- it does imply that there is some non-interest expense related to that business as well.

If you're (multiple speakers) insurance 15, 16 basis points would be $1 million.

Is that coming out?

9 basis points -- is it coming out of --

The noninterest expense related to that?

Yes, it will come out of non-interest expense.

But remember, we're replacing it with other deposits that will -- so that's not what we're focused on.

Okay, all right.

What was the (inaudible) process in 2011?

I'm sorry, say that again.

The dollar amounts, GDV, where are you at now in gross dollar volume in your debit card business?

Oh, I'm sorry.

Frank, you want to respond to that?

Yes, Matt, GDV was $13.3 billion for calendar year 2011.

Okay, all right, got you.

Last question, where do you want the excess liquidity, the cash to be?

Once you've exited that affinity relationship and that volatility has been reduced, when you look at just cash and cash equivalents as a percentage of earning assets, where do you want that number to be after May, once you're done with (inaudible)?

What do we need to keep?

Yes, what you need to keep?

Okay, Paul do you want to respond to that?

It is fairly minimal.

It would be our Federal Reserve bank, our reserve requirements, which without that third party are fairly minimal -- $50 million, $60 million, $70 million depending on the time.

If you want to use a growing number, use the $100 million as a deduction.

That's probably okay.

That will come down.

Do you anticipate adding securities at the same rate that you added them in 2011 as deposits came in?

If there are opportunities, we may do so.

If we have stronger asset growth, I mean we've had -- we identified a series of asset strategies for you.

They have in fact grown.

If they grow sufficiently, not to require the placeholder of securities, we won't.

And if they don't, we will.

All right.

I'll hop out and let somebody else in.

Thanks.

Thank you.

Frank Schiraldi, Sandler O'Neill.

Good morning.

Wondered if -- I'm sorry if I missed this, but in terms of some of the larger relationships you guys talked about -- you've already signed and you talk about revenue coming in the door from picking up (inaudible) spend and Western Union.

Did we see much of that come in the door in the fourth quarter now?

Or is there still some of that that you're going to see for the first time in 1Q?

17% of Q4, of Q4 to Q4 growth was driven by relationships that shifted to Bancorp because of Durbin and disruptive related issues at our competitors, Frank.

So without naming names, there's certainly a portion of the growth in Q4 that was attributable to that.

As I think I mentioned on previous calls, I do believe we'll be boarding business and seeing spikes in revenue all throughout the calendar year 2012.

The first quarter is certainly no exception to that.

I think you have to remember that the pattern, Frank, is not that you transfer 100% and bingo on day one, the revenue is at a constant rate.

It really is fed in over time.

And so even if we launched and began those relationships end of Q3 all through Q4, we couldn't possibly realize a complete quarter from that.

And those companies themselves, those relationships as they impact us and the companies themselves are in fact growing.

It's reflected in the external factors, so the prepaid market being a market that continues to have significant growth.

So, it is impossible to have.

It's not a snapshot.

It's a continual flow.

Okay.

And then on expenses, given some of the growth expectations you're seeing on the revenue side, I guess that is ongoing.

So is it possible we could see another ramp up in expenses just in the first quarter, to sort of get these new relationships signed as well?

No, we think that the revenue will begin to show up first quarter, second quarter, third quarter next year -- or this year, I'm sorry.

It's hard to remember we're already in 2012.

In the first and second and third quarter of 2012, as we shared with you before, the expenses perceived that because the time, the lead time for sales, contract negotiation and signing remains.

Even though it's been shorter with some of the Durbin related or disruption related customers, it still remains a six-month process, a beta process to get the program integrated and then a launch.

So you still have -- you have the expense in that prior three to nine months, and the revenue then follows.

So, we think that we have -- not that we're not going to add another person.

And as Paul said, if we see opportunities we will add people, because we consider them investments.

But that we will -- we don't anticipate a significant increase in that component of expense.

Is there a percentage of that expense?

Other than, you know, $300,000 in onetime costs that Paul mentioned, is there a percentage of that expense that will actually go away in the first quarter or no?

We're basically at the right run rate here?

No, no, no.

You are not (inaudible) customers when you have to service them.

Okay.

So onetime costs we're just looking at that $300,000 really?

Right.

And then finally, and I think you might have talked about this before, but what are your thoughts on a fairer efficiency ratio once everything is ramped up, once the expenses and the revenues are both in the earnings statement?

I'd rather not be predictive in that regard.

But there are studies that have been done by our peer group that we certainly could share with you, in which our expense ratios both on a salary and other basis appear to be at the low end of the range.

Now that is not the total, and maybe the traditional efficiency ratio is not the best ratio for measuring whether we're watching and being successful in watching our expenses.

But we think that we continue to be able to generate significant income with the expense investments that we have.

Okay.

Could you say that one more, just the current expense ratio is below peers versus now?

Paul, maybe you have that on your screen, which I don't.

The current efficiency ratio --

No, we were talking about the study that was done of us and our peers.

And I think of - there were -- and I can't recite to you, Frank, who the peers were.

But my best memory of this is that there were 10 or 12 peers, and that we were -- on the good side number two or three in that.

Yes, that was actually a measurement of noninterest income to assets.

I'll have to go back to that to get you the details, Frank.

And I'm happy to do that.

On noninterest expense, right.

Right.

But I think in terms -- if you see the 90% growth quarter over quarter, we should continue to improve in that -- in any kind of related statistic.

All right, thank you.

Brian Hagler, Kennedy Capital.

Hey, good morning.

Hi, Brian.

Just had a couple of follow-up questions; first of all, on the transition of the large deposit relationship out of the bank, I just want to make sure that I'm thinking about that correctly.

It seems like that will be more of an optics issue than actual increase in income, unless you're carrying an amount of excess liquidity above and beyond the current size of that relationship.

And I think earlier you mentioned that you think on kind of a normalized cash level for you guys is -- I thought you said maybe around $100 million.

And it looks to me on a period-end basis that was around $750 million.

Am I thinking about that correctly?

Almost.

There are two, I think, elements here.

One is that as we replace what are primarily volatile deposits, which we do not feel comfortable converting into longer-term assets because we don't want to mismatch, we will have an opportunity to -- our opportunity is replacing those with stable deposits.

And so that $750 million or $650 million if you take out $100 million, that $650 million that you mentioned, which is excess liquidity, will then be able to find an asset home in a longer-term asset and therefore contribute significantly to interest, net interest income.

Okay.

Is that helpful?

Yes, so it sounds like today you're earning --

Nothing.

25 bips or less, and after taking out expenses.

But after you replace that, you will be able to put it in (multiple speakers) securities you talked about.

Let's assume 2.5% to 3%, just a very low number here.

We would then be increasing on that component, that $650 million (inaudible) capacity by whatever you want to choose -- 200, 250, 300 basis points.

Okay.

No, that's helpful.

I appreciate that clarity.

And then I guess, Frank, you mentioned and then Betsy, that there is a certain amount of expenses that are built up ahead of the revenue.

And it sounds like we're kind of setup to see that revenue hit in the next couple of quarters.

Have you guys estimated kind of what percentage of your expenses are kind of an anticipation of coming revenues?

What percentage of the expenses, I don't think we have looked at it exactly that way.

But we can break it out and get back to you if that would be helpful, sure.

Okay.

And then I think Matt asked about the size of the affinity relationship, so I will follow-up with that.

And I think that is it for now.

I appreciate it.

Thank you very much.

Matthew Kelley, Sterne Agee.

Yes, Betsy, I wondered if you could just talk about bottom-line profitability.

I think a lot of observers in this stock and this story have been watching some progressions over the last couple of quarters after some frustrations in 2010, the first half of 2011 on just bottom-line profitability.

One of the conversations we have had in prior calls is just about your ROA potential and went back and kind of looked at what you guys are talking about at the beginning of 2011, and achieving that 75 to 100 basis point ROA.

I wonder if you could just revisit that.

You've had some nice improvements over the last three quarters here, but bottom-line profitability ROA, 40 bips, returns on equity 5%.

That's still a point of frustration for a lot of people who are watching all of this revenue growth, all of this great deposit growth.

But it's just not dropping to the bottom line like a lot of people believe is the potential.

So, can you talk about the bottom-line profitability of the institution and where you sit today in achieving some of those goals?

Absolutely.

I think as Matt just pointed out, we've seen significant growth in operating leverage.

I know that's a term that can be defined in many ways, but we're thinking about it in terms of the adjusted operating earnings.

Part of the adjusted operating earnings analysis is in fact the credit costs associated with this current round of the economy.

We both see those at a minimum stabilizing, and at a maximum improving.

And so we think that over what you're seeing is significant incremental profitability, even with assuming credit costs at that steady state, which would be high for the bank on a -- let's say two-year forward going basis.

The profitability of the bank is shown in part by the results of -- for the potential for the increase in profitability of the bank.

It's shown in part by the relationship between the increase in that adjusted operating earnings analysis, which for fourth quarter to fourth quarter -- excuse me, fourth quarter to fourth quarter was 30%, resulting in a 61% increase in net income.

So there's leverage implicit in that, and we think that that will accelerate.

Okay.

Yes, I mean everybody can see that the revenues have been growing.

But the expenses have offset a large portion of that.

And so, do you think you can achieve the 75 to 100 basis point ROA type of range that was discussed earlier in 2011?

I think that our goals remain consistent.

Okay.

Is 2012 a year of more topline revenue growth, acquiring new relationship?

Or is it marked more by broader my profitability and improvements in ROA and ROE?

I think it's actually both.

Okay, all right.

Thank you.

Ladies and gentlemen this concludes the question and answer portion of today's call.

I will now turn the call over to CEO Betsy Cohen for any closing remarks.

Once again, I think all of you for your good and helpful questions and a look forward to reporting additional progress next quarter.

Thank you again.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day everyone.