Bancorp Inc (TBBK) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Q1 2012 The Bancorp Inc.

earnings conference call.

My name is Shenae and I'll be the coordinator for today.

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

We will be facilitating a question-and-answer session toward the end of today's conference.

(Operator instructions).

I would now like to turn the presentation over to your host for today, Mr.

Andres Viroslav, Director of Corporate Communications.

Please proceed sir.

Thank you, Shenae.

Good morning and thank you for joining us today to review The Bancorp's first-quarter 2012 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 10.30 A.M.

Eastern time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 65379042.

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 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 Betsy Cohen.

Betsy?

Thank you, Andres, and thank you all for joining us for this Q1 call.

We're delighted to report to you today $0.12 per share earnings, which is the high end of the analyst estimates.

It is driven, as it has been in past quarters, by our increases in non-interest income and specifically within that category of prepaid income.

We believe that this validates our business model and provides us with confidence that new programs which are currently launched and I think we have spoken about in the past, the time between initiating or signing a new client and actually launching that program and having some impact on the P&L or the balance sheet and so you begin to see the implementation or the launching of programs in this quarter.

The 90% increase in prepaid is a very high number, as it was last quarter.

It's been two quarters in which it's exceeded 90%, but we don't believe that that's a reasonable continued expectation, although we do believe that the growth will be significant.

All of this growth is organic and in that regard, we need to focus on the fact that we terminated, some almost nine months ago, one of our large programs.

The program's effective date for termination is the beginning of May, and so you'll see several factors which occur as a result of that.

First, in retrospect, if we were to have eliminated those deposits from our deposit base in each of 2000 -- 3/31/2011 and 3/31/2012, the growth in deposits would have been 50%.

This is organic growth from new and existing programs and we are very cheered by that fact.

The program that's being terminated does not have non-interest income associated with it, so you will not see an impact on non-interest income.

The other important element that will be different, because we view this as a transition quarter from a deposit point of view, and I think we spoke about this in our last call, is that, as we have been anticipating the exiting of a large program, we have been building up our existing -- our remaining program and launching new ones.

So what you see is this spike during this quarter in deposits, which impacts both capital ratios and the net interest margin.

The capital ratios will bounce back to a more normal level for us in the second and third quarters, and the net interest margin, which, if we were to compute it without the existence of our terminating partner, would have been in the range of our norm for the last four quarters, which ranges from a high of 367 to the current 357 during those quarters, so that the net interest margin will remain relatively consistent.

Loan on the asset side, loan growth was less than anticipated, not because originations were not at their normal level.

We originate approximately $100 million in new loans a quarter.

Sometimes it's $85 million, sometimes $115 million, but the average is about $100 million.

What we don't always anticipate exactly is the amount of pay-downs, and so the net growth was smaller for the linked quarter.

However, if one were to compare the current first quarter to the first quarter of 2011, that growth was in the 7% range, which is almost precisely what we had been discussing.

The growth in total assets -- or excuse me, not total assets, but the growth in earning assets, which is comprised both of securities and loans, grew by 17%, which resulted in our 15% increase of first quarter 2012 to first quarter 2011 of net interest -- excuse me, of interest income, net interest income.

And so you see in both components, we have an opportunity to continue to grow the earnings of the institution without so significantly increasing its total assets and thereby to provide us with an opportunity to increase, as we did this quarter, the return on average equity.

We had an increase in nonperforming assets, but I would remind you that it was a small increase and it was off a relatively low base for our peers and for this time in the economy.

We remain at a low level in terms of loans, both 90 days past due, which were around the $4.5 million level, and loans 30 to 89 days, which were at about $4 million.

Those numbers have remained consistent over several quarters.

The makeup of our very healthy non-interest income generation is a matter of interest.

Overall, we grew 58%, although I mentioned that the prepaid increase was 90%.

Our adjusted core earnings, therefore, reflected this growth and first quarter 2012 to first quarter 2011 increased from roughly $9 million to roughly $13 million.

This was despite a nonrecurring item during -- we believe nonrecurring item -- during the first quarter of 2012 of $1.5 million of an adjustment of our OREO balances to 90% of what we believe today will be required to move these properties along quickly.

Although we put them into OREO at 90% of market value, the length of time during this particular period of the economy that it takes to sell a property has encouraged us to review that market value.

We marked it down by, in aggregate, by $1.5 million.

If one were to exclude that number from -- and we do think it's non-recurring in the sense that we have trued-up the OREO portfolio -- we would have, therefore, earned $14.5 million in core earnings versus roughly $9 million.

It also would have impacted the efficiency ratio which did go down from about 67% to 65% -- excuse me, 66%, but would have gone down to under 62% without that one-time charge.

So, we think we're moving in the right direction, both in operating leverage expressed by our current formula, or the current formula, for efficiency as well as bringing much of that earning capacity down to the bottom line.

There always is, associated with an uptick in non-interest income, some associated non-interest expense and we don't that net, so of the increase in non-interest expense, one could estimate between $500,000 and $750,000 to be that -- what we think of Q1 uptick in non-interest expense.

With that, I'm going to ask Frank to analyze for us the components of non-interest income.

Frank?

Thank you, Betsy.

As was mentioned earlier, [sport] value, our prepaid unit, continued to be the major driver of non-interest income increases with 90% year-over-year increase, 65% quarter-to-quarter increase.

Other areas were also contributors to the total 58% year-over-year non-interest income increase, though.

Health saving account fees up 66% year-over-year and merchant up 18% year-over-year, primarily driven by strong growth of our ACH business.

We look at the breakdown of prepaid income yet we continue to see deals we have -- relationships that we had signed in previous years continue to drive the majority of gross dollar volume and, therefore, non-interest income.

Deals we signed in 2010 or prior comprising 83% of that volume in income.

Yet you can begin to see the impact of some of those relationships we signed in 2011, which now comprise 17% of the Group's volume and gross dollar volume in non-interest income.

Lastly, what's propelling that forward is very, very healthy growth of total gross dollar volume in the Prepaid business segment.

Gross dollar volume in first quarter 2012 was just over $8.8 billion; that's up from rounded $3 billion in the first quarter of 2011.

Thank you, Frank.

As you can hear from Frank's report, our emphasis which we began as long ago as 2009, when we became convinced that interest rates would remain low over a long period of time, on the generation of non-interest income versus generation of deposits, even zero-based deposits, and just by way of mentioned, the cost of deposits continues to decrease.

Paul, maybe you would like to speak to that.

Sure.

While we, similar to the rest of the industry, have continued to lower deposit rate, we actually have room to continue to do that and we just went into another round.

The impact will not be as much as it was in prior round but we do find that the expectation of depositors is really adjusting and has adjusted to what's basically a zero rate environment.

So we have a significant service component and relationship component with our depositors as part of our business model, so we feel we can continue to lower deposit rate and you should see that impact throughout the rest of the year, as well.

Thank you.

I think Paul is really talking to the validation of our business model, part of which is to generate low-cost sticky deposits.

We view deposit generation as part of a business solution, rather than just the gathering of deposits, and so as Paul indicated, many of those deposits are not interest rate sensitive, but rather based on an integrated processing relationship with what we think of as partners.

So it makes them both sticky and subject to reduction in costs.

With that, I am going to turn it back over to Shenae and ask for questions.

(Operator instructions).

Frank Schiraldi, Sandler O'Neill.

Please proceed.

Good morning.

I wondered if -- Frank, I think you mentioned that deals you guys have done since the end of 2010 accounted for, I think you said, 17% of gross dollar volume.

Is this just the tip of the iceberg, really, in terms of what we've seen fall into revenues from those programs?

Where do you think that percentage could be, say, by the end of the year?

Keep in mind, Frank, you know, as we talked about in the past, I think a good metric is that it really -- as we diagnose this all, it takes about almost a year before one of these relationships begins to contribute meaningful volume and meaningful income, but it takes almost another whole year for a new relationship to really ramp up and hit its, let's say, mature volume and mature income.

Then, after that, most of the relationships will continue on at some more than nominal, but lower growth rate, either something equating to the prepaid industry's growth rate of somewhere between 25% and 35%, some outperform that, some under-perform that.

But, ultimately what it means is that, as we talked about, there will be a continued layering effect through 2012 as we signed new relationships all through 2011, they will be continue to be layered on in 2012, begin to ramp that volume, but ultimately won't be fully mature, likely, until sometime in 2013.

And, Frank, if I might just add -- and I think it's implicit in what Frank Mastrangelo said -- that the percentage of growth is in part dependent upon the mix of new and old programs, or new and mature programs, so that may shift from time to time.

There may be a spurt of new programs launching in a particular quarter and additional growth from maturing programs, but the balance between those two can shift over time as a sort of portfolio.

If -- looking at the programs you put on in 2011, I would think it might be a bit different between programs that may have been taken away from a competitor, let's say, that were already in place in terms of how long it takes them to mature versus programs that have just been -- begun.

So what sort of percentages are we talking -- first of all, is that right?

Is that correct?

Then what sort of percentage of business put on in 2011 of new programs to The Bancorp were programs that were in place with a competitor?

The answer to the first question is that's absolutely correct.

The program, it is already existing that's being transferred from another issuing institution obviously makes instant impact.

A new startup program has to ramp from a zero base.

I don't know the answer to your second question.

I don't have that number at my fingertips right now, but I can get back to you on that.

I think, also, it's important to remember that programs are not single in their characteristics.

We will transfer an existing block of business where a customer as a way of opening that relationship, but the customer is adding additional programs as well as volume to existing programs.

So it is a bit of a mix, but we'll give you as much clarity as we can.

Okay.

Great.

Then, I guess, just it would be fair to say, but tell me if it is fair to say that, given the ramp up in growth you guys saw in 2011, that growth in Prepaid processing fees should continue to outstrip the overall industry growth in Prepaid cards.

Is that fair?

I think that's very fair.

Okay.

Then, just finally, I just wanted to ask a question on expenses.

Betsy, if you exclude the $1.5 million in OREO in the quarter, I think you had said, well, you get to around a 60% -- a little bit higher than 60% efficiency ratio.

I missed your comments after that.

Is that a fair efficiency ratio going forward for, let's say, just the short-term, the next few quarters, or should we see it migrate down from those levels?

Well, I'll ask Frank -- excuse me, I'll ask Paul to answer that on the first round and then you know I always reserve the right to elaborate, yes.

Paul?

To answer your question, Frank, we're expecting to see an improvement in the efficiency ratio.

However, the first quarter is our strongest quarter so far from a fee income level, which obviously contributes a lot to that decrease.

So it will not be as low as that level in the second quarter, but, as we continue to improve it, obviously that's what we're targeting to continue improvement to get down to that level.

Okay.

So maybe it's more fair to look at it year-over-year and say that it will be down -- the thinking would be it would migrate down year-over-year from that level.

Absolutely.

It's why we continue -- and you took the words right out of my mouth, that we continue to impose upon you the discipline of looking first quarter to first quarter of a previous year, simply because the characteristics of the quarter remain consistent on a quarter-by-quarter basis, but not on a linked-quarter basis.

Okay.

That's all I have.

Thank you very much.

Thank you.

Matthew Kelley, Sterne Agee.

Please proceed.

Yes, hi.

I was wondering if you might be able to give us just a little bit more detail on the impact on the balance sheet, if that large affinity relationship was not there.

I mean, what would deposits have been at period end or on average for the quarter?

Well, I think that we have said to you in the past, and I'm trying to give you some guidance here, that we look at the Federal Reserve balance, but I'm not sure that, in this quarter, that that's a good guide.

I'm a little bit hesitant, Matt, to provide that information because we don't provide that information on a customer-by-customer basis.

What we've tried to say to you is that if you were to remove the deposits of that partner at 3/31/2011 and at 3/31/2012, the growth in deposits would have been about 50%

Right.

Okay.

I think that is all that we can say about it.

I'm sorry to be --

I guess the challenge is trying to figure out how much is coming out to get to that 350 type level on a margin guidance, or 360, whatever it is.

It seems like the amount that would have to come off the balance sheet that is currently sitting in fed funds and really weighing on the margin is bigger than what you talked about historically which, I think on average, was like $500 million to $600 million for the year with seasonal spikes close to $1 billion.

Yes.

And remember we have a seasonal spike in the first quarter from ex programs and other things.

So that's why I'm just -- I'm not giving you that number as easily as I could give it to you in the second or third quarter.

It would be a much -- it would have been a much more direct relationship.

Let me ask you in a different way.

In the past -- clearly, this is a big transition year with this relationship kind of rolling off the balance sheet.

One of the ways that we've talked through it is a goal of trying to rebuild the deposit base back to where it was at year-end 2011, which was $2.7 billion matched by that by year-end 2012.

Right.

It appears that the rate of growth of the core Bancorp business was much stronger and so my question would be do you --

Could you exceed that?

Yes, could you exceed that?

Yes.

No, no, no.

Could we exceed that?

We could.

But by how much, I can't really say.

Okay.

Got you.

All right.

Moving to the fee income component, if you look at 2011, you guys had $18.7 million of fee income on gross dollar volume of $14.1 billion.

So it was basically 13 basis points with that relationship there.

How should we be thinking about that relationship going forward?

Frank?

I'm sorry, Matt.

The question again?

The question was the relationship (multiple speakers)

If you look at fee income in 2011, stored value.

You know, you did $19 million on gross dollar volume of $14 billion.

That was the slide from your deck.

How should we be thinking about that relationship going forward?

Is that a 13 point basis relationship?

I think we've talked about this in the past, Matt.

Some of the new larger deals -- new larger relationships that we've signed that have been transitions from other institutions that don't necessarily have the same risk profile associated with them, you know, will be coming in thinner than that traditional margin, so I don't know whether we'll be able to maintain 13 basis points on GDV is growing as significantly as it is, but there's continued positive non-interest income associated with every new dollar of GDV.

I would expect, just because of the size, scale and scope of the players that we are signing, we are transitioning volume in or starting new program at that 13 basis points will come in a bit.

Matt, I know this is not helpful to your modeling, but it goes back to the answer that I provided to Frank Schiraldi, which is that we really have to look at the mix of the portfolio.

It may be heavy on the large customer transfer-in component during these next six or eight months, but the less mature programs are also growing.

So where we are in the second quarter, because of that, may be very different -- 2012 may be very different from where we will be in second quarter of 2013.

Sure.

Just I know that's not helpful but it's, in fact, true.

And just to be clear, you said $8.8 billion just in the quarter, so you're on an annualized of $35.2 billion GDV to start the year?

Well, yes, it was $8.8 billion in the first quarter, Matt.

I know, you understand, there is seasonality related to that, so you can't really just multiply that by 4 to come up with a total year GDV.

I think we've spoken about and still anticipate gross dollar volume somewhere between $20 billion and $30 billion for the year in that business line.

I know that's widespread, but --

Okay.

And then, just off of the core expense base, ex the REO write-down, what are you anticipating for core expense growth in the year ahead off of this quarter's number?

And excluding, as well, the seasonal impact of first-quarter not interest expense, which is actually, it should be a net out of non-interest income.

Paul, do you want to talk to that?

Sure.

Year over year, if you take out the OREO expense, it was a 19% quarter-over-quarter increase.

Of course, we're going to try to, for the year, this year, for the remaining three quarters, we are going to try to continue to improve that and slow that growth rate.

We do -- we are investing expenses in various items that, as Frank and Betsy noted, are not producing income yet and, in some cases, are at a negative, but we are confident in those programs and where we feel we can justify those expenses for future revenues, we'll continue to do that.

But we are targeting improvements in the rate of growth in the expenses.

Okay.

Then just one last question on the margin.

For the third quarter of this year, with that big relationship fully transitioned out and no impact for the full third quarter, you anticipate that a margin would definitely be above 325, 330.

I mean, definitely a three handle on that margin.

We normalize the margin for this quarter at 357 and if I were to look back to the third quarter of 2011, it was 262, so it's been pretty consistent.

Okay.

All right.

Thank you very much.

I would now like to turn the call over to Ms.

Betsy Cohen for closing remarks.

Thank you very much, Shenae.

Thank everyone for taking time during this busy reporting season to join us today.

We bring to you a complicated, but we think very exciting story about a business model that is, in fact, working in the banking business together with anticipated growth, and so we look forward to talking with you again.