Bancorp Inc (TBBK) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second-quarter 2012 The Bancorp Inc.

earnings conference call.

My name is Sharon.

I will be your operator for today.

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions).

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

Now I would like to turn the call over to Mr. Andres Viroslav, Director of Corporate Communications.

Please proceed sir.

Thank you Sharon.

Good morning and thank you for joining us today to review The Bancorp's second-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 A.M. Eastern time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 716-226-33.

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 would like to turn the call over to Betsy Cohen.

Thank you Andres.

Thank you all for joining us today.

We're talking about the second-quarter 2012 results, which we think were successful.

As you may remember from prior calls, this quarter was going to be and was in fact a transition period or a transition quarter for The Bancorp on the deposit side.

We exited at the beginning of May a large customer relationship about which we had been speaking over a nine-month period.

And we had promised that we would work diligently to replace the deposits represented by that exit.

We succeeded to an even greater extent than we had anticipated, and so this quarter and the net interest margin related to this quarter represents excess funds that we did not yet have an opportunity to invest.

Another way to look at the growth is if one were to exclude the exiting partner's deposit to June 30, 2011 and June 30, 2012, so period end, the growth in deposits would have been $1.2 billion, or roughly 70% growth in deposits.

That resulted, as I stated, in excess funds during the quarter, which were not -- which we just didn't have the time to invest.

If we were to remove those excess deposits, we estimate that the net interest margin would have been about $350 million and we think, when those funds are invested, that will be someplace around $350 million will be our basic net interest margin.

We also had what we believe over a six-month period if one were to look -- begin to look at The Bancorp recognizes the seasonality of quarter-to-quarter analysis at a slightly longer perspective, that we had a significant increase in operating earnings.

Operating earnings were up over that six-month period from approximately $16.7 million to approximately $23.7 million, or about a 40% increase.

That number is -- that percentage is a valid rate of growth even when we're looking at it a quarter-to-quarter basis.

If you took a slightly longer view and look back two years, because as we have been discussing the increase in operating leverage expressed in operating earnings was one of our goals over this period of time.

We had, over the two-year period, about an 85% increase, so the year-to-year 40% is not out of line.

That -- the six-month analysis, which is included in the press release, is -- reflects credit costs, a combination of OREO losses and provisioning, which is consistent, so there -- that is -- we think those are good and meaningful numbers.

Over -- the significant increase in deposits and the lowering of our cost of deposits, average cost of deposits from 50 basis points to 37 basis points provides us with an opportunity over the course of the next several quarters to look at our portfolio of deposits and hopefully to prune, as we say, those highest-cost deposits from the portfolio and thus have an opportunity for further reduction in costs.

On the loan side, we had loan growth and securities growth and asset -- if you put them together, securities being a much more rapid way to deploy our excess deposits.

We had a growth in both of those areas aggregating to about an 18% increase of -- in the earning asset component.

All of this resulted in an increase not to the level we would like, but certainly an improvement in both our return on average assets and our return on average equity on a year-to-year basis.

The credit side reflected our disposition of some OREOs, so a reduction from about $7.5 million to $4.9 million in OREO, but a decrease in the loans 90 days past due from about $4 million to $3 million, but an increase in the nonaccrual loans to about $24 million.

This is part of a cycle that the increase in nonaccrual loans was the result of the addition to that category of one significant borrower family-owned business that is going through a period of liquidation.

We don't anticipate loss on it but it would appear as it works its way through in the nonaccrual category.

I think that each -- the growth in -- moving back now to the growth in deposits and the business itself -- and Frank will give you more granular information about the portfolio -- reflects growth really across our lines of business.

And that's what really pleased us when we did our analysis of what we think was a very successful deployment of our efforts.

With that deployment of course comes some expense, and what you might have seen -- what you do see in terms of year-to-year increase in non-interest expense is really expense being focused on what will be earning opportunities in the future.

But as we've discussed in the past, the expense received, the earnings and so you see, in a growing business, always that expense line growing.

Frank, would you like to talk about the growth across the lines of business?

Absolutely, thank you Betsy.

As Betsy noted earlier in the call, deposits were up across the lines of business 69% year-over-year, excluding the large affinity group that we exited from in the second quarter.

That's being driven by growth across the board in business lines.

The top units, our prepaid deposits, grew 177% year-over-year, again excluding that large -- that large affinity client.

Our Merchant group grew deposits 148% year-over-year.

Our healthcare deposits continued to grow at a very healthy clip, 21% year-over-year, coming off a larger and larger base every year but constant growth rate there.

Wealth Management 37% year-over-year.

And while those business lines continue to contribute low-cost stable sticky deposits to the institution, many of them are also generating non-interest income.

For example our Prepaid group, 61% year-over-year growth in non-interest income.

Our Merchant group primarily driven by growth of the ODFI, the ACH origination business, 37% year-over-year.

And if you recall, I think a year ago or so, we talked about the shift in strategy related to the health savings accounts where we were weighting the dynamics of that more towards non-interest income than deposit generation.

Fees in that area are up 93% year-over-year.

Thank you Frank.

I think, as Frank touched on, some of our lines of business like Wealth Management provide us with an opportunity to have loan growth as well as deposit growth.

And we have targeted, as we have discussed before, several lines of loan growth to focus on.

One is clearly and is programmatic and clearly integrated into our Wealth Management group.

And security-backed lines of credit did grow significantly, and I think even more significantly than the absolute balance sheet growth was the growth by more than 35% of the commitments, so it takes time for the commitments to be taken down and we think that's a very positive sign.

We have been focused on leasing and leasing as line of business grew year-to-year about 10%, so above our average.

We have been reducing our construction loans in the one-to-four family range, and so that is a drag upon portfolio growth as a whole, but we think it's the right thing to do.

And the SBA program has shown significant growth on a small base but significant growth over the course of the last year, indicating that that long leadtime cycle of putting on government guaranteed loans was in fact evolving into a more consistent pipeline, and so we believe you'll see more growth in that area over the course of the next year.

With that, I'm going to ask Sharon to ask you for questions.

(Operator Instructions).

Matthew Kelley, Sterne Agee.

Hi.

Just a couple follow-up questions.

Frank, I was wondering what was the gross dollar volume in the quarter?

Sure Matt.

Gross dollar volume in Q2 for the Prepaid group was $6.5 billion, so we have exceeded $15 billion for the year in total through six months.

I think the important thing about that number is that that equals the entire gross dollar volume for 2011.

Yes, exactly.

Exceeds it by about $1 billion.

Right.

Got you.

And how should we be thinking about year-over-year growth in 3Q?

You guys were up 62% in the second quarter, 90% in the first quarter.

I assume that is starting to moderate as the numbers get a little larger, but maybe give us a little guidance about new relationships and kind of what's in the pipeline and where we are in the cycle of turning initial contracts into actual revenues?

I think we are still in the middle of that cycle.

We still have new relationships that are being boarded, haven't began to generate volume, and therefore revenue at this point are still generating expense only, let's say.

And every quarter we continue to layer on the relationships like that, then as we've talked about in the past, we've got the dynamic every quarter as those new relationships we have boarded continue to mature, we've got that second year period, so to speak, first year where we integrate and board second year where the volume matures.

We have a substantial number of relationships are actually in that position right now.

I think it's hard to make a percentage prediction, partially because a delay at 30 days in launching for a technological reason or a very short period of time impacts that percentage greatly.

But it's really not meaningful in terms of the business as a whole.

Okay, got you.

And then on the deposit side, deposits came in much stronger than I had been looking forward during the quarter.

In the past you talk about a goal of kind of reaching year-end 2012 having total deposits on par or slightly ahead of where you ended 2011, basically making up for the lost affinity relationship.

But it seems like you should be well ahead of that.

Could you talk about that?

We are well ahead of that now.

Right.

So that guidance is obviously going to be pretty solid then?

I agree with you, and I think that's what I was trying to allude to earlier in my comments, because it has both a long-term positive impact and a short-term what one could consider margin compression being negative in that sense -- or aspect.

But I think you have to really look at it over the long term.

I think it speaks to the health of the business.

Sure.

The securities up $100 million, could you give us a little bit of a sense of what you bought and the yields that those are coming in at, and the pace of securities purchases?

It seems like you're going to have just very large cash balances and liquidity as deposits continue to grow at $1 billion-plus a year, very healthy rates.

Could we see an acceleration of the rate of purchases even higher than what we saw in the second quarter of 20% sequential?

Paul, would you like to speak to that?

Sure.

The first question was what is the $100 million of growth, of net growth, comprised of?

And about 60% of it was in securities that were variable-rate securities, including insured student loans and a few other miscellaneous securities.

The balance of it was in 2- to 3-year mortgage-backed securities.

We were able to get those in the 1.5% range, so it approximate -- it gets close to 1% ROA in the current rate environment based on our cost of funds.

(multiple speakers)

What was the rate of student loans?

On the student loans it was 1.5% or slightly higher.

But on a variable basis.

Yes.

In terms of the pace of purchases in the back half of the year, how should we think about that?

We have -- as Betsy noted, we had good S block growth this quarter and we are anticipating more loan growth through the year, but we also obviously have the capacity to buy additional securities, and we are actually looking at those right now.

It's difficult to project the exact amount, but it wouldn't be surprising if we were able to do another $100 million.

And then so we are clear on the discussion about where the margin could be if cash was fully deployed, basically in the current quarter you had $950 million of excess at 25 basis points Fed funds.

The full deployment of that, call it 2%, would get you to kind of the low type of 3s%.

But again, that's $950 million, this quarter you put on $150 million of loans and securities combined.

So, do you expect to see accelerating pace of the earnings asset growth in both loans and securities combined?

Is that what we're looking at?

Absolutely, yes.

And that's why I spoke to the commitment growth for the S blocks, for example.

I mean we have pipelines in other areas, but if one were to only look at numbers for the S blocks, which are significant, we had about a 30%-something increase in commitments which will translate into balance sheet growth over the course of time.

So, it's a significant increase and we look forward to growing even further as the relationships we put on during the course of the last 12 months mature, those relationships with the financial advisors in those companies mature and the financial advisors have an opportunity to act on them.

I'll hop out and get back in, if I have more questions.

Thank you.

Frank Schiraldi, Sandler O'Neill.

Good morning.

I have just a few questions.

I wanted to ask Frank on the gross dollar volumes, I think in the first quarter, you gave expectations of $20 billion to $30 billion for the full year, and I think you firmed that up a bit in some of your more recent presentations.

But just wondering if now that you've got another quarter under your belt, there's any change to those expectations.

No, I don't think so.

I think the range -- and you're right.

After the last earnings call, we started tightening that range to a $24 billion to $26 billion target for gross dollar volume for 2012.

I think that's still the right target for the business.

Okay.

And then deposit growth continues to be obviously very strong as we've talked about.

Just wondering your thoughts going forward in the back half of the year if, Betsy, if you expect deposit growth to continue to outpace sort of what you can do on a loan and securities side.

I think it is there now.

And so the question is how quickly can we carefully and intelligently deploy it?

We are doing I think our best in terms of growing both loans and deposits.

I don't think we -- excuse me, loans and securities.

I don't think we can grow them as quickly as the first half of the year indicates we've grown deposits.

What I subsequently said was this gives us an opportunity to prune the deposit portfolio and take out some of the higher-cost deposits.

So that may give us some shrinkage, some lowering of costs and therefore some better rationality around the loan/security to deposit ratio.

Okay, great.

I know the affinity relationship that you exited was quite seasonal in nature.

Are the deposit balances still quite seasonal in nature, or no longer?

There is -- I would distinguish -- let me answer it a slightly different way.

I would distinguish between volatility and seasonality.

There's always going to be in our business some seasonality.

Many of the business lines or relationships, for example, are focused on first- and fourth-quarter business cycles.

So you're not going to be getting tax refunds, which is a business for us, in the third quarter.

It just doesn't happen.

So that's seasonality and that will continue to be inherent in the business or implicit in the business.

What we see, and you are right that there was seasonality to the exiting partner, and that overlay of seasonality will be gone.

But even more importantly I think, Frank, the volatility will be gone so that we can better assess what are investable funds over the course of the year, and we won't have the huge spikes resulting from seasonality, although we will have, as I say, continuing reflection of the business cycle.

Okay.

And then just finally, expenses.

I wondered if, given we are halfway through the year now, you can sort of have some expectations on where the non-interest expense line could end up in the back half of the year.

Should we expect it to be sort of flattish with the second quarter or any color there would be helpful.

Sure.

Paul, would you like to --?

Sure.

As Betsy alluded to earlier, we do have continuing opportunities, and so I think you're going to see some increases.

We are doing our best to limit them as much as we can.

But we think that we should be investing at this time, as we have been, in future income-producing opportunities.

But if you look at the rate of growth of non-interest expense year-to-year, it probably won't be much off that.

Right, okay.

Understood.

Thank you.

Thank you.

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

Thank you Sharon, and thank you all for joining with us today.

We were delighted to be able to bring you a quarter in which net interest income -- excuse me, net interest income and non-interest income were both up, resulting in significant increases in earnings per share.

And if one were to look at those numbers on a six-month basis, not only were operating earnings up significantly, but earnings per share on a favorable share count more than doubled.

So we think that we are on our way to good performance as reflected in those numbers.

Thank you again and we look forward to your joining with us next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a good day.