Bancorp Inc (TBBK) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to The Bancorp, Inc.'s earnings conference call.

My name is Perita and I will be your operator for today.

At this time, all participants are in the 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.

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

Please proceed.

Thank you, Perita.

Good morning and thank you for joining us today to review The Bancorp's third-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 85079916.

Before I turn the call over to Betsy, I would like to remind everyone that when using 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 occurrences of unanticipated events.

Now I would like to turn the call over to Betsy Cohen.

Betsy?

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

We would like to report for the third quarter a great enthusiasm about the growth in our business both on the deposit and on the asset side.

It validates for us our decision to invest in the acquisition of marketshare and to grow the business significantly, even incurring expenses ahead of income or expenses ahead of revenues certainly as we have discussed on prior calls.

Deposits are particularly gratifying -- the growth in deposits particularly gratifying this quarter.

Although not at period-end, if one looks at the average deposits for the period ending 9/30/2011 versus 2012, there is almost a $300 million, or 12%, increase.

And that despite the fact that during the second and third quarters, we continued to prune our deposit portfolio for both volatile deposits as we did in the second quarter and costly deposits as we did in the third quarter.

The aggregate of those two elements was approximately $1.1 billion, so you can see that we have robust growth in deposits even though we are not -- even though we are being very disciplined about the deposit profile.

The combination of these two elements caused the cost of our deposits to decline to 37 basis points.

On the asset side, we also showed growth.

In the loan portfolio alone, there was a growth of about $149 million, or 9%.

Again, from a strategic point of view, this was significant because $133 million of the $149 million was as a result of growth in our targeted areas that we have discussed previously, SBA and security backed lines of credit and leasing.

And so we begin to see traction in those elements.

The combination of those two things created an expansion in the margin.

If we look back a couple of quarters, back to the March quarter of -- the first quarter of the year, the margin was 2.19%.

That increased in June 30 quarter to 2.59% and again, in the third quarter to 2.90%.

The 2.90% is a reflection of our continuing to have some excess deposits.

We absorbed them -- we are absorbing them in each quarter and if we were to rationalize the portfolio for those excess deposits, we continue to have a net interest margin of about 3.40%, which is what we had predicted.

Our credit costs remain high and -- or higher than we would wish.

We think that it is a result of the economy and we are working our way through the legacy portfolio.

I know everyone would like me to predict the exact quarter in which that will change, but given the current state of the economy, it is a bit hard to predict.

We do think that it will peter out during 2013.

Non-interest expense has been growing significantly less than non-interest income and we consider that to be a good sign even as we invest in our market position ahead of recognizing income.

But the numbers on the non-interest income side I feel are impressive.

Prepaid income, non-interest income grew 85%.

Non-interest overall, including the lines of business, 67% and we had a 21% increase in revenue, all of which we think are good predictors of potential profitability in the future.

This is -- we are in an industry in the prepaid side, which has been growing significantly and we believe will continue to grow significantly.

It is diversifying in terms of its channel, adding now much more attention to the mobile channel.

But as we have discussed in the past, we invested in positioning ourselves well within these new channels and believe that that will bear fruit in the future.

I am going to turn the call over now to Frank Mastrangelo who will talk about specific lines of business and the growth in each of them.

Thank you, Betsy.

Just to touch first on -- I think adding to the comments Betsy made related to deposits, I think the other thing to underscore is we had mentioned to the market a number of quarters ago that we had a goal of stabilizing the book of deposits and removing the volatility that essentially was a barrier to investing those deposits in various asset classes.

So I think that you will see not only have we been able to achieve deposit growth, but there is great stability and stable and stickiness to the deposits that we are generating now.

So we will be better able to invest those, as I mentioned.

Our merchant book of business grew deposits 50% year-over-year, merchant -- excuse me -- our wealth management business 30% year-over-year.

Betsy also noted the robust growth in non-interest income, 67% year-over-year.

That is really driven by our prepaid business, which has achieved an 85% year-over-year growth; our healthcare business, which has increased 110% year-over-year; and our merchant processing business, which has increased 25% year-over-year.

That 25% largely driven by our ACH origination business and new additions there to the client roster.

The prospects for continued growth look good through the first three quarters of 2012.

Gross dollar volume in our prepaid business for example was in at $21.1 billion, was $5.8 billion for the third quarter of 2012 and we believe that GDV for the year will probably come in slightly above the ranges that we have provided to the market in the past, which was $24 billion to $26 billion.

Thank you, Frank.

We continue, as well, to increase our position in the healthcare area, in the health savings account area and retain a very significant position as a custodian of health savings accounts, which, as you know, are a very steady source like the IRA of continuing deposits.

And so just to reinforce what Frank was saying about the deposit profile, it is both low cost and sticky and therefore, will allow us the greatest opportunity to invest in productive assets.

On the income -- on the P&L, I might just mention one other item and that is the adjusted operating earnings, which we have provided you.

There has been a 32% increase in adjusted operating earnings year-to-year and we have continued to see progress in this quarter.

In addition to that, if we were to step back, because many of you have asked us when did we really begin to see operating leverage increase, and we have been talking about it I think for the past year and think that perhaps the pivotal time was sometime around the beginning of 2011, so we looked back at operating earnings over a two-year period and during that period, they increased by 86%.

So we feel that the momentum of the business is a forward-looking one, that our market position is very much intact, that we participate and invested in and now are looking forward to reaping the rewards of the investment in new technologies and expanding technologies and have increased the visibility and strength of our positions in the prepaid market.

With that, I am going to ask that we open this to questions.

(Operator Instructions).

Frank Schiraldi, Sandler O'Neill.

Just a couple of questions.

I wondered if you could talk a little bit, Frank, about -- in the past, it seems that prepaid card business has been a bit seasonally slower in the summer and so revenues have gone down a bit linked quarter in the third quarter.

Is it no longer the case that that is seasonally weaker?

Well, gross dollar volume from the second quarter to third quarter actually did decrease about 9.5% on a linked-quarter basis, $6.5 billion to $5.8 billion in gross dollar volume.

There is still some seasonality to GDV.

At the same time, it really does matter which programs produced GDV in a particular quarter to drive non-interest income.

So we are still able to achieve non-interest income gains quarter-over-quarter.

Okay.

And then you mentioned you probably -- you are thinking that now you would -- gross dollar volume for the full year could be above the previous guidance of $24 billion to $26 billion.

I am wondering how to think about that from a revenue standpoint.

In the past, I have sort of taken a number around $24 billion to $26 billion and applied 11 basis points and that is how I got to my prepaid revenue figure.

Is that low-balling it at this point or should it be a higher margin?

No, I think it is a good conservative way to look at it.

It could come in slightly higher than that, but I think that that is a safe way to model.

I think, Frank, the reason it is so hard to pin it down precisely is that it is impacted by the mix of business, which is really very hard to predict in any one quarter because there are larger customers who may pay less and smaller customers may pay more and whether you have more business from smaller customers or larger customers, as an average, is really how we come to the 11 basis points.

So since it is both dependent on seasonality and portfolio mix, as Frank said, you are using a good number, but it is hard to be more precise.

Okay, so the question I have then is if I use even $28 billion in gross dollar volumes for the year and I apply 11 basis points to that, it would imply that prepaid card revenues would be down linked quarter in the fourth quarter, which wouldn't seem right to me given previous strength in the fourth quarter.

And then, of course, it would imply much lower year-over-year growth.

Still very impressive at 30%, but I am just trying to figure out where I might be sort of missing something here.

Frank, did you want to --?

Yes, look, I think the year-over-year growth -- I mean, if you recall, I think Q4 '10 to '11 was a 90% year.

So where we have been achieving through calendar year 2012 80% year-over-year growth, I think we have been pretty upfront that, at some point, that was going to slow back to more reasonable numbers and while we will still continue to achieve I think very nice growth in the business on a forward basis, I don't think the numbers are going to consistently come in in an 80% to 90% range.

So I do think some slowing of that growth rate is probably reasonable in Q4, but will linked quarter or year-over-year non-interest income be down?

No, that is not the case.

We will still continue to grow that nicely year-over-year at healthy double-digit numbers.

Okay.

But linked quarter then you would expect it to be up as well, linked to the third quarter?

Yes.

Linked to the third quarter should also be up, yes.

The same relationship quarter-to-quarter does exist, yes.

Okay.

And then -- so I guess we could see over $30 billion -- when you say higher than $24 billion to $26 billion, I mean can you sort of -- do you expect maybe $30 billion or higher or are we talking at sort of close to the high end of this $26 million or is it just too tough to tell?

I think it is really hard to tell.

Many of these are -- we are getting growth from two sources -- one, new customers and two, growth within existing customers.

And the second is even harder to predict than the first.

Right.

Okay.

And then just on expenses, I just wondered, year-over-year, the expense base has been growing around I think 15%.

It ticked up a little bit year-over-year this quarter.

I mean is 15% to 20% growth at least in the short term given the investment opportunities, is that sort of a viable expectation of expense-based growth?

Paul, do you want to respond?

Yes, I think that is reasonable.

On a linked-quarter basis, it was 4%, so that is 16%, which is towards the lower end of your estimate.

Okay, great.

Thank you.

Matthew Kelley, Sterne Agee.

Yes, just starting with the credit discussion, clearly the provision was higher than what I was looking for.

If you go back and just look at what the non-accrual construction book was back in the June quarter of last year, it was less than $1 million.

And if you look at the total charge-offs you've had in that portfolio over the last four to five quarters have been enormous relative to that balance of just non-performers.

So implies that new stuff is coming in and is being charged off.

So maybe if you could just talk about that construction book in particular, which has been driving the bulk of the charge-offs overall and the credit challenges overall and what has transpired.

Just more recently, these aren't clearly legacy-type loans, but more recent type of (multiple speakers).

No, no, I don't think that's true.

I think that one of the things that occurs in this marketplace and in a very prolonged downturn in the economy is that borrowers lose heart, that they get discouraged and that the normal responses of that these very seasoned borrowers and in many cases people to whom we have been lending over many credit cycles over a 25 or 30-year period, this has been such a prolonged credit cycle downturn that they really have not -- they really just get discouraged I guess would be the best way to put it.

And that can come relatively suddenly and in an unpredictable way.

I think many of them would have believed, as we would have believed, that the economy would have allowed, and the absorption of housing would have allowed values to tick up and it is not even value so much because we get a spot check on those from Case-Shiller and many different sources, but it is really the absorbability, the salability, the length of time that it takes to sell a particular property that causes a lot of the disruption.

And we are seeing it now, we are absorbing it, we are facing it as quickly as we can.

And I think it is a profile of this credit downturn in a way that I haven't seen it over my 40 years in this business.

Okay.

And would you anticipate similar levels of loss severity on resolving construction credits, commercial credits going forward that we have seen over the last 12 to 18 months or do you feel like the marks on those portfolios are much different today than they were 18 months ago?

Yes, and I think that on the 1-to-4 family residential portfolio, that is down significantly; it was down $20 million year-over-year.

It is roughly $70 million.

We have been taking it way down.

Some of it is due to write-offs, but some of it is due to repayment.

I think we are just working it down now.

Okay.

One question, just on the balance sheet, you had a much larger sequential increase in the securities portfolio in the second quarter compared to the third quarter.

Yet the stickiness of the deposit base would presumably give you more confidence in investing that cash and liquidity position.

What should we anticipate for the rate of deployment of the excess liquidity going forward into the securities portfolio in the quarters ahead?

Yes, I think we are trying to anticipate with hopefully some accurate miss duration.

And so we are looking for securities every day, but don't want to be penny wise and pound foolish, as one says and so we will invest at as quick a rate as we can.

The level of absorption that we have to work our way through at the end of the third quarter is much less than it was at the end of the first quarter.

And so it will be an incremental approach.

Paul, do you want to add anything to that?

No, I think that is a good answer.

We have been -- in this period since the end of the quarter, we have been actively purchasing securities, so you will see a measurable increase in this quarter as well.

Okay, and Paul, what did you buy during the third quarter and kind of yields you were able to get?

We have been buying rate-sensitive securities, so we had a portfolio of about $50 million at the end of those securities at the end of June and we increased those to about actually $150 million.

Those are guaranteed by the United States government, 97% guaranteed and overcollateralized for the remaining 3%.

We achieved those at yields from 1.15% to 1.35%.

Those have tightened up since then, so we basically have stopped buying them.

But we got in the market while they were at those levels.

Now they are trading somewhat under those levels.

So while we are only earning on average say 1.2%, 1.25%, they are rate-sensitive, they are tied to LIBOR.

So when rates go up, we will be very well-positioned to take advantage of that.

And I think just to underscore what Paul was saying that we haven't taken the easy position of buying long to enhance current profitability.

We are really looking at this portfolio over a period of time and making sure that we do get the advantage of increasing rates whenever it comes.

And people may say that it won't come ever, but I don't think that that is the case.

Right.

Got you.

And then a question for Frank.

Can you give us the 4Q GDV for last year, 4Q '11?

Give me one second while I look that up, Matt.

I can't put my finger on that.

We should have anticipated that Matt would ask a question we have not yet prepared.

And then just while we are looking for that, I mean big-picture question on just the prepaid industry.

I mean how quickly is the GPR business changing with some of the big banks and Amex getting into that, some of the marketshare shifts that we are seeing to kind of new entrants?

Yes, I will just -- while Frank is looking -- just answer the first part of that.

The big banks are really getting into the business for their own customer base and that hasn't been our business.

They are trying to convert -- primarily convert their low deposit, low balance depositors.

The profile that they provide in the press is very helpful to us because, in fact, that reinforces the vibrancy of the prepaid industry and the prepaid card.

We have been doing exclusively third-party vendor not for our own depositors and so it is a slightly different business.

Bluebird, which is the Amex, I will leave to Frank to respond to and maybe by now he has found -- I am like the warm-up act -- by now he has found the number you were asking for.

Got you.

Yes, the number last year, Matt, was $3.9 billion.

There is an 18% linked-quarter increase from Q3 '11 to Q4 2011 in gross dollar volumes.

Got you.

And you guys have been moving actively towards some of the mobile wallet technologies and that is clearly where the new growth pockets are going to come from in the years ahead.

I mean do you see traditional GPR growth rates decelerating I guess is the question.

Well, I don't think so.

I still think there is a large section of the potential market for GPR that is still not served by the product, number one.

Number two, we still see many instances of high-cost, paper-based, inefficient payment systems converting even more rapidly today than I think in the past to electronic systems.

And that is really what drives the growth of this space, what drives the growth of the industry.

So I don't think we see -- there are certainly more players targeting that same GPR spectrum of customers and that same market dynamic of conversion from paper to electronic means.

So I think you have certainly seen some announcements related to growth rates slowing at particular companies, but I don't think that that is an indication that the growth rate of the industry itself in totality is slowing.

We still see very strong and dynamic growth of the industry overall.

Okay.

In our particular portfolio, Matt, as I said I think to Frank Schiraldi, that we have a mix of new customers and growth within existing customers.

So we continue to have robust growth in new customers, which therefore might mask -- we don't see a decrease in growth in our existing customers.

But if it were to occur that would be an offset.

Okay, thank you.

Jeff Bernstein, AH Lisanti.

Good morning.

Just a question for you on healthcare savings accounts.

I guess the industry statistics are that only about 20% of the eligible employees are actually enrolled in these things today and that use it or lose it has been (technical difficulty).

Hello?

Why don't we talk a little bit?

Jeff seems to have had a --.

(Operator Instructions).

Hi, can you hear me?

Yes, we can hear you now, but we did lose the last part of your question.

Yes, I was asking about health savings accounts.

I guess only about 20% of the eligible employees are enrolled in those today because of the use it or lose it feature and I know there has been some discussion in Washington about getting rid of that.

Can you give us any update that you know of around that and also if that penetration were to fairly rapidly go from 20% to 40% or 50%, how would that impact you guys and what would you do?

Well, in a word, positively, but, Frank, would you like to give more color?

Sure.

Well, first of all, so use it or lose it is a dynamic related to flexible spending accounts, not health savings accounts.

So health savings accounts, actually the funds in that type of health account actually do carryover year-over-year.

You are right that the penetration rate into employers at this point is somewhere between 10% -- is actually only somewhere between 10% and 20%.

It has grown year-over-year.

Larger employers are making the high deductible health policies and health savings accounts available in their plans.

One of the dynamics of this business is that we see very strong average balance growth year-over-year from a portfolio that has been built over a long period of time starting back in 2004, 2005.

So while we retain a large portion of the account base year-over-year, we also see average balance growth of $600 to $800 per account year-over-year.

That means we have got a base, for example, of vintage 2005 accounts with average balances of about $4800, much stronger than let's say the vintage 2011 or 2012 accounts.

And those newer accounts with lower balances are also the accounts driving non-interest income growth year-over-year, which was up 110%.

If that 10% to 20% penetration rate was to become 40%, as different portions of the Healthcare Act are implemented, that is certainly one of the possibilities, as more individuals are insured, the high deductible health policies and HSAs are actually qualified to go into the state-based and federal exchanges.

So we could continue to see very dynamic both deposit and non-interest income growth in that line of business if that was to occur.

And you don't feel constrained in terms of the ability to deploy those deposits at this point?

No, I think our ability to deploy deposits is incremental and improving and so we have -- we are optimistic that we will be able to absorb them.

What Frank is talking about though really doesn't eventuate until 2014.

So we have a bit of time to both anticipate and then to deploy.

Great.

I appreciate that.

Thank you.

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

Please go ahead.

Thank you very much and thank you all for again your good questions.

We are grateful for your continuing interest and look forward to speaking to you again next quarter.

Thank you for your participation in today's conference call.

This concludes the presentation.

You may now disconnect and have a good day.

Thank you.