Bancorp Inc (TBBK) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 Bancorp, Inc., earnings conference call.

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

(Operator Instructions).

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

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

Please proceed.

Thank you, Grant.

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

The dial-in for the replay is 888-286-8010 with a confirmation code of 81909498.

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 meanings 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.

Betsy?

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

The fourth quarter of 2012, as was the year as a whole, was a very dynamic time for The Bancorp.

During the fourth quarter, revenues grew significantly, showing an increase in the business and, we can think, an increasing importance of Bancorp within its various markets.

Operating earnings, which are evidence of our operating leverage, grew 48% Q4 over Q4 and 41% year over year, both indicators of a continuing trend of increased operating leverage, which is expressed in the operating earnings calculation.

And that growth was expressed also in our earnings per share, which fourth quarter over fourth quarter were up 50% and year over year, up 79%.

In the fourth quarter, net income was up 59%, and that resulted in a decrease in the efficiency ratio during that fourth quarter from 67.2% to 63%.

We think you will see that, as operating income grows, to be a continuing trend.

Fee income across the bank was up 84%, and it continues our focus on what we consider to be quality income, quality earnings generated by fee income, which, as many of you know who have listened to us before, we began to focus on in 2009 when we recognized there would be a sustained period during which interest rates, and therefore net interest margins, would be under tremendous pressure.

On the measures of return on average assets and return on equity, in the fourth quarter both were up approximately 45% over the prior year, so we are gaining some traction.

The balance sheet also expressed significant growth.

Deposits were up 10% on a year-over-year basis, but if one were to measure that growth without the terminated customers, which represented approximately $1.2 billion in deposits that we pruned it during the year, those deposits were up by about 100%.

And as a corollary to that, we were able to bring down the cost of those deposits.

For the entire year of 2011 over 2012, the cost went from 43 basis points to 33 basis points, and during this fourth quarter from 40 basis points to 31 basis points.

As is always the case during a surge of deposits such as we experienced in the fourth quarter and during the entire year of 2012, it does create some pressure on the margin until those funds can be invested wisely.

During this quarter, book value also increased as a result of our offering from $8.18 to $9.05, giving us strengthened capital in terms of both regulatory and nonregulatory measures, but also great support for what we see to be continued growth.

Loans as a segment of our assets grew by 10%.

Of that 10%, the targeted segments of our loan growth, SBA financing, securities-backed lines of credit, and leasing represented 80% of the growth.

The loan quality remains steady.

Nonperforming assets as a percentage of assets actually decreased to 92 basis points of assets at the end of 2012 from 97 basis points as a percentage of assets in the fourth quarter of 2011.

I'm going to turn the call over to Frank Mastrangelo to talk a little bit about the various segments of growth.

Frank?

Thank you, Betsy.

As Betsy mentioned, non-interest income growth was very, very strong for the quarter.

It was primarily driven by our pre-paid unit, which grew non-interest income 77% year over year.

Our health savings group also grew non-interest income 66% year over year because we've discussed in the past that the business line that we pivoted from a focus on market share and deposit gathering to non-interest income, and that has worked very nicely for the institution.

The prepaid non-interest income, of course, is a factor of growing our gross dollar volume year over year.

2011, that was $13.3 billion.

We ended calendar-year 2012 at $27.2 billion, a 105% increase year over year.

As I'm sure you're all aware, we have a series of very mature, some new, some very emerging, programs within our portfolio.

I think we're on safe ground in saying that 2013 GDV will grow faster than -- for our institution will grow faster than the general industry growth rate of prepaid and payment.

That growth rate is expected at a 30% clip year over year.

Obviously, we grew that much faster in calendar-year 2012, but again, as I said, the combination of mature programs, things like that, we are projecting above industry growth rate, but without really pegging a specific number there right at this moment.

Deposit growth, as Betsy mentioned, factoring in that we exited out of almost $1.2 billion in deposits during the calendar year, up almost 100% year over year with decreasing cost of funds from 43 basis points to 31, driven significantly by wealth management which increased deposits 50% year over year.

Our pre-paid group, while deposits grew just about 20% year over year, it's a large aggregate number, so a big contributor to deposit growth there.

Lastly, I just want to note that loan growth for the quarter primarily came from three business lines, SBA, leasing, and wealth management, with the rest of the loan portfolio essentially flat quarter over quarter.

So the focus that we've had on those specific lending areas are really beginning to bear fruit for the institution.

Thank you, Frank.

I think that the one segment of our balance sheet that we didn't discuss, and I'm going to ask Paul to talk just a little bit about, is our securities portfolio, which is certainly our placekeeper for other assets and itself a significant contributor to income.

Paul, would you like to talk about the characteristics and the growth?

Sure.

We grew the portfolio such that it is now totals close to $800 million by quarter-end.

And our goal is to continue growing that.

At the same time, we're very cognizant of interest rate risk, and while we feel that rates will be low for the next couple of years, we are controlling very closely and monitoring the tail risk of our mortgage-backed securities and our durations in every security that we buy.

So we -- obviously, in this rate environment, the rates are in the 1% range, generally.

But we do find opportunities to get slightly higher than that on average on certain securities that are still AAA and very highly rated and very strong in credits.

We also use several advisers to look at credits, experienced municipal advisors, which is important because we've been buying the shorter-term municipals.

And as I said before, we hope to continue to increase that portfolio significantly.

Thank you, Paul.

Grant, if we could now open the floor to questions, I would appreciate it.

(Operator Instructions).

Frank Schiraldi, Sandler O'Neill.

Just a few questions, if I could.

First, I wanted to ask you, I wanted to ask Frank, early on in 2012 you gave GDV expectations for the full year, or at least a range.

And I'm wondering if you're prepared to give some sort of range expectations for 2013.

And if not today, when you think you might have a better sense and be able to come out with something along those lines?

No, I don't think we are quite prepared to do that yet, Frank.

We're still working through mature components versus emerging components of the portfolio, trying to peg the right range for the market.

Suffice to say, as I mentioned earlier, we're confident we'll grow the portfolio faster than the industry average of 30% year over year.

Okay.

And do you see -- it looks like, if I'd look at the GDV you gave for the full-year 2012, and if I did my math right in terms of what prepaid grew year over year, then it's about a 12 basis-point margin.

And I'm wondering if you see pressure on that in 2013 or if you think you can hold those sort of margins.

We don't see pressure.

I do think that we will probably hold those margins for 2013.

I think as we talked about initially in 2012, we had added one large client.

That client was priced under the average of the portfolio, but, of course, came with a large block of existing gross dollar volume.

We were able to build back to something closer to the 13 basis-point average we traditionally maintain.

I don't see any pressure on that for 2013.

Okay, great.

And then, Betsy, if you could maybe just give a little bit of color on your expectations going forward on credit.

As you mentioned, I think nonperformers actually ticked down a bit.

Charge-offs were a bit elevated from where we have seen in previous quarters.

Is that -- if you could just give us your expectations, a 20,000-foot view, on how you see credit going forward.

Yes, I think it's very much a static situation, Frank.

Although reports are circulated that the US economy is gaining strength, I think it's a very regional element -- there are regional elements that contribute to that, so that in many places, like Miami or Arizona or California where there were such significant disruptions to the economy and to values, an uptick is in fact possible in a place like the mid-Atlantic, which is our basic community bank footprint.

The downtick was not so significant, but the uptick is also a little slower to come back.

So we're looking at 2013 as being a repeat of 2012, maybe a little bit better, but in the range of.

And it may be better than that and the economy may pick up more quickly and the velocity of transactions may be quicker, but it's very hard to predict that at this time.

Sure.

And I guess when you say that 2013 may look very similar to 2012, could we -- and I know quarter on quarter you can't really predict something like this, but could we maybe assume that provisioning levels might remain in the ballpark of 2012 levels?

Absolutely.

Okay.

Because remember that as we do grow the portfolio, there will be some additional provisioning that is necessary for the growth as well.

So it's not all provisioning for losses or for a downtick experience.

It's also as we grow that portfolio -- and it did grow.

We grew outsized to our peer institutions by a good margin.

As we do grow that portfolio and we have targeted what our experience even during this very difficult period has been, extremely good in our three targeted lending areas.

We've had virtually no losses in these areas.

And the growth is targeted to that.

As an expression of the historical factors, we will grow the portfolio as volume grows.

Not the portfolio -- we will grow the provision as the portfolio grows.

Sorry.

Got you.

Okay.

Thank you very much.

Matthew Kelley, Sterne, Agee.

I just wanted to clarify a couple numbers on this fee income side, just given we don't have a lot of detail in the press release on how we got to the $15.1 million.

What was the specific stored value income for the quarter?

And what was GDV just for the fourth quarter?

If I back into it, it looks like it was $6.1 million for the fourth quarter and GDV, it is $1 billion, and then around $9.7 million on stored value.

Is that correct?

You said up 77%?

Spot on both numbers, Matt.

Okay.

So $9.7 million on annualized of $24.4 million, it actually implies a higher stored value income relative to the GDV ratio than we've seen in the past.

What is driving that?

Well, Matt, we were talking about having three separate segments.

The mature segment is large and has a lower, therefore, percentage growth and a lower fee income as expressed as a percentage of GDV.

Whether that segment grew less than the other segments, which are emerging, and new customers, which have higher rates, it's really a quarter-by-quarter basis.

Okay.

And so, if you had $9.7 million in stored value, it looks like there must have been another item in the fee income side of the equation that came in much stronger.

Any detail there?

I think we have been trying to focus on businesses and growing businesses within our range of expertise by taking a fee income approach much as we did in prepaid that will generate over time additional fee income.

I think we're not ready to talk about all of them at this time because they are not mature enough, but we think that they will be continuing contributors.

Okay.

And then, if you look back, the first quarter of 2012 you had a surge in deposits.

I believe part of that is related to the tax business, so your deposit balances swelled and then you also had $1.5 million to $2.0 million of extra tax business fee income as well.

What should we expect for deposit balances in the first quarter of 2013 and will we see a similar type of trend on the fee income side as well?

Sure.

Frank, would you like to --

I'm sorry, I missed the last part of the question, Matt.

Just if you go back to the first quarter of 2012, you had a surge in deposits.

Some of that was related to the tax business.

And then, stored value fee income also benefited, like $1.5 million to $2.0 million of additional income just related to the tax business.

Will we see something similar in the first quarter of 2013?

Yes, absolutely.

We'll have similar seasonal dynamics through 2013 as we saw in 2012.

So there will be an expansion of deposits.

There will be an expansion in noninterest income weighted heavy in Q1, some impact in Q2 from the tax business.

A lot of those tax deposits then will roll off Q2 forward.

Okay, I got you.

And then, is there going to be an accelerating pace of securities purchases?

You bought -- the securities book grew 10% in the third quarter on a sequential basis, went to 16% in the fourth quarter.

Is that going to continue an upward trajectory and the sequential growth is you have this surge in deposits?

We would hope to grow all of the assets -- all asset classes of the bank, not only securities, but securities because of the ease of purchase in terms of timing as compared to the pipeline and business development approach for loans, we'll probably grow faster.

Okay.

I got you.

All right.

And obviously, as you get that surge in deposits, we will see a similar type of pressure on the margin (multiple speakers) last year as well.

Absolutely.

We can't help it.

I think that what you will over time see, because the surge in deposits in the fourth quarter was a bit greater than we thought, is that we will accelerate our securities purchases to absorb some of that that we can now, being in our third or so year of the tax seasonality business, we will be able to predict as a continuing source of liquidity.

Okay, got you.

And then, can you just give us a little bit of insight on things that might be in the pipe in terms of payroll programs, GPR programs, or business wins?

What's changed over the last couple of weeks, not naming names, but the types of programs that are new that you hope to board over the next 12 to 18 months?

Give us an update on the pipeline, if you could.

Sure.

Frank?

Sure, absolutely.

The pipeline continues to be very robust.

While we did sign quite a number of new clients through calendar-year 2011 and 2012, every time we seem to land one big new relationship, a new one drops into our pipeline.

And that's continued.

The pace has actually -- whereby now, late 2012, our expectation was things like Durbin, the Durbin thesis, the problems at other issuers thesis would have fully played out, it's actually not the case.

And the pace of, I would say, new business development activities has done nothing but increase all through calendar-year 2012.

Remember that most of the relationships we saw in calendar-year 2012 still had made no impact, no positive impact, at least from a P&L standpoint, and probably won't until sometime later this calendar year, in 2013.

The impact that you see in calendar-year 2012 here, in Q4 2012, these are largely relationships we signed in 2010 and 2011 that really drove this revenue growth.

So there's still a lot of embedded growth that still has to hit the P&L from the relationships we've already signed through 2012.

And then, of course, we still have the very, very robust pipeline of new prospects coming to us.

And the prospects really are across the board from mobile wallets to existing GPR programs to startup GPR programs, existing gift card programs.

We've even managed to find, although we certainly hadn't expected this, FSA portfolio out there that we don't already issue, even though our market share in that particular segment of the space is relatively high.

There are little nooks and crannies of things out there that are with other issuers, and we've got our fingers on some of those, too.

Got you.

All right, thank you.

Frank Schiraldi, Sandler O'Neill.

Just one follow-up on deposit growth.

In the past, I believe you've talked about -- well, you've certainly talked about focusing on fee income versus getting deposits in the door, which obviously the excess, there's little to do with.

Can you talk about strategies that you are working on where you might be able to continue to get this strong fee income growth without having the deposits fall onto the balance sheet?

Let me answer that in what may not sound like a straightforward way, but I think it really provides your answer.

And that is that 90%-some of our deposits are really what we would call clearing accounts.

So that innate in every program is the need to have deposits in order to execute on that program.

So we don't have a lot of deposits that are fluff or that are discretionary is another way to look at it on behalf of the program manager.

The program manager is maintaining those funds with us, which is one of the reasons our cost of funds is so low, those funds that are needed to clear its business.

So we will have a continuing increase in deposits.

What we have done, though, is to say, forget those deposits.

They're of no value to us in our negotiations with our program managers, those that are re-upping and those that are new and those with whom we have some reason to talk otherwise and say we need a greater percentage of the fee that is being generated here without regard to the deposits because, in fact, we're supporting them from a capital point of view and at this time they have no value.

So they're not -- there are no programs that come with no deposits because they need to do business.

Right.

I had thought, though, that there was a strategy somehow to -- although, obviously, it's based on -- the deposits is based on gross dollar volumes, your fee income, that there was some strategy for perhaps being able to --

Yes.

There was and there is a strategy not to take excess deposits not needed for the clearing from our partners.

Because (multiple speakers) okay?

Got you.

And then, I guess, a follow-up to that, when you look at equity levels, where are you comfortable in terms of tangible equity levels?

What is too low, in your mind, in terms of TCE ratio?

Paul, do you want answer (multiple speakers)

Sure.

I think you can actually go down to the 7% and 8% range, and probably 8% from a regulatory point of view is the more desirable level, but you could actually be below that.

Okay.

Okay, thank you.

Thank you for your question.

You have no further questions at this time.

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

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

And as always, our thanks for the good questions which surface information we may not have touched on.

We look forward to continuing this very dynamically growing Company to the benefit of shareholders and look forward to reporting to you again next quarter.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This now concludes your presentation.

You may now disconnect.

Have a good day.