Bancorp Inc (TBBK) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Four 2014 The Bancorp, Incorporated Earnings Conference Call.

My name is Tracy and 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)

And now I'd like to turn the call over to Andres Viroslav.

Please go ahead.

Thank you, Tracy.

Good morning and thank you for joining us today to review The Bancorp's fourth quarter and fiscal 2014 financial results.

On the call with me today are Frank Mastrangelo, Chief Executive Officer and Paul Frenkiel, our Chief Financial Officer.

This morning's call is being webcast on our website at www.thebancorp.com.

There'll be a replay of the call beginning at approximately 12:30 PM Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 63783831.

Before I turn the call over to Frank, 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 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 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 Frank Mastrangelo.

Frank?

Thank you Andres and good morning everyone.

We'll start the call with some background.

The Bancorp is comprised of two primary business types.

First, we private-label and integrate banking and payment sponsorship services into platforms of non-bank financial firms and leverage those firms' distribution channels to the end client.

These activities encompass our payment issuing, ACH origination, merchant acquiring, institutional banking and health savings account business lines.

Our partners benefit by providing a more holistic and robust offering to their end client, thus increasing their retention and revenue over time.

This business does primarily generate low-cost stable deposits and non-interest income for the Bank.

Second, we operate a series of specialty finance businesses that contribute to interest earning assets.

These activities encompass our CMBS, small business administration and leasing business lines.

Distribution in these channels is both direct and through intermediaries.

These are carefully selected business lines, which including the securities-backed lines of credits generated by the institutional banking business, have demonstrated exceptional credit performance, as they are designed to either produce a very granular portfolio of smaller credits or in the case of CMBS, to shed the credit risk relatively quickly.

Now to some detail on the quarter.

Fourth quarter results reflect challenges, as well as material progress we've made in transitioning the Bank's business.

BSA-related consulting expenses, investments in personnel, a volatile CMBS market and an increase in our FDIC insurance assessment contributed to a loss for the quarter from continuing operations of $537,000 or $0.01 per share.

Including discontinued operations, The Bancorp reported net loss of $2.2 million or $0.06 a share.

One of the headwinds we faced during the quarter was new guidance issued in early January by the FDIC related to recognition of broker deposits.

As a result, we categorized $3.9 billion or approximately 83% of deposits as brokered and as a direct result, deposit insurance expense increased approximately $1 million over the prior quarter.

Possible reductions in that expense are dependent upon future FDIC evaluations of the Bank.

Nonetheless, we believe that this categorization is not reflective of the economic value of these deposits is driven by their duration, stability and cost.

We've also made continued progress in our efforts to strengthen our infrastructure related to BSA and compliance.

As previously noted, we believe that we are on target to complete BSA remediation in early 2015.

One-time expenses incurred in the fourth quarter related to that effort were $3.9 million and we estimate additional future one-time expense of $7.5 million, which we will likely incur over the next two quarters.

We've made progress staffing the BSA and compliance teams with BSA now fully staffed with tenured professionals in AML BSA specific practice area.

We estimate incremental annualized operating expenses beyond that realized in the fourth quarter at about $3.1 million per year.

We continue to believe that this investment will differentiate us from competitors and that our infrastructure will provide the Bank with a strategic advantage in the marketplace.

Additionally, the fourth quarter was absent a previous contributor to earnings and gains on sale of loans to secondary CMBS markets.

This was due to volatility in these markets, which the Bank had not previously experienced.

As we've noted in past calls, we are subject to external market conditions beyond our control in the CMBS business line.

In the fourth quarter, spreads tightened, but we managed the balance sheet with strong discipline and sold into the market rather than elongate duration.

The net result was a $926,000 loss in the business after sale-related expenses.

The market volatility has since subsided.

We look forward to return to contribution levels of prior periods.

Despite these challenges, gains for the year on such sales still amounted to $12.5 million.

Prior to year-end and with the assistance of advisors, we sold a portion of the discontinued loan portfolio to an entity managed and controlled by an independent investor who contributed $16 million in equity to that entity.

The Bank retains a 49% interest in the purchaser and provided financing of two notes.

The first was for $178.2 million of notes at a 1.5% interest rate, and the second was for $15.4 million of subordinated notes at a 10% per year.

Both mature in December 2024.

The loans that were sold at a principal balance of $267.6 million had been marked to [$209.6 million] in the third quarter of 2014.

In the fourth quarter, we did absorb a $3.9 million loss recognized upon sale.

We continue to work with intermediaries to sell the approximate $900 million remaining discontinued portfolio, so that sale proceeds may be reinvested in our continuing operations, including our targeted lending segments and investment securities.

We're making good progress in our negotiations with potential buyers.

We view this not only as a sale, but more importantly, as a transfer of long cultivated relationships, therefore we are working best outcomes, both for the Bank and the borrowers by matching portions of the portfolio to buyers with interest in specific segments, regions and borrower types.

while this course of action may extend the loan sale process beyond our previously described timelines, I believe that all parties will be best served by the focus on good outcomes for all involved.

It's that same client focus that's enabled us to earn the trust of the large organizations we serve in our prepaid acquiring and institutional banking business lines and ultimately provide us the platform for reinvestment of sale proceeds.

Net interest income for continued operations increased 33% to $15.8 million, compared to $11.8 million in the fourth quarter of 2013, as a result of strong growth in our focused areas a lending.

SBA grew 43%, securities-backed lines of credit 44%, and leasing grew 11%.

Including our CMBS business line, we grew loans $371 million or 51% from year-end 2013.

Combining strong loan growth with careful balance sheet management, we're able to deploy more of our excess liquidity and the yield on assets increased to 2.58% from 2.2% in the fourth quarter of 2013.

This excess liquidity in fed funds was deployed into loans.

Our cost of funds declined to 28 basis points and we continue to maintain a very asset-sensitive profile.

Excluding the CMBS business line, total non-interest income grew 8% as compared to the fourth quarter of 2013.

Our merchant acquiring ACH origination business contributed with a 27% increase and the HSA business drove the 34% increase in deposit account fees over that period.

The payment issuing business noninterest income growth rate of 8% was affected by the mid-quarter transition of relationship we'd previously noted to the market we were exiting.

Gross dollar volume grew 18% as compared to the fourth quarter of 2013 to $9.1 billion and margins increased 5% from the previous quarter to 13.8 basis points.

This concludes my prepared remarks for the quarter and I'd be pleased to take any questions you might have.

(Operator Instructions) William Wallace, Raymond James.

So the sale of the good commercial loan portfolio you mentioned that you're breaking that up into basically into batches and selling it to individual buyers.

I was just wondering if you could talk a little bit about how that will be broken up and what your expectation now of the potential timing of these sales could be, and maybe how many different batches it might be?

Yes, I think there is a possibility for as many as three different batches, based on loan type, region -- primarily based on loan type and region and to a slightly lesser degree, loan size.

I believe because of that, that we'll probably have some of the sales bleed into Q2, although it's certainly possible and plausible that some will still occur this quarter.

Are you in the negotiation stages now?

We are indeed.

Do you have any visibility or can you give us an update on your confidence on the marks for the commercial loans?

I've said previously and continue to say that we believe that the marks that we took in the third quarter of 2014 accurately reflect what the loans would sell for in the secondary market.

And moving on to the continuing operations, did you say you've got $7.5 million of additional one-time expense related to the BSA order in the first half of the year?

Yes.

Then that will be absorbed most likely between -- in the first two quarters of 2015.

What is that expense?

It's the ongoing consulting and BSA remediation expenses.

The consulting expenses coming in significantly higher than your initial expectation, is that -- what's --

Yes, I believe somewhere in the range of -- it is an increase in the estimate of the one-time expenses of something close to, I believe -- Paul, is the number [about] $3 million, $3.5 million?

Yes, we are -- we had to revise based on information from consultants that it's just going to take more time and they have to do more work, so it increased, yes.

So is your expectation that -- so you're saying this will be absorbed in the first half of the year.

So by the end of the second quarter, are you expecting that you will be in compliance with the order, or would you then need to implement?

No, no, implementation will be completed early in 2015.

And then my last question, just along the same lines on expense.

So if I take the roughly $32.7 million of operating non-interest expense after the BSA-related consulting expenses in the fourth quarter, you're saying, layer on an additional annual $3.1 million of expense, and that's a good kind of idea of where we're starting today.

I guess, is that true?

And then are there any expenses that can come out?

Yes, I think the calculation you just mentioned is accurate with one caveat and that is that there is a relationship between -- because much of the expense is variable relationship between CMBS revenue and expense.

So as CMBS revenue increases or decreases in any given quarter, now there is a linkage to expense.

And then what about the opportunity to find some efficiencies as it relates to any office space or stuff that's not directly related to discontinued, but that's currently could be supporting some of the discontinued operations?

Yes, sure.

As we've noted in the past, we do believe that we will have some of those efficiencies still, expenses that exist in the continuing operation line items.

Some of those will be offset by, of course, the infrastructure build in BSA and compliance, that additional $3.1 million incremental operating expense that we've noted for personnel.

But, we do believe we will be shedding more expense than we're taking on.

Frank Schiraldi, Sandler O'Neill.

Hi, just a few questions.

First on just the BSA expense going forward again, Frank.

So I had thought that we were looking at -- aside from the one-time cost, about $3.5 million annualized expense that was going to be ongoing, now are you saying that that has increased by another $3.1 million, is that the message?

If you recall, Frank, I think we said $3.5 million related to BSA.

Last quarter, we spoke of an additional investment in compliance infrastructure of another $1.5 million.

Now most of that $1.5 million has not been -- has actually not been incurred, has not been loaded, it's not in the expense load today.

There's a portion of the $3.5 million that's also not in the expense load today.

And there is -- we are planning a slightly larger investment in compliance infrastructure beyond BSA, third-party risk management and compliance.

So, the remaining incremental operating expense, beyond what is loaded in Q4, is $3.1 million.

That also takes into consideration that at least a portion of the BSA staff, which is now in place, joined us in Q4.

So it did not have a full impact from an expense standpoint within the quarter.

So the $3.1 million overlaps with a $3.5 million number then.

I guess how much of the $3.5 million number would you say is already baked to 4Q earnings?

Paul, do you have that number?

Well, I think the best way to look at it is that it's [$3 million] incremental to what we had in the fourth quarter.

We're going to have annualized expense of that $3.1 million and that is an increase for the reason that Frank said, which was that we were mostly focused on BSA and while the order doesn't specifically require other increases in compliance in looking at satisfying every possible request to the FDIC and all their concerns, we're inclined to add more staff to fully satisfy them.

At some point, obviously we'll do our best to manage efficiently and improve efficiency in that area, but initially we are going to be adding more positions.

So, there is going to be more incremental expense and we estimated it $3 million, $3.1 million.

So, I may be repeating the last question here, but in terms of the $3.1 million, if you add that in incrementally next year and you just forget about the one-time cost for a second, so it makes sense to think about the run rate expenses as just $3.1 million higher than this year, excluding the one-time costs.

And then you talked about some efficiencies to move that lower.

Can you just talk about efficiency ratio expectations as we go forward and where you hope -- where you think you can get to in maybe longer-term?

I mean, I think we'll probably provide some targets for this in future quarters, once we are able to bring -- better understand and bring some of the expense out of continued operations that we know we should be able to get.

Historically, for us, efficiency ratio has been one of the core ratios that we're focused on and that will be the case again in the future as we transition the Company.

We don't think it's going to be -- it's actually going to be a meaningful target during the transition here, though, while we're in the process of selling and transitioning these loan relationships to another institution and redeploying the proceeds into the investment and other continued focused areas of lending.

I guess, how do you boost profitability in the next year or two?

Is it in terms of ROA, is it -- do you look to shrink the balance sheet more and perhaps ramp up the deposit sale program?

How quickly can efficiencies be realized, just trying to get a sense of where we can expect maybe profitability as we look out to 2016?

Just redeploying cash into -- from loan sale proceeds into interest earning assets will improve efficiencies.

Secondly, I think we've never been shy in cutting deposit-heavy fee like relationships.

I think over the last three years, we've probably pared relationships approaching $2 billion in deposits off the roster, including close to $425 million this calendar year.

So I think we will manage the balance sheet with tight controls as we have done in the past and not be shy about paring relationships that might not be sensible for us with an increased liquidity position off the roster.

At the same time, we do believe deposit sweep can be a contributor to handling the excess liquidity, and we have grown these focused areas of lending relatively well over the last calendar year and believe that we can continue to do that in the future.

The card-based businesses, the best way to look at it now is just to combine prepaid processing fees, service fees on deposits, the merchant card processing, ACH, is this the best way just to combine that all together and think about perhaps a run rate akin to what we saw in this quarter year-over-year, which was 12%.

Is that reasonable?

And then the second part of that question would be, it looks like gross dollar volumes were up 18% year-over-year.

But again, the card business growth look like about 12%.

So our margins come in overall on a year-over-year basis and do you expect to see that continue?

Just the second part of your question, margins year-over-year did come in a little over 1 basis point quarter-to-quarter, Q3 2014 to Q4 2014 margins increased 5%.

And you're right, the relationship of 8% increase in non-interest income, 18% increase in GDV, that's indicative of -- I think, we've probably talked about this one the last earnings call, that's indicative of I think our larger relationships continuing to take market share there.

Just aren't that many new entrants into the business right now.

The larger players are starting to acquire some of the smaller program managers, and I think there is certainly consolidation, both from organic gains in growing and from consolidation trends in the larger program managers.

But, do you think -- I mean, I don't know if you want to -- I don't think you want to be giving a growth rate, but in terms of like just year-over-year card businesses, it is low double-digits still a reasonable place to be do you think as you look out?

Yes, I do believe it is, absolutely.

And then just on the CMBS securitization, is there any thought maybe pulling back a little bit on what do you guys had been doing, just given the volatility last quarter, maybe some continued volatility this quarter?

I don't think so.

Look, it's a business that has performed extremely well, even despite the loss in Q4 from that business line, it still generated $12.5 million in non-interest income in 2014, and we believe it's an excellent business.

I guess just how high or how much in expenses are tied to that, that $12.5 million in revenues.

What sort of efficiencies are there?

Yes, I mean the majority of the expenses are variable, which is a benefit of the business.

Paul, do you have the percentage that runs --

I would say a minimum -- it's in excess of 40%, but the minimum is 40% of the gains translating to expense, and again that's a minimum and they are actually somewhat higher than that, but the other portion is somewhat variable.

So, you have expenses, some of them are fixed, some of them are variable, some of them are semi-variable, so it's a difficult percentage to zero in on, but at a minimum, as I said, it's 40%.

Okay, that's helpful.

And then finally, if I could, just on the sale of the remainder of the portfolio, Frank, has anything changed?

You mentioned three different batches.

Would one of those batches still include sort of the performing commercial that has collateral in footprint that is really, I think, the great majority of what's remaining, is that still one of the batches you're talking about or do you think there's further reduction within that?

Yes, there is actually further segmentation even of that portfolio, both from a geographic standpoint, because some -- it turns out some institutions are interested, for example, in New Jersey versus Pennsylvania and by loan type.

And so, was it more like -- I guess you went through the process of marketing these loans and I think you probably went through the process of marketing them together, which would make it easier on you.

Is it fair to say, the bids -- or there was less interest in the full book, the bids didn't come in where you had anticipated.

I mean, why further segment that book?

No, it's more a focus on best outcomes than it is lack of interest.

And there are some deposits tied to that, I guess one of those batches at least, right, the Community Bank deposits would go along with?

Yes, it's a segment of I think what we've reported as Community Bank deposits, are actually tied directly to commercial customers somewhere in the range of -- we estimated at $175 million, $185 million in deposits.

Matthew Kelley, Sterne Agee.

On the commercial loans that you did sell and the cash -- the proceeds that you did get there, talk about the securities yields that you've been investing at.

Last quarter, you talked about a 1.75% to 2% yield.

How do those compare today for the types of bonds you'd like to buy as you sell loans?

Paul, would you like to take that?

Well, if you've been following interest rates, interest rates are down a bit.

So we had thought we could do it at least at 1.75%.

So now our most recent estimate is 1.65%.

Of course, we really can't predict, because there has been volatility in those rates as well.

We can't predict what they're going to be when the loan sale happens even in a month or two, but as of right now, we believe we could deploy at an average yield of 1.65%.

And then, Frank, what I'm hearing now is that you expect to have the full $900 million done by the end of the second quarter is going to sneak into 2Q, is that right?

Yes, it is definitely going to -- at least a portion I think will certainly trickle into Q2.

So, say, if you have the full $900 million on your balance sheet, how quickly would you anticipate investing that in securities at those types of yields?

Sure, Paul?

Yes, we think we can do it relatively quickly in 60 to 90 days.

That may change and we'll have to look at where interest rates are and if you -- since I know you're familiar with the Bank, you know that we've tried to time our securities purchases and we've been very patient, and so we have had some success in locking in rates when rates were slightly higher and being patient and not buying when rates blip down as they are now.

So we're actually having bought -- we have bought virtually nothing in the first quarter.

So we can't say for sure, but assuming that that rates are -- we feel adequate and we don't see anything -- any big changes on the horizon, we think 60 to 90 days we could have those deployed.

Now, there's a little bit more balance sheet growth, which pushed capital down to 7%.

It seems like this would have been a pretty good quarter to use the deposit sweep program.

Did you utilize that during the quarter and talk about the progress you've made and the ability to help manage the size of the balance sheet and manage capital through that tool?

Sure, we do have banks on the platform today.

We have swept some cash off balance sheet to those bank buyer institutions.

We do believe that it will be useful tool in the future.

What we're seeing in Q4, of course, is part of the normal buildup in deposit balances that will happen in Q1, as the tax refund processing business kicks in, peak in May, within Q2 and roll off with pretty heavy velocity.

There is never really the intent to utilize the sweep system for the more volatile deposits, those that flow on and flow off with relatively high velocity, but rather place ongoing stable core deposits at other institutions, and that is how we will utilize the platform.

How much did you have sold at December 31 (multiple speakers)?

I don't have that number in front of me, Matt, but I can get it for you.

So when we look at the average balance sheet, the $11.2 million of interest income earned on the assets held for sale, I understand that includes a portion of what actually was sold during the fourth quarter, but that interest income is running through the P&L of the discontinued operations.

So call it $9 million to $10 million of interest income.

And then we see the loss from discontinued operations of $1.7 million.

So, are there additional write-downs, maybe just talk about what were the other expenses in that P&L of just the discontinued operations that drove the loss, when you do a pretty substantial amount of interest income flowing into the topline?

Well, first of all, obviously there is a $3.9 million loss related to the sale of the loans that was sold to the Walnut Street vehicle that was absorbed through discontinued operations.

There were significant legal expense actually associated with that sale that was absorbed in discontinued.

There was a decrease in interest income, and lastly, there was [A] mark on series of loans, an additional mark of $3 million that was taken through discontinued.

On the stuff that is to be sold, right, (multiple speakers) talking about the part of the $900 million?

That's correct.

Frank Schiraldi, Sandler O'Neill.

Yes, just a follow-up on -- sorry If I missed it, but securities backed lending, what's the average yield there and do you expect that to continue to be the big driver of growth in the loan book?

I think the yield is about 2.7% in that business and we do believe it's going to be one of the core drivers of loan growth, absolutely.

Those, of course, are all floating rate credits today.

William Wallace, Raymond James.

Just one follow-up on the variable expense associated with the commercial mortgage backed business.

Do you have what portion -- like what was the variable comp or the variable expense rather for 2014 that's tied against that $12.5 million?

Wally, I don't think that's a number we have in front of us.

We can work with you -- work to get that for you offline.

Maybe one other way of asking it is, if I assume that spreads normalize and you get back to, say, $4 million or $5 million -- call it a $4 million run rate, do you have an idea of what the bounce-back in expense would be, as that same --

As I said before, Wally, you have to use at least 40%.

We can look at some of the other expenses, but the problem is, in the history, some of the other expenses, it depends on which securitization, which company we're selling into.

It depends on just the expenses associated with particular sales.

So they seem to vary considerably.

So, I would start with 40% and that's a pretty good beginning estimate.

And then one follow-up question for you, Paul.

The notes that were issued in association with the sale of the stressed commercial loan portfolio, that -- I think it's roughly blended 2.2% yield.

Will that income flow through net interest income?

No, it will flow through -- I believe, it will flow through other income, because the investment in those notes is actually not in our -- it's in another asset right now, but we really haven't clarified that with our accountants as yet.

Okay, all right.

So, so stay tuned, I guess is it?

Right.

It's not a very -- because it's another asset, it's not clear that it should go in earning assets, although theoretically you could make an argument that it should.

Matthew Kelley, Sterne Agee.

A question on capital.

As you do have volatility in the size of your balance sheet, inflows of deposits and liquidity, where are you trying to maintain or what's the minimum TCE level you're trying of maintain throughout the cycles here?

Yes, I think the [VPs] way to answer is just to say that we don't believe we're going to have any near-term need for capital, rather we'll manage the balance sheet and probably find ways to continue to shed excess liquidity.

Is holding about 7% a decent bogey or benchmark to consider?

Yes.

I believe so, yes.

And then, now just taking a step back, before the loan sale, you folks were earning about $25 million to $26 million in just straight net interest income and obviously now, a big transition selling $1 billion of your portfolio at a little bit higher yields, eventually deploying into securities at a little bit lower yield.

When do you think you can get back to that level of just net interest income?

Again if you look in the later quarters of 2013, early 2014, before the loan sale, call it $25 million to $26 million and getting back to that level or something close seems to be the important goal to returning to real profitability.

How long do you think it takes to get there?

We don't really project.

We don't give that kind of guidance.

But one thing you should be aware of when you watch the interest rate markets that we believe that because so many of our prepaid deposit relationships are contractual that our deposit costs are going to go up much less than peers when interest rates increase.

So I think we have that advantage to look forward to over the coming couple of years, when I believe the consensus, even with some wavering now, is that rates are going to go up, that should benefit us.

So that's what we're looking forward to.

And then on the remaining $900 million of loan sales, would you consider using the same structure, where you hold a portion of the equity and a new partnership created and lending money to that entity as well?

It's not the -- it's certainly not the first -- not the first option or priority.

Would we consider it in the right transaction?

Possibly.

But just not certain there's going to be a need to do that.

Thank you for your question.

I would now like to turn the call over to Frank Mastrangelo for closing remarks.

Well, fantastic.

Thank you every one for joining us this morning and we appreciate all of the good questions and insights and I look forward to following up with you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you and have a good day.