Bancorp Inc (TBBK) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to The Bancorp Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I'll now turn the call over to your host, Andres Viroslav. Please go ahead.

Thank you, Stephanie. Good morning and thank you for joining us today for The Bancorp's third quarter 2015 financial results conference call. 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 will be a replay of the call beginning at approximately 11 AM Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 58529199.

Before I turn the call over to Frank, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see the Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward- looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now, I'd like to turn the call over to the Bancorp's Chief Executive Officer, Frank Mastrangelo. Frank?

Thank you, Andres, and good morning, everyone. I'm going to touch on a number of items in my introductory comments today, the earnings capacity of core business, volatility we experienced in our CMBS business line, non-reoccurring expenses related to the BSA order as the drivers of this quarter's loss, in addition to the status, the bank's discontinued lending operation and the transaction we entered into and closed subsequent quarter end.

First, let's start with some background. The Bancorp is comprised of two primary types. First is, we private-label and integrate banking and payment sponsorship services into the platforms of non-bank financial firms and leverage those firms' distribution channels to their end clients. These activities encompass our payment issuing, payment acceptance and institutional banking business lines. Our partners benefit by providing more holistic and robust offering to their end client thus increasing their revenue and retention over time.

These businesses primarily generate low-cost stable deposits and non-interest income to the bank. Secondly, we operate a series of specialty finance businesses that along with the bank securities portfolio comprise most of the interest earning assets of the organization. These activities encompass our CMBS, SBA 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 credit generated by the institutional banking business have demonstrated exceptional historic credit performance as they are designed to either produce a very granular portfolio of smaller credits collateralized by assets, which are easy to price, control and liquidate, or in the case of the CMBS business line, to shed the credit risk relatively quickly.

We believe these business lines comprising the institutions core, represent channels in which we've demonstrated the ability to grow and can produce strong earnings. Even in this third quarter in which we faced some headwinds contributing to a net loss of $5.6 million when we adjust or strip out non-reoccurring costs related to BSA remediation, costs associated with the restatement and OREO expenses related to discontinued operations. On a pre-tax basis, the Company would have earned $3.5 million for the quarter and $20.2 million year-to-date. Contributing to that core earnings capacity is a 17% increase in interest income as our focused areas of lending grew outstanding balances 36% year-over-year led by our securities-backed lines of credit and SBA channels, each of which grew 35%.

While non-interest income associated with our prepaid and payments issuing business decreased 6.6% from the third quarter of 2014, we do see many positive trends. Gross dollar volume was flat over that period while exiting from a large general purpose re-loadable program, primarily for risk-related reasons in the fourth quarter of 2014. Normalizing for the exit of that program, year-over-year GDV growth would have exceeded 15% demonstrating the greater than market rate of growth we've spoken about previously. Margins also improved 1 basis point or 9% from the second quarter of 2015.

Much like the fourth quarter of 2014, we experienced a market in which spreads tightened and affected our marks on and realize gains associated with the CMBS line of business. As we noted in past calls, we are subject to external market conditions in this business line. In the third quarter, spreads tightened, but we managed the balance sheet with strong discipline and sold into the market rather than elongate duration in credit risk. The net result was an $830,000 loss after sale-related expenses as compared to $5.9 million gain last quarter. Despite these challenges, gains for the year in the CMBS business line still amount to $6.8 million and the business remains a healthy contributor to net interest income.

That same tightening of spreads has also affected the bank's plans to package the majority of the remaining performing loans in our discontinued operations into a collateralized loan obligation transaction. These loans are all marked utilizing our external loan review advisor, and with the exception of the first position, consumer mortgage portfolio represents larger and more concentrated performing relationships. While we will continue to seek good execution in packaging these loans into a CLO, which we believe is the most appropriate and efficient way to reduce discontinued operations, we are subject to the recent tightening in the market making this timing uncertain. As a result, we are working with individual borrowers in large banks to further reduce exposure.

In the quarter, loan balances in the discontinued operations decreased from $629 million to $588 million as a result of those efforts. We've also made considerable progress in our efforts to strengthen our BSA related infrastructure. We're beginning the validation phase of our efforts. Associated non-reoccurring expenses for the quarter totaled $11.7 million, and as we previously noted, we believe we'll continue into at least early 2016 for that level subsiding next year. Independent validation and testing of our infrastructure is an important step in both reducing these expenses and ultimately moving beyond the restrictions.

Subsequent to September 30, we signed and closed the transaction in which we've sold the majority of our HSA administration relationships to our long-term client, HealthEquity, the specialized and focused administrators of health savings accounts. Those client relationships were sold at a gain of $34.4 million prior to disposition and transaction expenses, which will improve our capital ratios and the bank's tax position relative to utilization of our deferred tax assets.

A December 2015 transfer date for approximately $400 million deposits related to the sale, will reduce excess liquidity consistent with the plan we announced in late September. Additionally, approximately $485 million of other high-cost deposit relationships were exited in early October 2015. Beyond capital and balance sheet management benefits, the transaction should also improve the earnings capacity and efficiencies of the organization.

We anticipate that we will achieve an ongoing pre-taxed annualized earnings benefit of between $4 million and $6 million net of revenue produced by the business line annually. We've also entered into an extension of our issuing of sponsorship relationship with HealthEquity and we'll continue to grow non-interest income as a result, as they continue to scale their business. We'll provide more detail and you'll obviously see the impact of this transaction more acutely in our fourth quarter earnings call.

That concludes our prepared remarks today and I'd be pleased to take any questions you might have at the moment.

(Operator instructions) Frank Schiraldi, Sandler O-Neill.

Good morning, I just wanted to start with just prepaid fee growth. Obviously, you mentioned 6.6% year-over-year down result. Once the headwind of that business that you guys (inaudible) 2014 is behind you on a year over year basis. What sort of growth rate do you think is appropriate for that fee income level?

So, Frank, we've grown gross dollar volume like I said on an apples-to-apples basis netting out that the exit of that GPR client 15% year-over-year as we look at volume. Margins are in 1 basis point from the third quarter of last year, so about 8%. So, 15% increase in volume, 1 basis point decrease in margin is ultimately what's been achieved net of that GPR program this year.

And in terms of the margins from here, do you anticipate further contraction as you move along quarter-over-quarter, year-over-year?

Year-over-year, I would anticipate near to 1 basis point was consistent, I think in Q1, Q2 also, 1 basis point tick down. So, I would think about that forward for the near term, although we do believe we'll have opportunities to increase margins over a longer period of time.

And then in terms of just -- I know these BSA consultant costs seem difficult on any given quarter or to estimate exactly. But for conservatism, do you think this is a reasonable run rate what we saw in the third quarter for at least the short term here?

I would hope that that's a high watermark and that the run rates lower than that although might not be substantially lower. I do believe that the expenses will subside in the first quarter of 2016 or they may extend into Q2 2016, I believe it would be at reduced levels.

And then just finally on the loan sale or the discontinued ops, it sounds like $40 million reduction quarter-over-quarter and that was just reflected a one-off sale to another banking institution, is that?

No, it wasn't a sale, Frank, it's just an effort, as the spreads tightened and CLO execution became less certain, we began working with borrowers directly in large banks to press more of these relationships out the door. And that will be one of the ongoing strategies to continue to reduce the discontinued operations portfolio. At the same time, we'll continue to try to execute the CLO market, I mean we are subject to prevailing market conditions to be able to get that done and achieve that, so if the market cooperates, we still believe that's the most elegant and efficient manner to reduce outstanding and disc ops.

I still don't understand that, so the $40 million reflects moving $40 million in loans off the balance sheet?

$40 million reflects payoffs from borrowers.

We pay off from borrowers. Okay. So, paying down -- those are just pay-downs on that $40 million. And then in terms of moving these off the balance sheet going forward, it so sounds like likely we'll just see a couple of maybe, what would you think, a couple of large transactions or I would think maybe one large transaction, and it's still by the end of the year, still sort of the timeframe?

I think we're uncertain on the timing, right. And that's a result of spreads tightening. And as I said, the market for CLO is tightening. So, if the market cooperates and we're able to execute on, they could execute on CLO and then certainly would be seen as a single transaction with the majority of loans left in the disc ops. Short of that, given the current market conditions (inaudible), we are pressing forward borrower-by-borrower as we started to do late in the third quarter and did achieve $40 million reduction and exposure.

Okay, great. And I guess this pay-down is a part of that.

Pay-down is part of the loan.

Yes. Okay and I guess, just finally on that front in terms of -- I wonder if you'd be willing to give where the remaining loans in that book are marked to and do you -- I guess the difference between selling these out right or packaging them together, do you think that could create more marks, all [else] being equal?

Every sale and what I'd say is, every sale and pay down, we've achieved as a result of the decreases to date, and the discontinued ops portfolio has been done at par with the exception of (inaudible) Street transaction. It's been actually a part of our premium. So, we believe we have the portfolio properly marked. We don't believe for the performing portion of the portfolio reduced at this moment in time given our review of credit, additional marks would be necessary.

Okay. And where is that mark (inaudible) in total at this point?

(inaudible) 93, but that's not really -- it's not really helpful given that potential portion of that mark as you probably imagine on the -- it's a non-performing portion of the portfolio.

Okay. And then what -- I guess we can see maybe in the release what the non-performing portion is versus the performing percentages.

Right.

William Wallace, Raymond James.

Maybe just, I got a little bit confused on the very last part of that conversation. So, we can now see what the non-performing part of the held for sale portfolio is?

Paul, that's not in the releases, it's only the performing, that's only the...

Yes, that's correct. We only report on continuing operations in the financials. We don't actually report on the discontinued operations. The reporting is better to mark-to-mark. And as Frank said, it's difficult to apply, what you're trying to do isn't especially helpful in my opinion because most of the mark as Frank said is on loan that might have some element. They might either be delinquent or have some kind of weakness. So, our third-party loan review advisor marks those down proportionately to what they believe they should be marked down to whereas most of the portfolio does not have a mark against it.

[Whereas] a nominal mark.

Yes (Multiple Speakers)

Yes. So, maybe I'll just try to ask directly, what is the balance of the performing loans in the discontinued portfolio?

Wally, it's about -- it's in the range of $540 million.

Okay. And then those loans, I mean if you were -- what are those carried at, is it a 1% discount or is it less than that?

We would actually have to go back to the analysis, there are several components to it, Wally. There is the credit mark and then the credit mark goes to another third-party valuation who applies discount rates and so forth. So, it's not like one line answer. So, we can do that and we are considering breaking that out in the public releases, but it's not a standard disclosure for the discount.

I understood. So, I guess it would probably be helpful just for us to see how the mark is being allocated. So, in that roughly $540 million, that includes the -- is it $90 million [debt] that will be kept for CRA.

It does.

And then of the remaining $450 million or so, how much of that $450 million would you like to wrap in the CLO?

Yes, I think the answer is as much as possible.

Okay. And so what goes into the process of identifying how much of that $450 million can be (inaudible). Is it really just finding investors that have an appetite for it or are there pricing considerations?

Yes, it's largely appetite and credit exposure, Wally.

And so if spreads move in your favor at some point in the next three months, how quickly can you package up some portion of that and sell it.

Yes. End-to-end, we think we would look something like 60 days.

Okay. So, and you have to wait for the spreads to widen first?

Yes.

Okay. And in the meantime, you mentioned that you're working with bigger banks, so in other words you're trying to find bigger banks they would perhaps buy relationships or you're trying to find bigger banks that would basically refinance these relationships off of your balance sheet onto theirs?

Really both.

And have you had -- are there any early indications of interest?

$41 million in reduction in Q3.

Those were refinanced to other banks, not paid down by cash on hand.

Correct. Those are largely refinanced from other banks, yes.

And you're actually contacting these banks or you're working with the borrowers and say or you go, talk to bank A, B and C and C (inaudible).

The combination of the two, some are direct -- some direct dialog with other large institutions, in some instances, it's through the borrower.

And then on the Walnut Street transaction, can you give us any update on the experience with that? And where we stand today?

Yes. The experience continues to be good. I think that we've continued to achieve results ahead of budget from a cash flow and return of principal standpoint. Paul, do you want to provide some more details related to that?

Yes, I think we can say that it's performing that it's -- the bank is being paid what it's owed on the notes and we actually have the third party monitoring it for impairment. And they've reported that on a net basis that the carrying value that we have is appropriate. So everything seems to be working as planned on that.

Can you update on what's remaining and what the value was at the beginning. I know we'll get back and look up where it started, what's left?

Wally, the principal reduction is fairly on a quarter-to-quarter basis, isn't that significant. If you look on the balance sheet within the press release, investment and unconsolidated entity, we have $186.6 million on the books.

That's for the note -- okay, the note on the trust.

Yes, there're actually two notes.

And what was the -- remind us where that started?

It started about [$193 million].

So that doesn't mean that only $6 million of loans have been repaid, right, or (inaudible) or does it? How does the principal you have paid down?

Yes, the principal odd portion of the note gets paid down as principal is in fact getting paid down.

Yes, so the gains stay in the trust. Is that right?

Wally, there are no gains per se, significant gains per se to date. Basically, the majority is actually, but there are some resolutions of dispositions and so forth. There are also some loans that are paying principal and interest. And yes, so it's been about $7 million of principal that's been paid down that goes to the principal in our notes.

So if you have marked that loan, these are all priced that are marked individually, correct, or is it all marked as a pool?

It was actually marked individually as part of the sales process. So, originally the bank on September 30 went through and marked them all down back, restated as part of the restatement. But then there was an independent investor who analyzed, had their own team, they analyzed each loan, loan by loan and marked and there was an additional mark at that point as part of the sale. And that's what they raised to what we ultimately now have on our balance sheet. So, it's been marked down by the bank originally and by the purchaser.

And so it's something as a result, at par or above the mark. How is that difference accounted for that, that difference in the carrying value or is that just not happens yet so?

Okay. So, any proceeds go according to the terms of the sale and the notes. So, first the interest is paid to the bank and the investor, and then excess amounts go to pay-down principle.

Okay. Great. Last question is, Frank, if you look at the $485 million deposits that were moved off in early October. Were those related to any prepaid-type businesses or were those?.

There is no non-interest income associated with that $485 million, Wally, and it was not related to payments business.

All right.

It was primarily in our institutional banking business, kind of one-off deposit relationship with few large entities we've taken on quite a while ago with the idea that we could expand services within those large organizations. The second piece of that didn't happen, so they ended up this kind of one-off large deposit relationships.

So, that's $885 million roughly that you've pushed off, are you done?

That's it.

Okay. So, are there any deposits associated with the loans and held for sale.

There is probably about $170 million in deposits there related to the loans in the discontinued operation. They were eventually probably in the organization also, as their loans are sold.

(multiple speakers) it wouldn't be like one quarter type.

(inaudible) Maybe a one quarter type of that, unless we -- If we execute on the CLO, we get good execution on the CLO to reduce those outstanding balances, will be able to be stage and exit of those deposits on a schedule we control.

And I'm showing no further questions. I will now turn the call back over to Frank Mastrangelo for closing remarks.

Thank you, everyone, for joining us this morning. We appreciate all the insight for questions. I look forward to following up with you on the fourth quarter earnings call. Thanks, everyone.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. And everyone have a great day