The Bancorp's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: The Bancorp, (TBBK)

The Bancorp, Inc. (NASDAQ:TBBK)

Q4 2012 Earnings Call

January 24, 2013, 08:30 am ET

Executives

Andres Viroslav - IR

Betsy Cohen - CEO

Frank Mastrangelo - President & COO

Paul Frenkiel - EVP, Strategy & CFO

Analysts

Frank Schiraldi - Sandler O'Neill

Matthew Kelley - Sterne Agee

Operator

Good day ladies and gentlemen and welcome to the Q4 2012 Bancorp, Inc. Earnings Conference Call. My name is Grant and I’ll be your operator for today. At this time, all participants are in a 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 now like to turn the call over to Mr. Andres Viroslav, Director of Corporate Communications. Please proceed.

Andres Viroslav

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 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 maybe 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?

Betsy Cohen

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 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 that you will see that as operating income growth 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 has 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 improved during the year, those deposits were up, by about a 100%. And as a corollary to that we were able to bring down the cost of those deposits for the entire year 2011 over ’12 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 and so 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 non-regulatory measures, but also great support for what we see to be continued growth.

Loans; as a segment of our assets grew by 10%, out 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 remained steady; non-performing 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 am going to turn the call over to Frank Mastrangelo to talk a little bit about the various segments of growth. Frank?

Frank Mastrangelo

Thank you, Betsy. As Betsy mentioned, non-interest income growth was very, very strong for the quarter and was primarily driven by our prepaid unit which grew non-interest income 77% year-over-year and our savings also grew non-interest income 66% year-over-year because we've discussed in the past with the business line that we pivoted from focus on market sharing deposit gathering to non-interest income and that's 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 and end of calendar year 2012 at $27.2 billion, a 105% increase year-over-year as I'm sure you are all aware we have a series of very mature some new, some very emerging programs within our portfolio.

I think we are on safe ground in saying that 2013 GDV will grow faster for our institution grow faster than the general industry growth rate of prepaid and payment that growth rate is expected at 30% plus year-over-year. Obviously, we grew that much faster in calendar year of 2012 but again as I said, a combination of the core programs and things like that it's, 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 a $1.2 billion in deposits during the calendar year up almost a 100% year-over-year with decreasing cost of funds with 43 basis points to 31 driven significantly by wealth management which increased deposits 50% year-over-year. Our prepaid group well or deposits grew just about 20% year-over-year to 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.

Betsy Cohen

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

Paul would you like to talk about the characteristics and the growth.

Paul Frenkiel

We grew the portfolio such that it now totals close to $800 million by quarter end and our goal is to continue growing that. At the same time, we are 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 duration 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 advisors 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.

Betsy Cohen

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

Question-and-Answer Session

Operator

Thank you, Betsy. (Operator Instructions) and the first question comes from Frank Schiraldi from Sandler O'Neill. Please proceed.

Frank Schiraldi - Sandler O'Neill

Just a few questions if I could. First, I wanted to ask Frank, early on in 2012, you gave GDV expectations for the full-year or at least a range. I am wondering if you are 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?

Frank Mastrangelo

I don't think we are quite prepared to do that yet, Frank. We're still working through mature components versus emerging components. So, the portfolio trying to peg the right range for the market. Suffice to say, as I mentioned earlier, we are confident we will grow the portfolio faster than the industry average of 30% year-over-year.

Frank Schiraldi - Sandler O'Neill

Okay. And do you see it looks like if I 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 than it’s about the 12 basis point margin and I am wondering if you see pressure on that in 2013 or if you think you can hold those sort of margins?

Frank Mastrangelo

We don’t see pressure. I do think that we will probably hold those margins for ’13. I think as we talked about initially in ’12, we had added one large client that client was priced under the average of the portfolio that of course came at the large block of the existing gross dollar volume. We were able to build back to something closer to our 13 basis point average we traditionally maintained. I don’t see any pressure on that for ‘13.

Frank Schiraldi - Sandler O'Neill

Okay, great. And then Betsy, if you could may be just give a little bit of color on your expectations going forward on credit as you mentioned I think non-performers actually take down a bit, charge-offs were a bit elevated from where we have seen in previous quarters, is that sort of if you could just give us your expectations 20,000 (inaudible) view on how you see credit going forward?

Betsy Cohen

I think its very metastatic situation Frank, although, reports are circulated that the US economy is gaining strains I think it’s a very regional element. There are regional elements that contribute to that. So that in many prices like Miami or Arizona or California where there was such significant disruptions to the economy and to values, an uptick is in fact possible and the price like the Mid-Atlantic which is our basic community bank footprint.

You know, the downtick was not so significant and the uptick is also little slower to come back. So, we are looking at 2013 as being, a repeat of 2012 maybe a little bit better but in the range and it maybe better than that and the economy may pick up more quickly and the philosophy of transactions may be quicker but its very hard to predict that at this time.

Frank Schiraldi - Sandler O'Neill

And I guess when you say that 2013 may look very similar to 2012, could we and I know quarter-on-quarter you can really predict something like this, but could we maybe assume that provisioning levels might remain in the ballpark of 2012 levels?

Betsy Cohen

Absolutely.

Frank Schiraldi - Sandler O'Neill

Okay.

Betsy Cohen

Because remember that as we do grow that portfolio, there will be some additional provisioning that’s necessary for the growth as well. So it’s not all provisioning for losses or for downtick experience, it's also as we grow that portfolio there, and it did grow, I mean 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 we – and the growth is targeted to that. As an expression of the historical factors we will grow the portfolio as volume grows. And not the portfolio we will grow the provision as the portfolio grows, sorry.

Frank Schiraldi - Sandler O'Neill

Okay. Thank you very much.

Operator

Thank you, for your question there. Our next question comes from the line of Matthew Kelley from Sterne Agee. Please go ahead.

Matthew Kelley - Sterne Agee

I just want to clarify a couple of numbers in the fee income side. Just because do you have a lot of detail in the press release and how we got to the 15-1 what was the specific stored value income for the quarter and what was GDV just in the fourth quarter, if I back into it, it looks like it was 6.1 for the fourth quarter and GDP it's billion and for 9.7 on stored values, is that correct, you said up 77%?

Paul Frenkiel

Spot on both numbers, Matt.

Matthew Kelley - Sterne Agee

Okay, so I mean 9.7 on annualized or 24.4 it actually implies a higher stored value income relative to GDV ratio than we've seen in the past, what's driving that?

Betsy Cohen

Well, Matt we were talking about having three separate segments. The mature segment has is a 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 segment which are emerging in new customers which have higher rates, you know, it's really a quarter by quarter basis.

Matthew Kelley - Sterne Agee

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

Betsy Cohen

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

Matthew Kelley - Sterne Agee

Okay, and then if you look back the first quarter of 2012 you had certain deposits, I believe a part of that is related to the tax business so your deposit balances swell and then you also had a $1.5 million to $2 million of extra tax business fee income as well, what should we expect for deposit balances in the first quarter of '13 and will we see a similar type of trend in the fee income side as well.

Betsy Cohen

Sure, Frank, would you like to.

Frank Mastrangelo

I missed the last part of the question, Matt.

Matthew Kelley - Sterne Agee

If you go back to the first quarter of '12 you had a certain deposits, some of that was related to the tax business and then stored value fee income also benefited like a $1.5 million to $2 million of additional income just related to the tax business, will we see something similar in the first quarter of '13.

Frank Mastrangelo

Yeah, absolutely we will have similar seasonal dynamics through 2013 as we saw in '12. So there will be an expansion of deposits, there will be an expansion of non interest income or weighted heavy in Q1 some impacting Q2, from the packs business while this packs deposits will roll off Q2 forward?

Matthew Kelley - Sterne Agee

Okay, got you and then is there going to be an accelerating pace of securities purchases, I mean you bought the securities book grew 10% in the third quarter on a sequential basis, went to 16% in the fourth quarter. I mean is that going to continue in upward trajectory in the sequential growth as you have the search in deposits?

Betsy Cohen

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 loan, we'll probably grow faster.

Matthew Kelley - Sterne Agee

Okay, got you. Alright, and obviously as you get that certain deposits will see a similar type of pressure on the margin, last quarter as well?

Betsy Cohen

Absolutely. I think that what you will overtime 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 of seasonality business, we would be able to predict as a continuing source of liquidity.

Matthew Kelley - Sterne Agee

Okay, got you and then can you just give us a little bit insight on things that might be in the pipe in terms of the payroll program, the GPR programs or business wins? What's change you know, in 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 in the pipeline if you could?

Betsy Cohen

Sure, Frank.

Frank Mastrangelo

Sure. Absolutely the pipeline continues to be very robust. While we did sign quite a number of new clients through calendar year ‘11 and ‘12 every time we seem to land in one big new relationship the new one drops into our pipeline and that's continued the pace is actually where by now in early ‘12 our expectation was things like Durban the Durban piece is the problems at other issuers, pieces, 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 increased all through calendar year ‘12.

Remember that most of the relationships we signed in calendar year ‘12 still have made no impact no positive impact at least from a P&L standpoint and probably won't till sometime later this calendar year in 2013 the impact that you see in calendar year ‘12 here in Q4 these are largely relationships we signed in 2010 and 2011 that really drove this revenue growth. So there is a still a lot of embedded growth that still have to hit the P&L from a relationships we have already signed through ‘12 and then of course we still have a 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 startup GPR programs existing gift card programs. We have even manage to find although you know certainly had can't expected this, (NYSEARCA:FSA) portfolio out there that we have already issued even our market share and that particular segment of the space is relatively high, they are little mix and crannies of things out there, that are with other issues, and we got fingers on some of those too.

Matthew Kelley - Sterne Agee

Got it, all right, thank you.

Operator

Thank you for your question. We do have another question that has just come through from Frank Schiraldi from Sandler O'Neill. Please proceed.

Frank Schiraldi - Sandler O'Neill

Hey, just one follow up on deposit growth. In the past, I believe you talked about; you certainly talked about focusing on non fee income versus gain deposits on the door which obviously the access is 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?

Betsy Cohen

Let me answer that in what may not sound like a straight forward way, but I think it really provides your answer. And that is that 97% of our deposits are really what we would call clearly clearing the accounts. So that in a very 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 plus, or that are discretionary. There is another way to look at it. On behalf of the program manager, the program manager is maintaining those funds which 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 are of no value to us in our negotiations with our program managers. Those that are really-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's being generated here without regard to the deposits because in fact we are supporting them from a capital point of view and at this time they have no value. So they are not, there are no programs that come with no deposits because they need to do business.

Frank Schiraldi - Sandler O'Neill

Right, I had thought that there was a strategy somehow to although obviously it’s based on, the deposit is based on gross dollar volumes, your fee income that there was some strategy for perhaps being able to…

Betsy Cohen

Yeah, there is, there was and there is a strategy not to take excess deposits not needed for the clearing from our partners because those --- okay.

Frank Schiraldi - Sandler O'Neill

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 I mean what is too low in your mind in terms of TCE ratio?

Betsy Cohen

Well, Paul do you want to answer?

Paul Frenkiel

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.

Operator

Thank you for your questions. You have no further questions at this time. Therefore, I would now like to turn the call over to Betsy Cohen for closing remarks.

Betsy Cohen

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.

Operator

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.

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