The Bancorp, Inc. (TBBK) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Bancorp Incorporated Earnings Conference Call. My name is Keisha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Andres Viroslav, Director of Corporate Communications. Please proceed. Andres Viroslav – Director of Corporate Communications: Thank you, Keisha. Good morning and thank you for joining us today to review The Bancorp’s first quarter 2011 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 12:00 pm Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 97477604. 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 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 Betsy Cohen. Betsy? Betsy Cohen – Chief Executive Officer: Thank you Andres and thank you all for joining us today. We’d like to talk today about certain causes and improvement in the first quarter which we think represents a trend. The first is in the area of interest income and the increase over the prior year was 12%. This is as a result not only of increases in loans and securities, which made and purchased, but also as a result of reduced cost of funds. As you may remember from prior calls, we have been pursuing a strategy during this low interest rate environment of increasing income by focusing on our attention on businesses, but in addition to generating deposits generates significant non-interest income. For this period of backing out one-time events, interest income increased by 55% which over the prior year, which we think represents a significant reflection of our efforts and in the prepaid position increased by 69%. All of these increases resulted in a decrease in the efficiency ratio, both over the year as a whole for 2010 from approximately 70% to 66% and indeed also from the first quarter of 2010 from roughly 67.5% to roughly 66%. So both of those are as a result of increase in operating income and we have to be able to carry that forward. Frank is going to detail for you in just a minute the lines of business represented by the significant increase in non-interest income, but before doing that I’d like to talk for a minute about the balance sheet. On the deposit side we added not a new line of business, but a line of business that had been in beta during the first quarter or had just launched during the first quarter of 2010 which is represented by the collection on behalf of taxpayers of refunds, which are due to not loans, but deposits, refunds that are due to their clients. This quarter of 2011 both deposits represented on average $155 million in comparison to $47 million in 2010 and we continue to build out the business. As we have been doing over the course of our management of the deposit portfolio, we try always to be pruning higher cost deposits and the highlighting and bringing in lower cost deposits. And so you will see a decrease in our HSA balances, primarily from third-parties as a result of that strategy. On the loan side, we did in fact the key loan growth of 7%. Our SBA program that we have been talking with you about in terms of franchisees and on behalf of underwritten franchise is expanding. It made a contribution this quarter in terms of the growth. But we had even a most significant event occur which was the naming of the bank as or the approval of the bank as a preferred lender and that will certainly see that’s across just more like the chicken and egg event that you have to underwrite the SBA loans before you get named as a preferred lender but once you are a preferred lender, those loans grow more quickly. During this quarter we launched about 15 new relationships and had significant impact in terms of innovation and addition of products within the insurance area and again Frank is going to just speak to that. If you take a look at the margin, you will see that it decreased for this quarter from 306 at the 2010 quarter to 272. You look at the average, balance sheet you will see that there is approximately $830 million, which was excess funds during this quarter earning 25 basis points. And I have to tell you that’s the whole story. We are trying to manage the portfolio through less seasonality or less dramatic seasonality, and hopefully you will see the benefit of that over the course of the next 12 months. That was responsible though in great measures for the reduction from 70 basis points to 41 basis points of the cost of funds. So it comes with a cause but also a benefit. All of this gets reflected in the core earnings and core earnings for the Bank increased from about 6 points, $8 million to about $8.9 million for the quarter, which we think is a very significant indicator of earnings progress. On the asset side among the loans, there was an increase in delinquencies under 90 days represented by a relationship that is a fully collateralized relationship and it was the first time in March that loan became delinquent in its history. On the positive NPA decreased slightly on a quarter-to-quarter basis and during the year-to-year basis. And so with that, I would like to ask Frank to expand both on the definition of the increases in non-interest income and a couple of new relationships that were launched in the insurance area during the first quarter. Frank Mastrangelo – President: Thank you, Betsy. As Betsy mentioned we had quite a number of programs that launched in the first quarter of 2011. The couple of the exciting, more exciting progress, more exciting and innovative programs, the ACE USA disaster card, we expect to be a very, very nice program, whereby ACE we use that in disaster areas to provide insurance proceeds how to individual to utilize to, you know, recoup losses etcetera. And also our Genworth program, which is in SEI-like program, whereby we are integrating cash management services into Genworth non-bank wealth management platform available to RIAs across the nation. We have big expectations for both of those programs, but importantly as we have talked about before, we signed a number of groups every quarter and it’s usually somewhere between six to nine months before those programs go live and there is another six to nine months before those programs begin to make impact. So, the impact we are seeing today both from non-interest income and on deposit growth really driven some programs we are signed in previous quarters. For example, we signed both of those programs ACE and Genworth somewhat really in 2010 both of those were signed in the first half of 2010 that are just beginning to make some impact now. From non-interest income standpoint, non-interest has grown significantly year-over-year, Betsy mentioned. The prepaid group is up 69% year-over-year $1.9 million comparing Q1 2011 to Q1 2010, were significant increase. Our health savings account fees are also up substantially. We spent a long-time building market share there in that particular area, Betsy have mentioned. We have more recently carried off some higher cost HSA deposit implemented fees schedule and ultimately grew non-interest income generation a 120% year-over-year from calendar year 2010. Merchant income continues to be very strong as non-interest income is across the board. Betsy Cohen – Chief Executive Officer: Thanks, Frank. I think the picture that Frank just [indiscernible] it’s an answer to a question that we get from time-to-time, in fact quite often and really revolved around what is the barriers entry within your field. One of them obviously is the length of the contracts that we signed which are five years. But the second is really the amount of upfront work that goes into not only the negotiation of these contracts, but into the implementation of the contracts. And so we think both of those are good barriers entry and have resulted in our having inbound inquiries of significant number, because we continue to evolve greater and greater presence. With that, I would open the floor to questions.

(Operator Instructions) Our first question comes from the line of John Hecht representing JMP Securities. Please proceed. John Hecht – JMP Securities: Good morning, guys. Thanks for taking my question. The first question is really related to margins. You had a slight decrease in the loan yield and I’m wondering was any that related to the makeshift and as the franchise, franchisee loans ramp up is the yield opposition as similar to the other types of loans in your book. And then the second is related to the deposits, the second part of the question would be related to deposits. You’ve had a nice decrease in the cost of deposits for a while now. I’m wondering have you guys assessed the potential for or do you continue to think there is some benefits on the cost of fund side going forward?

We thought we would be innovative and ask depositors to pay out. But we haven’t quite gotten there, John. John Hecht – JMP Securities: Well, I suggest there [indiscernible].

What you know, Paul will answer both of those questions, thank you.

Sure. To answer your first question in terms of the loan yields, one of the things that should improve those loan yields to offset some reductions in fixed rate loans, which have been pricing, so we had five-year average maturities and so forth. And flow is those pay-down, there is a little bit of a – there can’t be a little bit of interest rate loss there. But now I think so we are somewhat subject to the market in that. But it’s fairly modest and for the most part we’ve actually been able to maintain rate flows even on a variable rate loan. One of the things that should help this is the SBA loans that we targeted. So we are looking at that to reverse that trend.

Excuse me, I would add to what Paul said, John. That we also have been seeing increases in our leasing, direct leasing portfolio and that is at the high yield portfolio. So that will, in addition to the SBA loans, help the averages. John Hecht – JMP Securities: Okay.

Sure. On the deposit category, adding to Betsy’s comment, where you’d, obviously you can’t go below 0%. We still have $2.6 million in the first quarter or annualized above $9 million of interest expense. So as we alluded to before in addition to managing deposits for seasonality, we are also managing deposits to the lowest cost of funds and that relates back to Betsy’s comment that we actually reduced health savings deposits intentionally because even though they were fairly modest in rate they were still much higher than what we have now and what we, the lower rate we expect to have in the future. So, we have so many new programs in the pipeline we continue to be able to progress and bring them in at lower rate. John Hecht – JMP Securities: And the third party -- I’m sorry, the, echo now. The third party HSA, the higher cost average deposits that you’ve been rallying to roll off or be able to encompass portion of the overall deposit base. How much of that do you have remaining to kind of continue at the mix shift there?

Well, I think that next we took a slug. I mean it is a technical term. And we have another slug to take, but it’s not available to us for about 12 months. John Hecht – JMP Securities: Okay. And then on the new deposit affiliations with, I guess with the Genworth and the insurance, I guess, particularly the insurance side, if I take that or is that only occurred that the type of inflows would occur with insurable events and so therefore it’s kind of seasonality and the things that we have become accustomed to with your deposit business are little bit less visible with the insurance relationships, are there some sort of escrow deposits associated with these relationships?

There aren’t any escrow deposits. And the insurance business across the board should be actually pretty stable. There are some unique programs like the ACE program that does have the potential to be slightly more seasonal since that is solely focused on disaster type situation. The majority of our insurance programs where we’ve really innovated a lot in payments is stable primarily due to the focus on workmen’s compensation and disability where the payments are much more predicable, occur every week, every other week whatever maybe in the particular state where the individual lives by state mandate. So the majority of that business should actually be very stable and even. John Hecht – JMP Securities: Okay. And then last question is related to the growth in non-interest income, you talked about the prepaid component growing, I think, 65% or $1.9 million, 120% pickup in HSA fees, any other big line item increases that you guys can provide details on for us?

Yeah, I mean, just I don’t know whether you want to get into this much detail, John, but normally, debit card fees are up. This is interchange income is up 120% year-over-year. Leasing income is up about 20% or merchant income is up about 18%, which is still pretty nice on the base.

And that wonderful category called Other is up 242%.

Yeah. John Hecht – JMP Securities: Did that include the one-time in there?

Yes.

Yes. John Hecht – JMP Securities: Okay. Hey, thanks very much guys.

Okay, thank you John.

And our next question comes from the line of Frank Schiraldi representing Sandler O’Neill. Please proceed. Frank Schiraldi – Sandler O’Neill: Good morning. I wanted to ask about the strategy on the securities book, is part of the reason for not building that more in the quarter, I mean, I know that there is going – some of it is due I would think to potential deposit outflows in 2Q, but also is it sort of a wait-and-see approach on interest rates?

I just think if I may clarify for us that we answer appropriately your question. You are referring now to the excess funds, we had invited those not find their way into securities purchases, is that what you are asking? Frank Schiraldi – Sandler O’Neill: Exactly.

Yes, okay. I’ll go one and I’ll let Paul answer in more detail, but one, they come in – it’s almost impossible to turn it around that fast. We see that they extend beyond the first quarter, we will be investing them, but it’s very hard to build prudently more quickly than we are, because there is a 63% increase over the last year, but Paul maybe you had more to add?

Right. We actually have a few purchases in process that will those settle after March 31st. So we are pursuing what you are advocating. There are couple things that we did, one even though we only increased about 40 million, we had about $50 million of very short-term money market. So, we replaced those with $50 million of five-year paper between 3.25% and 3.5%. So we’re trying – what we’re trying to do is limit and get as much yield as we can, but limit the overall limit invested in securities, so when breaks begin to increase and it appears that the dollar continues to devalue and the rest of the world puts a lot of pressure on the fair that, that seems to – it’s going to happen sooner rather than later that we don’t want to overdo it now, but you’re right, clearly, we have the capacity to build the balance sheet with securities, but I think it’s going to take several quarters until that start raising that we’ll do that fully.

And I think one, you might also remember Frank that we did a capital rate at $55 million net that came in like the 1st of March, so that’s in those numbers as well where it’s only yielding maybe 25 basis points, but on the other hand it just take time to investors. Frank Schiraldi – Sandler O’Neill: Okay, I mean, and thinking about modeling, do you think it’s possible, could we see an increase in the securities portfolio, now talking about averages and the average securities portfolio linked quarter of $100 million or is that way too aggressive?

I don’t think it will be quite that – I don’t think it will be that high. Our current discussions aren’t that high, but it’s possible, I mean, we are considering it – we’re considering what we’re going to do. We actually put as I said before. We added about $100 million net in the – I’m sorry not net, but we bought $100 million of five-year paper, that’s a lot to buy in a period and we’re debating by that we should buy more.

But we also have $50 million in orders that you don’t see on this at this moment, so the growth will be some place north of 50, but maybe not a 100. Frank Schiraldi – Sandler O’Neill: Okay, great. Thank you.

And I guess the other component there is maybe for a moment quality, we just talk to what would a normalized “net interest margin” have looked like if we backed out the excess funds compared to where we were and maybe that helps remodeling tool as well, Frank.

Yeah, if you exclude the seasonality that we have where we continue to be in the 340, 350 range and that’s actually if you look on average for last year eliminating the seasonality that’s where we ended up. And as I said before, we are between the leases and the SBA loans and continued reductions in deposit rates we have those tools to try to improve that. Frank Schiraldi – Sandler O’Neill: Okay, great. And then in looking at the deposit growth in the second quarter, I know it’s always very difficult to gauge these things, but is sort of the best way to look at it for modeling purposes to take a look at what happened last year from 1Q to 2Q or is that that you’ve made enough progress sort of getting some of these seasonally what would be in the summer deposits that’s we are not going to see as much or we wouldn’t think we’d see as much of a outflow.

Frank Schiraldi – Sandler O’Neill: Okay, great. And then finally I just to want to ask about on the fee income side, prepaid card revenues were up obviously very significantly year-over-year, quite significantly quarter-over-quarter as well. I’d think that’s going to follow. There is going to be some seasonality there as well, but is the growth year putting on enough to trump the seasonality of the deposits you think.

No, that’s definitely seasonal and also there are ebbs and flows in spikes of the revenue in non-interest income. Q1 was particularly strong with lot of the tax processing that Betsy had mentioned in her opening comments. So that is the seasonal business. Some of that will trickle into Q2, but enough into Q2 to stave off slide down of the non-interest income and revenue.

I think it’s a template, Frank. We think that comparing the first quarter of the year to the first quarter to another year, second quarter, second quarter is in fact the best way to gauge the growth in the business and we continue to have significant increases, which I think are markers for the growth. But if there is a 40% growth Q1 ‘10 to Q1 ’11 one could assume that kind of growth Q2 ‘10 to Q2 ’11, but on that basis. Because it just in the nature of business in where always asking if anybody knows if this is that are strong in the second quarter so we have been no, you know, exciting me, we have the first, third and fourth quarters under control, but the second quarter it’s a tricky one. Frank Schiraldi – Sandler O’Neill: All right, okay. Thank you.

(Operator Instructions) And our next question comes from the line of Matthew Kelley representing Sterne, Agee. Please proceed. Matthew Kelley – Sterne, Agee: Yeah, Hi.

Hi, Matt. Matthew Kelley – Sterne, Agee: I just want to get back to the margins just I’m clear and I understand exactly what’s your thoughts are there. If you look at the first quarter of last year it was down 75 basis points and snapback 35 basis points in the second quarter. So, roughly half of the first quarter decline is that the magnitude of up and down we can anticipate you think this year as well to get back above 3% for Q2.

In Q2 because we won’t have the seasonality Q1, we will go up, but we will have – we will go approach, we will start and getting back on an increasing mode. Matthew Kelley – Sterne, Agee: I guess the question would be, if you exclude the seasonality, which you are referenced earlier and you at least see a margin of 340, the 350 that’s you had for 2010. What do you anticipate that new run rate is going to be? It sounds like your non-deploying as much of the liquidity?

It’s difficult to say, because we’re growing so much in deposits – in excess deposits, in fact, you said, we are actually looking at decreasing in certain relationships, which we did with the [ATSI] and so forth, which was difficult for us to do before because we didn’t want to do anything that was negative in any sense in terms of turning down deposit, but it seems to make sense to do that. But even with those efforts, it’s difficult within one quarter to say that we can actually manage in 90 days manage it down and even to this day like the deposits are still high. So it’s really difficult to say…

If I may just suggest the way to look at it although I can’t fill in the numbers, it’s really a product of what the excess deposits are. We showed you that number of 800 whatever million dollars in the first quarter, will it be 400 million in the second quarter, if it is then we have one result, I mean, you can figure out the arithmetic, if 300 or 500 is slightly different result and that’s not something we can manage to. Matthew Kelley – Sterne, Agee: Okay, all right. Do you think the full year margin can hold about 3%?

Yeah, that’s what we are saying that… Matthew Kelley – Sterne, Agee: Okay.

Probably within 10 basis points of where we were last year. Matthew Kelley – Sterne, Agee: Okay.

Okay, but how exactly, temporarily it will rollout. Matthew Kelley – Sterne, Agee: All right.

Is a little bit harder to predict. Matthew Kelley – Sterne, Agee: All right got you. The second area I wanted to discuss was expenses on the conference call we had back in January asked about that and some of the guidance and commentary was trying to hold the line of expenses around the annualized rates that we saw in Q3 and Q4 of last year. And it came in a little bit higher this quarter, I mean, what are you anticipating for expense growth rate for the full year?

Well, for changes… Matthew Kelley – Sterne, Agee: Relative to one…

We are going to have some increases – some increased compliance costs. We’re trying to basically continue to build infrastructure that’s scalable and one of the spots we need to do it is in that area. And in other areas, very honestly where we’ve seen growth, because we continue to book to add these programs, but we know we’re going to generate very significant amounts of non-interest income. It’s a judgment call and where we know that we can build long-term value and long term income streams it seems worth it to make those investments. So we continue to do that.

I think that we may get some benefit from a down tick in the FDIC rate. But as you compare based on our analysis of ourselves, but if you compare the FDIC cost in the first quarter of 2011 with that in 2010 there was a significant increase. There was an increase, as Paul was saying, in salaries, one, and I think we gave you some clue that this might be coming because we said we wanted to be able to capture the business that was in the market side as a result of certain disruptions and you can’t do that without having some investments in personnel and it’s front end loaded. Matthew Kelley – Sterne, Agee: Okay.

And there were – the third one that I’m just moving but just looking desperately at Paul.

We have – the FDIC insurance was a big one. We had data processing and insurance. But we are also looking at ways to reduce that in the long term. But as Betsy was saying like in terms of the front end loading cost, if you look at, at our expense base, a significant portion of the salaries and other expenses they are required to generate new business. And there is significant lag between the time we generate that business and we actually award it and enjoy the non interest income.

We were pursuing a branch model. You wouldn’t see this because most of the cost associated with the new branch would be taken over a 10 or 20-year period, but we expensed them all and so you’re in a growing environment, that is a current earnings impact. Matthew Kelley – Sterne, Agee: Okay. So again, half of an annualized rate that we saw in Q3 and Q4 have cost 65 million, do you think we are on track for who have got 10% to 15% expense growth or what type of percent increase do you anticipate for the full year ‘11 versus let’s call it 55 million?

That may not be unrealistic although we are using our best efforts to manage the growth and manage the expenses, but I think we are going to have some expense increase and it can’t be in that range. Matthew Kelley – Sterne, Agee: Okay. Last question for you Betsy, how do you think we are tracking on an ROA goal of 75 to 100 basis points versus where you guys are 30 or 40 basis points right now, what type of timeframe do you think is realistic to get into that more desirable overall profitability range?

It’s a hard question, because again you are in a growing business where the opportunity is today to gain market share. We would hope that within a 12 to 24-month period, we will be meeting those goals. Matthew Kelley – Sterne, Agee: Okay, all right. Thank you very much.

We’ve no further questions in the queue. I would now like to turn the call back over to Betsy Cohen for closing remarks. Please proceed. Betsy Cohen – Chief Executive Officer: Thank you all for joining the call and again for as always you are very good in penetrating questions and we look forward to reporting even greater progress to you next quarter. Thank you.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.