The Bancorp, Inc. (TBBK) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 The Bancorp Inc. Earnings Conference Call. My name is (Sharon), and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will be 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. Now, I’d like to turn the call over to Mr. Andres Viroslav, Director of Corporate Communications. Please proceed sir. Andres Viroslav – Director, Corporate Communications: Thank you, (Sharon). Good morning and thank you for joining us today to review The Bancorp’s second quarter 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 10:00 AM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 71622633. Before I turn the call over to Betsy, 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 risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see The Bancorp’s filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now, I would like to turn the call over to Betsy Cohen. Betsy? Betsy Cohen – Chief Executive Officer: Thank you, Andres, and thank you all for joining us today. We’re talking about the second quarter 2012 results which we think were successful. As you may remember from prior call, this quarter was going to be and was in fact a transition period or a transition quarter for The Bancorp on the deposits side. We exited on at the beginning of May a large customer relationship about which we had been speaking over a 9 months period. And we had promised that we would work diligently to replace the deposits represented by that exit. We succeeded to and even greater extent than we had anticipated and so this quarter and in the net interest margin related to this quarter represents excess funds that we did not yet have an opportunity to invest. Another way to look at the growth is if one were to exclude the exiting partners deposits at June 30, 2011and June 30, 2012 the period end, the growth in deposits would have been $1.2 billion or roughly 70% of growth in deposits. That resulted as I said again excess funds during the quarter which were not which rejected which has the time to invest. If we were to remove those excess deposits we estimate that the net interest margin would have been about $350 million and we think when those funds are invested that that will be some place around $350 million will be our basic net interest margin. We also had at what we believe over six months period if one were to look – begin to look at The Bancorp recognizing the seasonality of quarter-to-quarter analysis at a slightly longer perspective that we had a significant increase in operating earnings. Operating earnings were up over that six months period from approximately $16.7 million to approximately $23.7 million or about 40% increase, that number is – that percentage is a valid rate of growth even if when we’re looking at it quarter-to-quarter basis. If you took a slightly longer view and look back two years, because that’s we have been discussing the increase in operating leverage expressed in operating earnings was one of our goals over this period of time, we’ve had over the two-year period it’s about an 85% increase though. So, the year-to-year 40% is not out of line. The 6 months analysis which is included in the press release looks like credit costs a combination of OREO losses and provisioning, which is consistent so that as we think those are good and meaningful numbers. Over the significant increase in deposits and the lowering of our cost of deposits – average cost of deposits from 50 basis points to 37 basis points provides us with an opportunity over the course of the next several quarters to look at our portfolio of deposits and hopefully to a prune as we say those highest cost deposits from the portfolio and thus have an opportunity for further reduction in cost. On the loan side, we had a loan growth and securities growth and asset if you put them together security is being a much more rapid way to deploy our excess deposits. We had a growth in both of those areas aggregating to about an 18% increase in the earning asset component. All of this resulted in an increase not to the level we would like, but certainly an improvement in both our return on average assets and our return on average equity on a year-to-year basis. The credit side reflected our disposition of some OREOs, so a reduction from about $7.5 million to $4.9 million in OREO, but a decrease in the loans 90 days past due from about $4 million to $3 million, but an increase in the non-accrual loans to about $24 million. This is part of the cycle that the increase in non-accrual loans was a result of the addition to that category of one significant borrower of family-owned business that it’s going through a period of liquidation. We don’t anticipate loss on it, but it will appear as it works its way through in the non-accrual category. I think that each – the growth is moving back now to the growth in deposits and the business itself and Frank will give you more granular information about the portfolio reflects a growth really across our lines of business, and that’s what it really pleased us when we did our analysis of what we think was a very successful deployment of our efforts. With that deployment, of course, comes an expense and what you might have seen – what you do see in terms of year-to-year increase in non-interest expense is really expense being focused on what will be earning opportunities in the future. But as we have discussed in the past, the expense received the earnings and so you see in a growing business always that expense line growing. Frank, would you like to talk about the growth across the lines of business? Frank Mastrangelo – President: Absolutely. Thank you, Betsy. As Betsy noted earlier in the call, deposits were up across the lines of business 69% year-over-year, excluding the large affinity group that we existed from in the second quarter. That’s being driven by growth across the board in business lines that the top units or prepay deposits grew 177% year-over-year, again excluding that large affinity client or merchant group grew deposits 148% year-over-year. Our healthcare deposits continue to grow at a very healthy clip, 21% year-over-year coming off of larger and larger base every year, but constant growth rate there, wealth management 37% year-over-year. And while those business lines continue to contribute low cost statements to key deposits for the institution, many of them are also generating non-interest income. For example, our prepaid group 61% year-over-year growth in non-interest income, our merchant group primarily driven by growth of the ODFI, the ACH origination business, 37% year-over-year. And if you recall I think a year ago or so we talked about shift in strategy related to the health savings accounts where we were weighting the dynamics of that more towards non-interest income, then deposit generation fees in that area were up 93% year-over-year. Betsy Cohen – Chief Executive Officer: Thank you, Frank. I think as Frank touched on of some of our lines of business like wealth management provide us with an opportunity to have loan growth as well as deposit growth. And we have targeted as we have discussed before several lines of loan growth to focus on. One that’s clearly and is problematic and clearly integrated into our wealth management group and as security backed lines of credit did grow significantly. And I think even more significantly than the absolute balance sheet growth was the growth by more than 35% of the commitments. So, it takes time for the commitments to be taken down and we think that that’s a very positive sign. We have been focused on leasing and leasing as line of business grew year-to-year about 10%, so above our average. We have been reducing our construction loans and lease. 1-4 family range and so that its drag upon portfolio growth as a whole, but we think it’s the right thing to do. And the SDA program has shown significant growth on a small base, but significant growth over the course of the last year indicating that that loan lead time cycle of putting on government guaranteed loans what is that evolving into a more consistent pipeline and so we believe that you will see more growth in that area over the course of the next year. With that, I’m going to ask (Sharon) to ask you for questions.

Thank you. (Operator Instruction) Your first question comes from the line of Matthew Kelley with Sterne Agee. Please go ahead. Matthew Kelley – Sterne Agee: Yeah, hi.

Hi, Matt. Matthew Kelley – Sterne Agee: Just the couple of follow-up questions, Frank I was wondering what was the gross dollar volume in the quarter?

Sure Matt. Gross dollar volume in Q2 for the prepaid group was $6.5 billion. So, we’ve exceeded $15 billion for the year in total through six months. Matthew Kelley – Sterne Agee: Right.

Okay, I think its important thing of about that number is that that equals the entire gross dollar volume for 2011.

Yeah, exactly it exceeded actually by about $1 billion. Matthew Kelley – Sterne Agee: Right, right, okay, got you. And how should we be thinking about year-over-year growth in 3Q I mean you guys were up 62% in the second quarter 90% in the first quarter. I assume that that is starting to moderate that as the numbers get a little larger, but maybe give us a little guidance of new relationships and kind of what’s in the pipeline and where we are in the cycles of turning initial contracts into actual revenues?

I think we’re still in the middle of that cycle. We still have new relationships that are being boarded, haven’t began to generate volume and therefore revenue at this points are still generating expense only let’s say. And every quarter we continue to layer on new relationships like that. And then as we’ve talked about in the past, we’ve got the dynamic every quarter as those new relationships we have boarded continue to mature. We’ve got that second year period, so to speak first year where we are integrating board’s second year, where the volume matures, we have a substantial number of relationships that are actually in that position right now. Matthew Kelley – Sterne Agee: Okay.

I think, Matt, it’s hard to make a percentage prediction partially because a delay at 30 days in launching or for a technological reason or a very short period of time impacts that percentage so greatly, but it’s really not meaningful in terms of the business as a whole. Matthew Kelley – Sterne Agee: Okay, got you. And then on the deposit side, deposits came in much stronger than I have been looking for during the quarter. In the past, you talked about a goal of kind of reaching year end 2012 having total deposits on par or slightly ahead of where you ended 2011 basically making up for the lost, affinity relationship, but it seems like you could be well ahead of that? I mean, could you…

Well, we are well ahead of that now. Matthew Kelley – Sterne Agee: Right, right. So, that guidance is obviously going to be resolving?

I agree with you. And I think the best what I was trying to allude to earlier in my comments, because it has both a long-term positive impact and a short-term what one could consider margin compression being negative in that sense aspect, but I think you have to really look at it over the long-term. I think it speaks to the health of the business. Matthew Kelley – Sterne Agee: Sure. The security is up $100 million, could you give us a little bit of the sense of what you bought and the yields that those are coming in at and the pace of securities purchases. I mean, it seems like you are going to have just very large cash balances and liquidity as deposits continue to grow at $1 billion plus a year, a very healthy rates. Could we see an acceleration of the rate of purchases even higher than what we saw in the second quarter, a 20% sequential?

Sure. Paul, would you like to speak to that?

Sure. The first question was what is the $100 million of growth of net growth comprised of and about 60% of it was in securities that were variable rate securities, including insured student loans and a few other miscellaneous securities. The balance of it was in 2 to 3-year mortgage-backed securities. We were able to get those in the 1.5% range. So, that it approximates – it gets close to 1% ROA in the current rating environment based on our cost of funds. Matthew Kelley – Sterne Agee: And what was the issue on the student loans?

On the student loans, it was 1.5% or slightly higher. Matthew Kelley – Sterne Agee: Okay.

But on a variable basis. Matthew Kelley – Sterne Agee: Yeah.

Yeah. Matthew Kelley – Sterne Agee: And in terms of the pace of purchases in the back half of the year, how should we think about that?

Well, we have, as Betsy noted, we had good S block growth this quarter and we are anticipating more loan growth through the years – through the year, but we also obviously had the capacity to buy additional securities and we are actually looking at those right now. It’s difficult to project the exact amount, but it wouldn’t be surprising if we are able to do another $100 million. Matthew Kelley – Sterne Agee: Okay. And then just a little bit clear on the discussion about where the margin could be if cash was fully deployed. Basically in the current quarter, you had $950 million of excess at 25 basis points stead funds, the full deployment of that, I call it, 2% would get you to kind of the low type of 3s, but again, that’s $950 million and this quarter you put on $150 million of loans and securities combined. So, do you expect to see accelerating pace of the earning asset growth in both loans and securities combined. Is that what we are looking at and?

Absolutely. Matthew Kelley – Sterne Agee: Okay.

Yeah. And that’s why our scope to the commitment growth for the S block, for example. I mean, we have type 1s in other areas, but if one were to only look at numbers for the S block, which are significant, we had about a 30 something percent increasing commitments, which will translate into a balance sheet growth over the course of time. So, it’s a significant increase and we look forward to it growing even further as the relationship that we put on during the course of the last 12 months mature, those relationships with the financial advisors in those companies mature and the financial advisors have an opportunity to act on them. Matthew Kelley – Sterne Agee: Okay. I’ll hop out and get back in if I have more questions. Thank you.

Thanks, Matt.

Thank you. And the next question is from the line of Frank Schiraldi with Sandler O’Neill. Please proceed. Frank Schiraldi – Sandler O’Neill: Good morning.

Hi, Frank. Frank Schiraldi – Sandler O’Neill: I just have few questions. I wanted to ask Frank on the gross dollar volumes, I think in the first quarter, you gave expectations of $20 billion to $30 billion for the full year, and I think you firmed that up a bit in some of your more recent presentations, but just wondering if now that you got another quarter under your belt, there is any change to those expectations?

No, I don’t think so. I think the range in you are right after the last earnings call, we started tightening that range to $24 billion to $26 billion target for gross dollar volume for 2012. I think that’s still the right target for the business. Frank Schiraldi – Sandler O’Neill: Okay. And then deposit growth continues to be obviously very strong as we have talked about, just wondering your thoughts going forward in the back half of the year, if Betsy, if you expect deposit growth to continue to outpace sort of what you can do on the loan and security side?

Well, I think it is there now. And so the question is how quickly can we carefully and intelligently deploy it. We are doing, I think, our best in terms of growing both loans and deposits. I don’t think we – excuse me, loans and securities, I don’t think we can grow them as quickly as the first half of the year indicates with growing deposits. What I subsequently said was that this gives us an opportunity to prune the deposit portfolio and take out some of the higher cost deposits. So, that may give us some shrinkage, but some lowering of cost, and therefore, some better rationality around the loan/security to deposit ratio. Frank Schiraldi – Sandler O’Neill: Okay, great. And then I know the affinity relationship that you exited was quite seasonal in nature. Are the deposit balances still quite seasonable in nature or no longer?

Well, there is – I would distinguish, let me answer it a slightly different way, I would distinguish between volatility and seasonality. There is always going to be in our business some seasonality. Many of the business lines or relationships, for example, are focused on first and fourth quarter business cycle. So, you are not going to be getting tax refunds, which is a business for us in the third quarter, I mean that didn’t happen. So, that seasonality and that will continue to be inherent in the business or reflected in the business. What we see, and you’re right that there was seasonality to the exiting partner, and that altered way of seasonality will be growing, but even more importantly, I think Frank, the volatility will be going, so that we can better assess what our investible funds over the course of the year and we won’t have the huge spikes, resulting from seasonality, although we don’t have, as I say continuing reflection at the business cycle. Frank Schiraldi – Sandler O’Neill: Okay. And then just finally on expenses, I wondered if given we are halfway through the year now, you can sort of have some expectations on where the non-interest expense line could end up in the back half of the year. Should we expect it to be sort of flattish with the second quarter or any thought – any color there will be helpful?

Sure. Paul, would you like to?

As Betsy alluded to earlier, we do have continuing opportunities and though I think you are going to see some increases, we are doing our best to limit them as much as we can.

But we think Frank that we should be investing at this time as we have been in future income opportunities though that if you look at the rate of growth of non-interest expense year-to-year it probably won’t be much of that. Frank Schiraldi – Sandler O’Neill: Right, okay, understood. Okay, thank you.

Thank you. I would now like to turn the call over to Betsy Cohen for closing remarks. Betsy Cohen – Chief Executive Officer: Thank you, Sharon and thank you all for joining with us today. We were delighted to be able to bring you a quarter in which net interest income, excuse me, net interest income, and non-interest income were both up resulting in significant increases in earnings per share. And if one were to look at those numbers on a six months basis, not only were operating earnings up significantly, but earnings per share on a favorable share count more than doubled. So, we think that we are on our way to good performance as reflected in those numbers. Thank you again and we look forward to your joining with us next quarter.

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