Bancorp Inc (TBBK) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the quarter 3 2005 Bancorp Incorporated earnings conference call. My name is Michelle (ph) and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

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 a further discussion of these risks and uncertainties, see The Bancorp Incorporated 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 Incorporated 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 occurrences of unanticipated events.

I would now like to turn the presentation over to your host for today's conference, Ms Betsy Cohen, CEO of Bancorp. Please proceed, ma'am.

Thank you very much, Michelle, and good morning to everyone. We're here to share with you a quarter of which Bancorp is very proud. We have given you in the financial highlights, really for the first time I believe, a year-to-year comparison because we think that perhaps September 30th, 2004, which was almost three quarters after our initial public offering, provides some guidance as to the ramp up of our business. And therefore, we can look to a year-to-year comparison. And in that comparison we show both growth in balance sheet items, such as loans increasing by better than 76%, and assets growing with an increase of $306 million from September 30th, 2004. But also increased earning capacity.

Return on average assets for the three months ended September 30, 2005 was 1.22, up from -- for the three months, up from 0.66 for the third quarter ending September 30th, 2004.

I think these are numbers which reflect the ongoing scaling of the bank, the growth of the bank, the increase in business flow and therefore, I'd like to focus you in terms of looking at the earning capacity of the institution on the income statement because I think that -- the operating earnings -- because I think that that's really the measure of the growth of the bank.

While I'm doing that I'll just make a small correction. There was a typo in the actual number of shares outstanding. If you look at the press release on the last line or the next to the last line before it says, 'conference call webcast' you'll see the number 13,000,958. That number should be 13,000,588 and that doesn't -- it's a rounding error and did not make any difference in the earnings per share. But we just want to present you with an accurate bit of information.

This was a quarter in which we continued to clean up our capital structure, as they say. And, therefore, attempted to get the maximum conversion that we could both of warrants, and in this quarter, preferred shares. And therefore, you see a preferred share premium that we paid to accomplish that of $459,000 for the quarter.

If one were to eliminate that one-time expense, and really be focused on operating earnings as they compare to September 30th, 2004, even with an increased number of shares, you'll see that we earn $0.16 a share as opposed to $0.05 a share, and for the 9 months earned $0.33 a share as opposed to $0.10 a share.

We think that this significant operating-- results of operating leverage is also expressed in the decrease in our efficiency ratio, which we have been saying to you would be in the high 50s by the fourth quarter of '05, and indeed was in the 58.3% as of the third quarter. So we're a little bit ahead of schedule on the operating leverage front.

And if you were to look at the 9 months, and I think that that's really reflective of where we've come, it's for the 9 months, 61.1% as opposed to 80% plus for the 9 months in 2004. And so you see that we have moved that steadily along, scaling the institution as we shared with you our goals.

Although the return on average equity is clearly not where we'd like it to be, if you take a look at it compared to 2004 you'll see that it's more than doubled from a little under 3% to almost 7%. So we're making significant progress.

During this quarter the flow of our funds, and we must share with you that virtually all of our businesses are seasonal with the third quarter being the low quarter. But that's particularly true in July and August, but virtually the growth both in demand deposits and in loans generally comes in the third month of the quarter. We had an unusual quarter this quarter in that -- excuse me -- during, early on in the quarter we closed a significant number of loans and had them on our balance sheet as you can see from the average balance sheet that we presented to you.

But on the deposit side those deposits were mostly realized in the month of September so they are not part of the averages. This allowed us though a very efficient balance sheet, and contributed to the uptick, significant uptick in net interest margin from approximately 420 in the linked quarter -- in the second quarter of 2005 to 477 in the -- I had to look twice myself, in the third quarter of 2005. And there are no promises that we'll be able to sustain that level. But as you can see we're working very hard on maximizing net interest margin and are optimistic.

We said, I think, in the second quarter that it would be above the 420 and we thought someplace between 420 and 544 which is what it was in the first quarter that we're able to achieve because of the flow of funds, a little bit better result.

One of the elements of our business is that -- and it's one on which we focus, is that deposit gathering takes place often through relationships, and therefore through our private-label banking program. That private-label banking program this quarter added $30 million in deposits to -- in demand deposits to our balance sheet, and that was all done in September because our private-label partners were on vacation in July and August.

So we think that that's a good measure of the kind of growth that we will be seeing over the course of the next several quarters. We try to provide you with some metrics as to our lines of business. We like to look at with you the percentage that -- of deposits, core deposits for example that the private-label affinity banking lines of business represent. And we can share with you that as of the end of the third quarter of 2005 that represented slightly over 38% of our core deposits. So we think it's just a further confirmation not only that our project client business but our private bank business, Philadelphia Private Bank, our community bank is growing significantly.

But also that our business model which gathers core deposits from private-label banks is also -- private-label relationships is also moving forward significantly. Frank Mastrangelo was going to talk about the traditional metrics that we provide to you, and the number of lives covered in healthcare and transactions in the ACH business which is growing, and assets under management, the growth of assets that we have private-label relationships with and the referral of flow of loans from that source. Frank?

Thank you, Betsy. To date we have signed healthcare relationships that cover 20 million insured lives nationally across the country, and that is, at least since the last call, up to 4 million lives so we've added 25% to that significant uptick in relationships and lives covered there. We ended -- to date we have 14,231 HSA accounts opened. We do have a number of these accounts that will not and cannot fund until some time after the new enrollment year begins. And we do believe that we will be opening a significant number of accounts coming here in the fourth quarter.

Our Private Client Group has assets under management that those groups are customing of $37.5 billion in total assets. That group continues to grow both deposits and loans bringing in a little over $14 million in deposits in the quarter. We also made $32.8 million in new loan commitments and still have a $35 million loan pipeline in that line of business. So that is continuing to grow and grow very well.

Our merchant processing line of business also added almost $17 million in deposits during the quarter, and our ACH transactional volume grew there from 1.3 million transactions for the quarter last quarter to slightly over 2 million transactions this quarter. It's also related to a growth in non-interest income of 50% there, the ACH business.

Our merchant volume was relatively flat at 401 million, $401 million in total volume with Q3 seasonally being the weakest quarter that we should see in that business line. We expect a seasonal spike in Q4 and into Q1 which we believe will be very, very strong quarters in that line of business.

We added some significant -- thanks Frank. We added some significant relationship in the merchant area, and you should be seeing press releases on those within the next week to two. So we're not going to share with you the names of those clients but you'll see them very shortly. And we hope be impressed by their size and our capacity to grow with them.

I think that with that overview I'm going to ask Michelle to open this for questions. Go ahead.

(OPERATOR INSTRUCTIONS). And your first question comes from the line of Steve Covington of Stifel. Please proceed.

Good morning Betsy, and everybody congratulations on a nice quarter.

Thanks, Steve.

I guess Betsy regarding the convertible preferred how much of that is left?

There are 129,000 shares held primarily by a single holder who chose not to convert and get the premium because that broke, which is the obligations of holdings for a year. So that's --.

Is that $10 dollar -- $10 dollar liquidation preference?

Ten, yes $10. I wasn't sure if it was 10 or 11. Yes, $10 liquidation preference.

Okay, thank you. And then I guess it sounds like from your comments --?

Steve, if I could just augment my response to you by another number which might be helpful. If none of those are converted we expect there to be instead of $192,000 in expense as there was this quarter, 171 in premium and 21 -- 171 in dividends sorry, and this is outside the 459, and 21 in allocation, we anticipate that there'll be roughly $20,000 replacing the 192. So that gives you some feeling for the impact of this conversion.

$20,000 replacing the entire 192?

That's correct.

Great. Okay, I guess secondly from your comments it sounds like you have roughly $145 million in your core deposits are from the private-label bank which is that 38% number that you referenced.

Yes.

Roughly what percentage of that has come from HSAs, and I guess maybe what are some of the other major private-label affinity groups that you're garnering those deposits from?

Remember that the HSA accounts that we're opening, and those that we've opened since probably July 1st, are really not funding until 1/1/06.

Okay.

Because that's the planned year. So that number is probably not indicative of what-- of the funding that you'll see in many of those accounts. Probably half of them are in that category. But we have about 10% of that number coming from HSA. On the merchant side in aggregate, what's the aggregate number? 65% of those, of the 38% is from merchant and the balance is a little under 20% from private clients.

Okay, thank you and I guess lastly the margin was clearly --?

We like to call it spectacular.

It was very nice. It's much better than we expected. But I guess given what you see, and I know you hesitate to comment on where that might end up, but it sounds like you're somewhat hopeful that somewhere in the range where it's been the last couple of quarters is a reasonable guesstimate to use.

You know, we don't promise 477 in the fourth quarter. We can tell you that. But we think that we continue to believe that we'll be between that 420 and 454 for the fourth quarter.

Great. Thanks.

Thank you.

Your next question comes from the line of Tom Doheny of Sandler O'Neill. Please proceed.

Good morning everyone.

Hi, Tom.

You know, I guess the first thing you've -- following up on the margin, you obviously have somewhat limited disclosure on individual line items there. But can you tell me how deposit costs performed in the quarter particularly?

Was it because we had four basis points?

40 basis points.

Okay. On average, deposit cost was up some 40 basis points.

From the second quarter?

From the second quarter, yes.

Okay and then on the fee income side, you mentioned, I guess the drop on a linked quarter. Some of that's really -- would you call most of that drop really attributable to the seasonality of the --?

Absolutely. We are in the retail business, and retail just really doesn't get started again until the end of September.

So that's really in the merchant credit card line?

Absolutely.

And on the -- with regard to loan growth you obviously went through --.

I'm sorry with regard to?

With regard to loan growth you went through some of the dynamics in terms of what impacted you on a end of period versus on an average basis? But it looked like, I guess versus the recent run rate anyway, there was certainly a little bit of slowdown in loan growth there. Is that kind of seasonality as well, or is there --?

Well we had a couple of unexpected pay-downs. Remember you're looking at net asset growth. And I think that we've been estimating that we'd be in the low 60s or even the high 50s because we just had a few loans pay off at the end of the quarter that we didn't anticipate.

But if you take a look at averages, Tom, you'll see practically all of that was right in the averages. It went from 530 to 583. So they were on over a long period of time.

And on the -- I may have missed this, but the actual health savings account deposit number? I know you gave the -- I got the account number there but the actual deposit number?

14.2 million -- no, I'm sorry. I had the wrong number, I'm sorry. 14 -- I'm sorry, I wasn't that far off, 14.1 million.

14.1 million.

And about 40 to 50% of those accounts will not fund. Well they were opening them. They won't fund until after the first of the year.

Okay. To go back to -- I mean for the health savings account business I think the 14.1 million that's actually a decline from the second quarter, is that correct?

No, it's -- the second quarter was -- oh okay. Yes it might have been, 14.3. No, I'm sorry, 14.0.

It's 14.0 this quarter? 14.0 last quarter?

Sorry, it's absolutely flat. Sorry, it was 14.1 and 14.1.

And again, obviously a lot of that business is seasonal and you mentioned a lot of those deposits or a lot of those accounts will fund towards the beginning of next year. But in terms of overall number of accounts on the HSA side, fourth quarter should really be --?

Absolutely, fourth quarter should be chaotic or at least it should be very, very busy. Because, in fact, that's when the healthcare business, it does a little bit of business in July but does the bulk of its business in the first quarter of the year.

Okay.

The fourth quarter sign-up for the first quarter date.

Great, and then turning to the credit side it looked like you had the first meaningful -- you know meaningful net charge-off this quarter. Can you take me through what kind of credit that was and what you're experiencing on the credit side?

We can tell you that we have no loans that we anticipate further losses on. This was a loan that arose, I'd say 2 years ago would be my best guess. Maybe 3 years ago, and was a result of a rapid deterioration in a particular business where we had securities supporting the loan from a qualified guarantor but in which we decided to take some write-off because we could just use as the legal expenses in those non-productive times which is going to offset whatever loss we took. So we did actually have collateral to cover all of the loan outstanding but just decided to not support the legal profession any further.

What portfolio did this, was someone said, straight C&I, this is a C&I credit I assume?

Yes.

Okay.

This was C&I.

And can you give us a sense of the size of the credit itself?

$205,000.

Tom that was our one non-accrual that we showed last quarter.

Great. Good, thanks very much.

Your next question comes from the line of Joe Stephen of Stephens Capital. Please proceed.

Good morning, Betsy.

Hi Joe, how are you doing?

Very well thank you.

Good.

I've got three questions. First of all on the margin side, a lot of people seem to be having some difficulties in this quarter, and obviously your margin was very strong. Can you tell us a little bit about how your company is positioned on a go-forward basis assuming if that continues to move rates? Because it obviously looks like you're positively GAAPed and I'm sure that's a very short statement but there's a lot more complexity to it than that. So can you comment on that? That's question number 1.

Question number 2 is your deposit growth is really strong. Could you tell us or can you tell us how much of the SEI was of the growth this quarter?

And then the final question is three, on the construction portfolio. Again, that was very strong growth. Just give us some color on that? Thanks, and good quarter.

Thanks very much. We are positively GAAPed. We can, from our point of view, the increases in interest rates are to our benefit, $100,000?

Okay 90,000 to $100,000 a quarter. We did not have deposits, significant deposits from SEI. I think that was your question?

Correct.

What we did have was excellent loan referrals growth, and we see enormous traction within SEI and within our other private client groups. They're not all of the referrals which is running today at a rate on an annualized basis, commitments, new commitments, they're running at maybe 125 million to $150 million a year on an annualized basis, and the pipeline would represent that kind of growth recognizing that many of these are lines so you don't have 100% outstanding on day 1.

But they did not represent significant deposit -- SEI did not represent significant deposit flow. Private Client represented growth of a little over 14 million. But it did not come from SEI. And the third question, oh on the construction loan? Our area continues to have very good statistics on the single-family housing construction market. There was a recent meeting in Washington in which there was a review, a national review, as well as selected area reviews.

And so remembering that those are loans which are generated by our community bank and therefore are within our service footprint, they're one, talking primarily to the mid-Atlantic area, Philadelphia particularly and the surrounding counties are not anticipated to feel a down tick of any sort until well into 2007. And then they're predicting that there may be some flatness for a 12-month period. So we're seeing very strong demand. We also have a phenomenon within our service area related to Philadelphia and there's tremendous growth within the Center City area, but there's been -- there's 6,000 or 7,000 units under construction. And so this provides us with an opportunity.

Okay, thanks Betsy. Good quarter.

Thanks.

(OPERATOR INSTRUCTIONS). Ma'am, you appear to have no further questions at this time.

Well I thank all of you for your good questions, thoughts, and we look forward to reporting to you again at the end of next quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.