Bancorp Inc (TBBK) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2007 The Bancorp Inc. Earnings Conference Call. My name is Annie and I'll be your coordinator for today.

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When used in this conference call the word 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 see the Bancorp Inc. 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 Inc. 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 anticipated events. I would now like to turn the presentation over to your host for today's call, Mrs. Betsy Cohen, Chief Executive Officer. Please proceed, ma'am.

Thank you, Annie, and welcome to all of you to The Bancorp first quarter 2007 earnings call. I think we'd like to start today with a focus on the earnings which as you see from the first financial highlight increased by 25% to $0.25 on a fully diluted basis for the quarter ending March 31, 2007, from $0.20 a share for the comparable quarter in 2006.

I might add at this point that earnings increased despite the fact that during this quarter and really beginning in the fourth quarter of '06 we began to add personnel to build out our markets, and so you may have seen an increase in the non-interest expense line disproportionate to our usual growth in that line item. But -- and reflected therefore in the efficiency ratio which ticked up a bit from the fourth quarter of '06 -- the fourth quarter of '06. But we feel that this is the moment to seize on what we see as a great advantage in our relationships and to build them out and to gain market share not only in terms of the number of relationships which now number about 140, but also the market penetration in each one of those relationships.

Deposits and loans each increased by roughly 45%. If you take a look at the increase in loans in the first quarter of 2007 I think it's important to reflect on what was for us an usual quarter in which we had $77 million in repayments in contrast to $25 million in the fourth quarter of '06. And on average of about $31 million per quarter during '06 and you really do have to average stock because it bumps up and down.

We view this as an unusual rate of repayment, and anticipate much lower numbers and therefore since -- if we were to take the first -- the gross production during the first quarter of '07 and compare it to the gross loan production for the first quarter of '06 which were virtually identical you'll by arithmetically should be seeing larger increases in the net.

You may remember back, or some of you may not, to 2005 where for that fiscal year deposits grew at a rate which was higher than loans. During 2006 we reversed that and loans grew at a rate that were higher than deposits. What we see in the first quarter of 2007 is a spurt in deposits. You can see from the Fed funds line at the end of the quarter that we're not convinced that on average all of those deposits will stick with us, and since we had repayments, significant repayments at the beginning of the quarter and were using the funds against short-term investment rates it impacted the net interest margin. On a more normalized quarter we believe that that net interest margin would have been north of four.

Our health savings accounts have grown during this quarter and Frank will speak more specifically to it but we are growing at a rate that is 1.5 times the national rate of growth. We ended up with $83 million in deposits and there is a study which shows us to be seventh in the country as an aggregator. We continue to believe this is an excellent source of deposit gathering. And so are looking forward to expanding it. The other interesting deposit strategy which has begun to play out and we've been talking about since we introduced it at the end of the second quarter of 2006 is remote deposit gathering in which we have a brand or what we think of as a brand called, The Branch in a Box, and that has been rolled out to a number of customers over the course of the last year or almost year.

This quarter we gathered $130 million in deposits through that source and that's in contrast to in April of -- in the second quarter of 2006 which was the introduction $13 million, almost $14 million. But most significantly we have identified groups of users such as financial advisers and have begun to roll out the program to that group, those groups, so that we believe that we will be gathering new deposits, accessing new deposits, we had not previously been able to access. The first round of -- the strategy for the first round of deployment was essentially to save expenses in terms of the way it was gathering deposits through the use of paid for, UPS or other mechanisms, and we did accomplish that. And the second phase is obviously the gathering of new deposits which we think we're on the way to doing that.

On a linked quarter basis net income grew at a little over 12%. We look forward to continuing to -- which would bring us in line with the estimates as they go forward. We continue to work hard at achieving that kind of profitability. You can see in the ratios that this was a quarter in which return on average equity popped up a little bit, but return on average assets declined a little bit.

We have continued our pristine, we think, performance in terms of asset quality ratios. Non-performing loans to total loans is down from 0.04 to 0.03%. Non-performing assets to total assets 0.02 to 0.03 and this is March 31 quarter 2007 to 2006. No non-accrual loans and loans 90 days past due but still accruing interest is a very modest and stable number 279 versus 270 for the quarter a year ago when the portfolio was significantly smaller.

I think I'm going to stop there for a moment and ask Frank to report on some of the Affinity information and then we'll come back and I'll finish up. "Frank?"

"Well thank you, Betsy." As Betsy mentioned the Healthcare group continued to grow very, very strongly. We ended the quarter in excess of 60,000 accounts booked and almost $82 million in deposits gathered. We continued to see very strong account inflows and dollars also. I think one of the more interesting statistics available really is that we see the average balances of these accounts sitting over $250 per account higher than this time last year. So we're certainly seeing the layering on of continued deposits in our Healthcare group and our Healthcare division and continue to see the strong influence of hospice there.

Our private client group in the first quarter of 2007 had a very strong quarter related to the booking of new commitments where slightly over $33 million in new commitments were made. The loan outstanding growth contributed by the private client segment was in the $6.3 million range. Many of those credit facilities that were established late in the first quarter we expect to draw sometime in Q2 related to tax liabilities that ultimately would be paid in the April timeframe and that's consistent with what we've seen on a cyclical basis year after year.

One of the other more interesting things, I believe, is the merchant processing segment whereby the first quarter of 2007 merchant processing volume was up about 10% over the fourth quarter so we had a seasonal decline to absorb in that line of business first of all. And secondly because of new business production there we're actually able to increase the amount of volume processed in that business line into the first quarter of 2007 and it speaks well to the growth prospects in that line of business throughout the remainder of this year.

As Betsy mentioned we still significant growth in the remote deposit platform. In the first quarter of 2007 we processed 63, almost 64% more transactions than we processed last quarter in the fourth quarter of 2006, and the amount of deposit flow through on that platform was in excess of $130 million for the quarter, over 44% increase over what was processed in the fourth quarter of 2006.

"Thanks, Frank." That was Frank Mastrangelo, President of the company. And I might just underscore one statistic that Frank touched on and that's with regard to the commitments that were generated by our private client group, loan commitments, excuse me, and they are almost $250 million in total commitments, year-over-year that's an increase of 86.4%, quarter-to-quarter almost 16%. And outstandings themselves well many of them await activation and draw down until the second quarter in connection with taxes. Outstanding were up 117% so that as we add as we are financial advisers to our platform we are seeing significant year-to-year and quarter-to-quarter growth in this area.

I think I will stop there and open the floor, Annie, or the phone rather to questions.

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And your first question comes from the line of James Abbott with Friedman, Billings, Ramsey.

Hi, good afternoon.

"Hi, James, how are you?"

I'm doing very well, thank you. I was wondering if you could give us some additional detail on, and I understand that there are payoffs from time to time and they can be somewhat lumpy. But could you give us a sense of the number of loans that were maybe greater than $10 million that paid down during the quarter of that 80, roughly $80 million?

I cannot give you that information at this time, but I'll be glad to give it to you off line.

Okay, would you say that the majority of the loans that paid down were larger, medium-size, smaller?

"James, I would have to assume that they were larger loans that paid off right after the 1st of the year as sometimes they do." I think you'd need to remember although for many of us remembering back four months is like remembering a life time in this business. But remember that at that time there was much greater uncertainty about whether or not the Fed would continue to raise rates or they would lower rates or they would do this or do that. I think there's much greater visibility on it today, and that may have led and you have to remember that a payoff in the first quarter of 2007 really has its genesis in the fourth quarter or third quarter without our knowledge, but with the borrower's work and thinking of 2006.

So I can only tell you that we don't see this as a pattern but as a blip and our experience during the first month of the new quarter, which is just where we are today, is that I haven't seen any big payoffs.

Okay, would you -- could you characterize for us maybe also the amount of loans that are maybe at risk for this in the future? Obviously the future is uncertain and I'm not going to hold you to this, but if you can give us a quantity of how many loans there are that are greater than $10 million in the portfolio that might with loan to values less than 65% or something those seem to be the ones that are usually susceptible to this type of activity?

Well I cannot do it on this call, but we'll develop those statistics for you.

Okay, okay do you have any idea as to the seasoning or how old these loans that pay down were? Were they relatively long dated? I'm just trying to get a sense as if there's any sort of trend that is developing?

We do not see any trend. We looked at every one of these loans we understand why the borrower paid them off. But it's not a consistent reason and we don't see a trend.

Okay, okay but you don't have seasoning statistics on it?

Not with me, no.

Okay well maybe we'll circle back off line and get these.

Sure, we'd certainly be happy to do that.

The other thing that I was going to ask and these are sort of macro questions is on the expenses relative to the assets that you currently have, the initiatives that you are in the process of, would you characterize whether the company is ahead of its expense?

Expenses are ahead of the growth.

Okay.

Because you have to invest in them before and I mean we have because we have a number of people in, for example, the position of a loan officer we can tell you that within the first six months, after six months of a loan officer being with us that loan officer will be a profitable unit. But many of these are not positions where we have 17 or 20 of them across the company and so our predictive powers as to that kind of -- with that kind of exactitude are sometimes a little bit shy.

Okay so you feel fairly comfortable that based on your initiatives, your staffings, what I guess another way of asking is, is expense growth going to ramp up or accelerate?

No, we did a big hiring because we had visibility on a number of programs that needed additional personnel to take the very good work that had been done to consummate that three-year contract and all of its service standards, and all of the rest of it and make it worthwhile in terms of balance sheet and income contribution.

Okay, okay so this is to support an initiative that was in place two or three years ago?

No, no, an initiative that we closed subject to a three-year forward contract because that's our usual term.

Okay, okay I think I understand it. All right well that's helpful and I'll step back for now.

Okay but not for long.

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And your next question comes from the line of Matthew Kelley with Sterne, Agee.

Yes, hi, I was wondering if you could give us an update on the residential construction loan portfolio and just kind of trends you're seeing in that. Whether or not there's anything of concern or pockets of weakness or just some commentary on that first?

Sure, I think that the residential mortgage construction portfolio is with very seasoned borrowers. I think in this loan size remember all of these are recourse loans and we're fortunate that at this point in the sales cycle that many of the seasoned builders, and really what we have are seasoned builders, have had the opportunity over several years to gather some liquidity.

What we see is that they're behaving very rationally. That they are continuing to sell houses. That the sales are good on a comparative basis. It's too soon because this is the season for selling -- it's too soon for us to be able to tell you whether there are 30 day -- the houses are going to be 30 days longer on the market or 60 days longer on the market. We don't know that yet because we haven't been through the spring sales cycle with them this year. But by and large we're monitoring this sector very closely and feel very confident about not losing any money in it.

Okay then just on the private-label banking business it's my understanding that there was kind of three layers within SEI that the rollout of your products would go through. I'm just wondering if you can update us on how far your products have been rolled out within the SEI network and then also an update on Legg Mason and kind of where that stands?

Sure, on SEI we are through, completely through the first circle, partially through the second circle and about to embark on the third. The third obviously is greatest in number in terms of financial advisers but each customer is smaller. And in some ways that's a very good profile for us so we're very optimistic on it. As to Legg Mason we continue to work with their individual offices, which is their mechanism or the way in which they handle it. They have a limited number of large offices and we're working with their individual offices, and I think making good progress.

Will we start to see some of the results in that the next quarter or the third quarter you think?

I think in the second half of this year.

Okay.

We should see some impact in the third quarter, but more meaningful impact Q4 and on of Legg Mason.

Okay and then the third tier of the SEI, the 6,000 investment advisers that will be second half as well or second quarter or --?

Second half as well.

Okay.

And your next question is a follow up from James Abbott.

"Well you were right, Betsy, I --."

"You couldn't stay away, James."

I couldn't stay away. I was wondering if you could just -- one of the things that I thought was interesting is on the margin of 4% if you normalize for things. So I was wondering if you could walk us through that as to how you got comfortable with that.

Sure, Marty Egan, the CFO is here, and I think he can do that.

Great.

Sure James. On the margin you can see we sold on average compared to the fourth quarter about $46 million more in average Fed funds. Obviously at a much tighter spread than normal, closer to 30 basis points.

Than our normal loan spread.

Than our normal loan spread. If you factor out the -- and normalize it back to $60 million and the $40 million was not there you would come back to increasing the spread approximately 12 basis points.

Okay that's [estimated] and so that does get you pretty darn close to 4%.

Yes.

And then any sense on the loan yields, what are the -- over the next couple of quarters what would you expect the loan yields to do? I know they were down this quarter. Would you expect them to continue to decline based on the production that you see coming and then at the end of the day it looks like your deposit cost was fairly stable, would you expect the margin to compress or expand from here? I guess expand once you get rid of the Fed funds, but excluding that little noise item what would you expect it to do naturally?

Yes I mean I think they're up over March 31 of '06.

The loan yields are you say?

Yes.

Okay.

And I think that the key to -- actually the key to them being down a little bit was the shift of a large relationship from the leasing portfolio to the loan portfolio and so the leasing portfolio, which is the higher contributor was off. Otherwise I think if that had not occurred we would have been just about at the same place as the 2006 -- with basis points of the December 31, 2006 quarter.

So this was a customer that had a lease previously and has now turned it into a loan?

Right.

Okay got you. All right I think that was my follow up. Thank you.

Thank you.

And there are no further questions in queue.

Well thank you, Annie, and thank everyone for listening to us and joining with us and we certainly appreciate your good questions and look forward to talking with you at the end -- about the second quarter shortly. Thank you.

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