Bancorp Inc (TBBK) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 The Bancorp, Incorporated Earnings Conference Call.

My name is Dan and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will facilitate a question-and-answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Mr.

Andres Viroslav, Director of Corporate Communications.

Please proceed, sir.

Thank you, Dan.

Good morning, and thank you for joining us today to review The Bancorp's Second Quarter 2008 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer, Frank Mastrangelo, President, and Marty Egan, 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 a.m.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 16798331.

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 risk 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 results of any revisions of 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?

Thank you, Andres, and thank you all, very much, for joining us on the call.

During the second quarter, we experienced a loss in our securities portfolio due primarily to the change in methodology that was implemented by the various rating agencies as they re-looked at securities that we had purchased in the end of 2004, beginning of 2005, and which had performed in accordance with their terms and re-looked at the categorization of the various classes within those securities.

We concluded that we should approach this issue frontally and to create what we think is a very full impairment charge against that security pool of $15 million.

So we charged $8.3 million against the $15 million security bucket.

The balance of the security portfolio is made up of single-issue [trups] against eight separate entities and all of which institutions are performing in accordance with our expectations and FHLP stock.

That's primarily the balance of the Level III assets within the securities portfolio.

The balance of the Level II assets, which are mark-to-market, are not regular basis and are quite traditional investments.

Despite the securities loss, we do think that this was a quarter in which we could see growth in our basic businesses, and I think that's what we really have to keep our eye on.

The bank continued to grow its loan portfolio.

In this period of time, we have chosen not to grow our commitments to resident one-to-four family construction lending and that portfolio is coming down, but we have a number of other avenues within Philadelphia, Wilmington, Carter, within this nine-county area, and we have made significant progress in developing new relationships.

On the construction lending portfolios, you can see from the total assets, which are non-performing at June 30, 2008 compared to March 31, 2008, which are only up slightly, that the Philadelphia market appears to have performed at least as well as any other market in the country.

We continue to touch base with our borrowers on an ongoing basis and have a sense as to the flow of traffic and sales and products and whatever have you, and can report that, in the second quarter, sales did pick up and values picked up.

They ended up about 5%, on average, above our underwriting levels.

So we believe that although there is a slowdown across the country that the lines of industry and business that drive this particular mid-Atlantic area, being education, hospitals, medical, pharma, et cetera, primarily, have held up very well.

There are also other indicators of our growth.

One of our lines of business, as you all know, are health savings accounts, and as of early July, we crossed the mark of $150 million in deposits attributable to that source at a cost of under 2%.

That's a 70% increase from last year and roughly a 60% increase from the end of 2007.

In our prepaid space, which relates to the acquisition of SVS, Stored Value Systems, deposits through the beginning of July with the addition of customers on that platform grew from about $100-some million at the time of acquisition in November of 2007 to approximately $290 million.

That allowed us to have transaction accounts as of early July of $940 million compared with $829 million for the March period.

Additionally, or to just reinforce, you can see that during this first six months, that loans did increase by 10.9% from December 31, 2007 and, as I said, we continue to see an increase of 10%-plus, and we do continue to see a flow of good business, to which we are responsive.

We continually remind you, and ourselves, that the second quarter is the low point for all of our major lines of business, merchant processing, health savings accounts, and the prepaid debit space.

But when you're looking at the number for the second quarter in terms of the generation of non-interest income and other such items, I think that it's important to keep in mind.

With that, I'm going to ask Frank to just review some of the numbers, which do reflect the growth during the quarter, and the moving forward of our baseline businesses.

Thank you, Betsy.

As Betsy mentioned, the core businesses continue to operate well and grow some, realizing significant growth this calendar year.

As Betsy mentioned, loans are up 10.9% for the calendar year, so far, our healthcare division, year to date, has increased deposits slightly over 60%, our private client group increased deposits slightly over 32%, merchant deposits are up 21%, year to date.

And since the acquisition of the Stored Value Solutions Group in November 2007, deposits have increased there from $116 million at the time of acquisition to $290 million in the middle of July.

We also see continued growth in our private clients segment from the securities back landing program that we operate to high net worth individuals, primarily to non-bank limited purpose trust companies.

Commitments were up for the quarter in excess of $32 million.

That's a 12% increase, quarter-over-quarter, and outstandings increased over $13 million at a 12% increase, quarter-over-quarter.

Thank you, Frank.

Just another interesting point, we have been talking to you about remote deposit and through this period of time, we've now crossed the billion-dollar mark in terms of deposits processed through that source and we have almost processed -- we have processed about 60% more deposits through remote deposits than we did in 2007.

I think that one other point that we might make is that during this period, the second quarter, although net interest margin dropped only by about seven basis points, despite the fact that during the quarter, there was a 25 basis point drop in the indexed interest rate.

We continued to have the issue that every asset-sensitive bank is dealing with in a low interest rate environment, which is that it's a low interest rate environment, and that the spread, therefore, is compressed.

We, in a sense, look forward to an increase in the full, as we anticipate in interest rates, which will have an immediate positive impact on our margin and profitability and the consequent calculations that are done as extrapolated from that, such as efficiency ratios, et cetera.

I would just conclude by saying that we view this as a one-time event, that we fully expect to return to profitability in the third quarter, and that the businesses that we are focused on, which emphasize low-cost, [iffy] deposits, continue to move forward in a way in which should give comfort during this period of financial turbulence in the markets and the general markets.

With that, I would like to open the floor to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of James Abbott from FBR.

Please proceed.

Yes, hi.

Good morning.

Hi, James.

How you doing?

Doing well, thank you.

A couple of questions on -- historically, The Bancorp has had a lower reserve-to-loan ratio and this quarter it obviously popped up quite a bit, and so I was wondering if you could give us some color as to what you saw that drove that.

Was it an increase in the 30 to 89-days past due or the watch list or something?

It actually wasn't any of those.

We just felt that it was important during a period of macroeconomic issues, not microeconomic and not specific to us, that we increase the loan loss reserve to what we felt was closer to an industry level.

Okay.

That's helpful.

And so, could you give us the 30 to 89-day number at this point?

Marty?

(inaudible)

We don't have that number but it was very much in line, James, with all of the previous quarters.

It's not a -- there was no significant pickup.

No surprises when the call report --

No, absolutely not --

And just to mention in the loan ratings that are behind the scenes that we won't see no particular increases in those rating (inaudible)?

Non-performers?

I'm sorry, I --

Sorry.

Special mention, and just other loans of concern, the watch list.

I mean, the watch list is a list that we expand and contract for a variety of reasons that's not always credit related.

There could be other issues.

But, no, I don't think so.

I think we, for example, added, this quarter, a $1.5 million to non-performing and it's a single first mortgage and we have the properties sold, so there will be ins and outs.

One of the frustrating issues that we've had with the non-performers is that it's taken longer to gain control of any particular property in some counties because the sheriff decides not to serve the foreclosure notice or some other element.

So we have a little elongation of the period, but everything that we have in that category, we have a pretty good visibility on disposition.

Okay.

Thank you.

And a couple other ones on credit and then maybe I'll step back and let other people ask away.

Do you have any -- I mean, I am sure there are plenty of construction loans that are large, but can you give us a sense as to are there any larger construction loans that are maybe a little bit closer to the end of their interest reserve that, if the current sales rates continue, that they would actually become, perhaps, delinquent over the course of the next six months or so?

Well, I think that you have to remember that all of our construction loans are fully at recourse, that if we see a loan that's coming to the end of its interest reserve, we do go back to the borrower.

And so, at the moment, we think we're an equilibrium, and that would be my answer.

Okay.

Maybe I'll follow up offline about that.

All right.

Thank you very much and I'll circle back later if there are other questions that people don't ask.

Sure.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Matt Kelley from Sterne Agee.

Please proceed.

Yes, hi.

I was wondering if you can give us an update on the single issuer, the pools and the CEOs, just kind of each of those three buckets now, where they stand in terms of your amortized cost basis after the OTTI charge and the fair value on each of those pieces, just so we're clear.

Well, I think that the math is relatively straightforward, that we've reserved a $0.3 million.

The pool is about $15 million and so what we have net is about $6.7 million.

Okay.

So that was just on the pools, right?

Yes, the others are single issue, single institution --

Yes.

-- of trups.

And what is the dollar amount of those?

I don't --

About $30 million.

About $30 million in aggregate.

Okay.

And --

Over eight names.

Is that $30 million in cost basis or fair value?

In fair value, it's about $25 million.

What was that?

I'm sorry.

The fair value is about $25 million.

Okay.

All right.

And then, getting back to James' question, where are you seeing difficulty in kind of serving notice on foreclosures?

What types of -- what communities is that process being prolonged?

It's one or two suburban counties.

I mean, it just happens to be a county in which we happen to have a property.

Care to share what county that might be?

I don't remember the name of the county, offhand, but --

Okay.

We just happen to have a property that we have indications of purchase on but we can't sell it until we get it through.

Gotcha.

And actually one other question on the pools.

What was the methodology for valuation?

Was it kind of a cash flow analysis or was it an actual quote from a dealer or a collection of dealers where they think that could actually trade?

It was a present value cash analysis.

Okay.

Cash flow analysis, excuse me.

All right.

And the, what is the credit rating of the pools that you have?

Matt, maybe this would be better done offline with Marty.

Okay.

I don't know that we have all that information right here.

All right.

All right, thank you.

(OPERATOR INSTRUCTIONS).

You have a follow-up question from the line of James Abbott from FBR.

Please proceed.

Hi, again.

May I ask you a quick question on margin progression during the quarter and maybe your outlook into the upcoming quarter.

Do you have any guidance or any direction on that?

No, I think it's pretty flat across the quarter, I mean, within, you know, three, four basis points, one way or the other, James.

You're talking month to month?

Yes, month to month.

Okay.

And so, would you expect it to continue flat for a little while or what would cause that to expand?

Well, what would cause it to expand would be an up-tick in Fed funds rates or any such item.

So there were macroeconomic events and we're trying to price our new loans so that they provide us with the widest possible opportunity for increasing our spread.

I mean, but it's simply a portfolio management issue since 68% -- it varies between 65% and 68% of our portfolio is on a floating rate basis, the biggest impact will come with an increase in price.

Didn't we see gradual expansion though with the increase in deposit activities that you're getting from some of these businesses?

Well, we haven't had the deposits in hand for the quarter so that you may see that during the third quarter but we're making no promises.

Okay.

All right.

Thanks very much.

And then on the expense outlook, what should we think going forward?

Any unusual changes or anything?

I don't think so.

I think what you have to remember across our businesses is that expenses remain steady, I mean, in that people are paid over four quarters on a regular basis but the income opportunity is seasonal.

So we should see, in the third and fourth quarter, non-interest income increase significantly.

Okay.

So --

Without the increase in interest expense.

Okay.

So you think second quarter is a good run rate, no expected significant jumps?

In non-interest expense?

Correct.

Yes.

Okay.

Thank you very much.

Thank you.

At this time, we have no further questions in queue.

I would like to turn the call back over to Betsy Cohen for closing remarks.

Sure.

Thank you very much, Dan, and thank you, everyone, for listening to the call and to James and Matt for their good questions.

I think we continue to have enormous confidence in our business model.

It's resulted in core deposits that are well priced and sticky and the entry point to bigger relationships with our partners.

We continue to experience, I think, very good results in our lending portfolio and our loan portfolio, as you can see from the level of non-performers.

And so, we look forward to reporting to you better quarters, even better quarters, going forward.

Thank you, again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.