Bancorp Inc (TBBK) 2008 Q3 法說會逐字稿

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

My name is Anne and I will be your coordinator for today's call.

(Operator Instructions)

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

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

We will be facilitating a question-and-answer session toward the end of the conference.

I would now like to turn the presentation over to Andres Viroslav, Director of Corporate Communications.

Please, proceed sir.

Thank you, Ann.

Good morning and thank you for joining us today to review The Bancorp's Third 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 11.00 a.m.

Eastern Time today.

The dial in for the replay is 888 286-8010 with a confirmation code of 12977157.

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 the results of any revisions to foreword looking statements which may be made to reflect events or circumstances after the date hereof or to reflect their current unanticipated events.

Now, I would like to turn the call over to Betsy Cohen.

Betsy?

Thank you very much, Andres.

And I'd like to say welcome to all of you who are on the telephone, but welcome is hardly the word that one thinks of in talking with people in this environment.

Certainly it's challenging for everyone both on the traded market or public market level, as well as on the level of the economy as a whole.

I might introduce my remarks though by talking a little bit about the Philadelphia nine county around where most of our lending is done and to the extent that there is good news.

Its that we are not in Florida, or Las Vegas, or southern California or one of those places, but Philadelphia, which has never been a town of high peaks and low valleys and which is driven as an economy by generally - by education, healthcare, hospitals, pharma.

It seems to be in a steadier state than many other parts of the country.

For the Bancorp on the deposit side of its business and as you know, we believe that we are creating value in our deposit gathering strategy, the third quarter was indeed actually a good quarter for us.

We increased transaction accounts significantly from the period ending June 30, 2008, which they were just under $800 million to the September 30th date in which they were almost in $1.1 billion, and thus the corresponding as we think of it accordion piece to the total deposit base being time deposits of ratcheted down accordingly.

We have been maintaining a very substantial liquidity as one does in markets of - such as we seek to date for banking and of course that has a [cost] on the net interest margin, but we feel that it's a worthwhile investment.

The net interest margin was fairly steady during this period, going down about eight basis points, but a little less than eight basis points but we think that that's a steady - in light of our strategy, it's a steady result.

We are asset sensitive, but today holds significant deposits that are priced in accordance with Fed funds as an [in debt] and therefore we believe that we will have a balance in our portfolio and less impact on our [NIM] from what the market is anticipating to be another ratcheting down of the Fed funds rate.

On the loan side, we continue to build our loan loss reserve and to take losses proactively as issues arrive.

No portfolio can be immune to losses in an environment of this sort.

However, if you look at the allowance for loan and lease losses even during a period in which we would have been growing our portfolio, although less so on the last quarter, the coverage has gone from 0.75 to 1.05 and we think that its appropriate to be continuing to - in this economic environment, continuing to add to our loan loss reserve perhaps disproportionately to the growth.

Non-accrual loans grew from roughly 10 million to 13.6 million over the course of the quarter.

The most significant portion of those non-accruals continues to be a large first residential mortgage, which as I've discussed on prior calls, is - we have - the county has had a policy of not bringing properties to foreclosure quickly.

And so we have been waiting six or eight months for a foreclosure date which has now been set in the fourth quarter and so we're hopeful that that will get resolved in the first quarter of next year.

The balance of the balances in the residential construction portfolio have come down and we expect them to come down further over the course of the next several months as houses which are in the process of being built, which are under agreement of sale continued to settle.

On the securities portfolio side and as to which we took a large impairment charge in the second quarter, the portfolio has not really changed from the second quarter as primarily agency - debt and FHLB together with level three assets that are now less than they were before as a result of the impairment.

The trumps that we hold in that portfolio for individual banks and as of the information that we have, which is fairly current for those institutions, they seem to be performing well and are well capitalized.

The commercial real estate loans for which we are reserving, I think, are very traditional in nature, looking at the list, the two largest are an owner occupied business, property and a personal residence.

We moved to non-accrual this month - this quarter two loans that relate to the - to a borrower whose loans we have been resolving over time and we expect to see those resolve within the next three to six months.

I think that that's - I mean we continue to resolve loans as we add them and as we get control of them as you can see from the other real estate owned category, which is zero.

We tried to move them through as quickly as possible and have no other real estate owned at this time.

Loans 90 days past due and still accruing are at a modest level, loans 30 to 89 days are significantly lower than they have been and roughly half of that amount are loans to the federal government and you may all have your own view on the credit of federal government, but we still think its okay.

I think that that's an overview of the third quarter and where we are.

We as a capital - our capital strategy at the moment is to consider very seriously participating in the [TARP] program.

We believe that the terms that are being provided by the treasury are very attractive and so we will continue to evaluate the total cost of that package versus the other available capital over the course of the next 10 days and are in a position - have put ourselves in a position to make timely application should we come to that conclusion.

People are always asking have you changed your lending parameters.

We think that we have, over the course of many years that we've been in business, and prior to the this economic downturn, I think you can look back at the very, very minimal losses that we experienced, have always had a very sober view of our lending parameters.

We lend to people who we've known over a long period of time, primarily in an area that we are familiar with.

One always is doing - making underwriting decisions based on current and projected economic conditions and therefore looking forward to the way in which a lender can exit from a credit that's currently being made.

Obviously the economy and the macroeconomic factors, the lack of liquidity in the market certainly impact our thinking and underwriting, but we hope that we can continue to be very clear and concerned as we have been in the past.

I think with that, I'm going to stop and ask whether there are any questions.

(Operator Instructions).

And the first question comes from the line of James Abbott, please proceed - he's from FBR Capital Markets.

Please proceed.

Hi, James.

Hi, Betsy, and everyone else who's there.

Did you go over what the charge off was or where it came from?

I think that I said it related to a single developer, one project, which was a condominium project.

Not - it was a small project, it was a 12 unit project of which six were sold and six were left to be sold.

We found - we felt that the market was not improving and therefore we found proactively six purchasers and sold the project and paid it off.

Okay, and what geography was that in?

In Philadelphia.

Okay.

How are the Jersey shore loans?

Could you give us an update on the dollar amount there and the status of those loans?

I don't have the number broken out in front of me, James.

I'll be glad to give that to you after the call.

I'm sorry I did not anticipate that question.

So far they seem to be performing.

We have strong borrowers and we have activity in that area.

So far it's okay.

We're not being predictive, but we're all right at this moment.

Okay, and can you give us - remind us of the amount of loans that are kind of where the project itself is not really on track, but because of interest reserves is still on performing status.

And then if the interest reserve, how much life on the interest reserve is left?

How many loans have interest reserve of less than three or four months?

I don't have that number in front of me.

Many of our loans are paid by borrowers individually.

Often our borrowers - some of our borrowers have not asked for interest [first].

Some of the loans do have interest reserve obviously as interest rates go down those reserves have longer life, but all of the loans are recourse to borrowers that we continue to believe have the capacity to service those loans by themselves.

Okay, and then last question is on the deposits.

Can you give us a sense for where the - I know you have a lot of different initiatives, can you run us through where - what was the primary largest source of growth there?

Sure.

There are two vectors of growth, I mean there are others, but we might just touch on two at the moment, or maybe I'll add a third.

But healthcare has - HSA accounts have increased over the course of the year to about 100, a little more than $180 million in deposits.

Partially as a result of people adding to their accounts and partially as a result of new accounts and new relationships.

There are about 110,000 accounts.

And so we expect those - that number to - those deposits to continue to grow.

Another fertile source of growth has been our prepaid business since the acquisition of SBS in the end of November of 2007, that deposit base has grown from about $115 million - and I'm giving you round numbers here, to about $450 million and so although it has seasonality in it, we expect to see it have substantial legs.

Those are two major initiatives.

And I think deposits grew a little over $280 million on a linked quarter basis, was most of that through the prepaid - because I don't think the health savings accounts deposits have grown, usually that's a first quarter, second quarter type of growth.

Yes, I'll pass this to Frank, but those deposits since June 30 - the healthcare deposits since June 30 have been [degrown] and Frank, do you want to give a little bit more detail on that?

Yes, absolutely James, the - thank you, Betsy.

The healthcare deposits actually grew almost $31 million in the third quarter of 2008, ending the quarter at about $178 million in total deposits.

So up almost 21% quarter-over-quarter from the second to third quarter.

Healthcare deposits then also were up about 117% year-over-year.

The other big bump in deposits in the quarter, as Betsy mentioned, really came from the - came from the prepaid segment which saw quarter-over-quarter growth in excess of $300 million in total deposits.

Both coming out of current programs and new programs signed in the last couple quarters that were actualized as a result of some of the synergies we've been discussing with that business and Bancorp's core business.

James, you're right as to the traditional timing of new accounts and of funding of accounts generally, but what happens when you have accounts that are two and three years old is that sometimes people are funding over the course of months.

Some times there is a July one date for a healthcare plan, which is the less important date from the standpoint of volume, but still provides some kick up during that period of time.

Okay.

And I did say that it was going to be my last question, but I now have a follow up.

Is the $300 million a sustainable number?

I suspect its not, but I was wondering if you could give us some outlook as far as what is the sustainable growth rate for the prepaid card business?

Well, the prepaid card has several elements of seasonality and this is our first - will be our first full year with those prepaid cards.

So we would not like to be predictive on this call because we would like to have the experience of there are several different seasons, depending upon the line of business.

And so we'd like to have a fuller look at the picture.

And the cost of the incremental growth, what the interest rate cost is?

Frank, can you help me there?

Yes, our average cost to funds for - in the third quarter for the prepaid segment blended across all programs was 106 basis points.

Wow.

All right, looks like a good acquisition.

I know you guys got criticized for it at the time, but obviously it's working out.

Thank you for your time.

Right, I think that's a good comment, James.

I think that the - what we paid for the business perhaps does not reflect well on the balance sheet due to the accounting mechanisms.

But in fact was a good business acquisition and we could not have grown the business as quickly and as effectively without that acquisition for the businesses.

Are there other question, I'm sorry - I'm ...

And there are no further questions at this time.

Okay, I think ...

I'm sorry, I take that back.

We have - the next question comes from Matt Kelley of Sterne Agee.

Please proceed.

Yes, hi.

What is the 30 to 89 day past due construction loans at September 30th?

Well, pull that out - but total 30 to 89 days was about $5.7 million, of which $2.7 million was the government, federal government and the $3 million that remained in that category, I don't ...

Instruction was ...

Was what?

Zero.

Construction was zero and there were some first mortgages, I think, that were - some leases and a combination of things that were [paid].

Okay, so the 15.5 that showed up on the June report, was that the piece that was charged off this quarter or has that moved to non-accrual this quarter?

What happened to that?

That was the piece that we disposed of at this quarter and took whatever loss we needed to take.

Okay.

And what is total risk based capital at the bank at September 30th?

Marty?

Around 11.

Okay, so it did move higher?

Well, you could see that we - not unlike every other bank in the country, which is probably the problem, we're very cautious in increasing the loan portfolio that we have a pipeline obviously so you don't stop on a dime, but have been extremely cautious in that regard with an eye to increasing the risk based capital.

Okay.

Go through my other questions here.

Hold on one second.

Betsy, you mean with the stock trading at these levels, I mean, would you consider buying the stock yourself at - with a book value at $7.60, stock trading at half that level?

Sound like you're more confident on the capital, on the credit front as well.

Yes, I mean I certainly would consider it.

I'm not telling you I'm buying tomorrow, but obviously we haven't been buying during this [trow] of the price of the stock.

If for no other reason than we are in a blackout period now.

Okay.

And then what do you think the timing would be for the TARP for a company of your size?

I mean it sounds like we're going to go through this kind of tiered process of some of the larger banks over the near term and then presumably small to mid sized banks in early November.

Well, the applications which just were completed last - were created last weekend are due by the 14th of November.

And then the [cash cowry], who's first name I cant remember, in a speech either yesterday or the day before said that it is anticipated that they will be funded or counted.

I don't know whether its funded or counted as capital by the end of the year.

But this is all happening so quickly and it's very hard to be precise.

The precise thing that we know is that the applications are due by November 14th.

Right.

Is there anything in it that concerns you?

I mean it - everybody seems to believe its an obviously a good plan, as do I.

Its five percent kind of cost here and ...

And warrants, I mean you know ...

...

Right.

...

it's always a questions of is - do you believe at the moment that its being offered?

And we have to wait to have it offered.

We don't have any - I have to say to the market you know there's no assurance for anything that they'll be a recipient of the capital.

But if we were to go forward with an application we obviously have to weigh that against whatever else is available in the marketplace.

So ...

Right, which - but I would assume that not much else is available in this environment, in terms of a private transaction?

Well, I think - you know the market as well as I do.

Right.

Okay.

And just last question, any updates at all on the remaining trust preferred CDOs and kind of where were those carried at the end of the quarter for ...

We are - we have four trust preferred single issue, not pools.

...

Right.

And I thought I spoke about them before, saying that we had just updated ourselves then as to each of them they were well capitalized and seem to be performing.

Okay, all right.

Thank you.

And the next question comes from the line of [Brad Neff], please - from Coral Capital.

Please proceed.

Hello.

How are you guys doing?

We're doing super, thanks.

Couple questions here.

With the non-accruals, can you just give me a little better break down as far as the composition specifically the construction loans in there?

On non-accrual, there is one construction loan.

Do you know the size of that loan?

A little under $5 million.

Okay and as kind of a follow up with the - in the investment securities portfolio.

How does the CDOs and individual issue preferred stock?

I had the second quarter, had original cost of around $38 million, and fair market value of $31 million.

I guess I was expecting a little more weakness there, whether in impairment or a reflection of - a write down to equity, and I believe those were all level three.

Can you just give - if you have more information, what is the fair market value as of the end of the third quarter, as far as that portfolio?

Were you able to sell any and can you just go again one more time how those are valued and as far as level three assets?

Well, we felt that this was not the moment to be selling.

You may feel differently, but that's our judgment.

And Marty, do you want to go to the levels?

Yes, the fair values remained about the same quarter to quarter when we looked at them.

Just remained consistent as to how we looked at them in the second quarter.

And are these generally - I know some of the individual issues of the trust preferred, there is a market for them, for a lot of them.

Is it safe to say that those are valued at market or do you use another cash flow type analysis?

We look at both the market, the cash flow and mix of management.

Okay, appreciate it guys.

And we're trying to re-underwrite the banks as well as - and take a look at the underlying credit.

Right.

Sure.

Okay, well I appreciate it.

It was a good quarter.

Thanks.

And the next question comes from the line of James Abbott, from FBR Capital Markets, please proceed.

James, you used up all your coupons.

I know, I know.

I didn't think there'd be anybody else but me.

So anyway, I apologize to the other participants for taking up too much time earlier.

But as a follow up on the bank trust preferreds, when you said they're well capitalized that's - I mean I can - I look out and see a lot of banks that are well capitalized that I still think will fail, they're still technically well capitalized today, but the rate of change of their non-performing assets and so forth are pretty onerous.

And so could you give us the ...

We're doing our best to underwrite these banks on a current basis and re-underwriting as soon as there is current information.

Our judgment, as we said, remains the same as it was in the second quarter.

Can you - if you could give us any additional clarification on - I mean ...

There's no additional clarification to give you honestly.

We're talking to the CFOs, we're looking at the information, we're doing all the same things that you do with a knowledge of what's going on in their individual markets and we're coming to what we think is a reasonable conclusion.

That's all we can tell you.

Okay.

All right.

Thanks.

And the next question comes from the line of Matt Kelley of Sterne Agee.

Yes, on the single issuer preferreds, obviously they don't trade, right?

That's why they're classified as level three's.

So they're not large banks, these are small banks where there is no market because large banks there's a - you can get a quote on most of these preferreds.

Two of the four banks were actually smaller banks that got acquired by larger banks.

But these particular issues don't trade because they have invented consolidation notes.

So two of the four banks are actually large banks - large bank credits, but they don't trade the individual issue.

Okay.

I mean would they be money centered type banks?.

I'm trying desperately to remember.

One is - I believe that one is a money centered bank and one is a - what I would call a large regional bank.

Okay, so these are preferreds of large regionals and money centers that don't trade.

Well, because they were acquired as part of a subsidiary.

Okay.

All right.

And what's the - what's the cost basis on those four?

I don't know that - I don't have that information in front of me.

Maybe we could give that to you after the call.

Okay.

I didn't really anticipate that question.

All right, thank you.

And there are no further questions at this time.

Okay, thank you once again to all of you're for your good and probing questions.

And we look forward to talking with you again at the end of the fourth quarter, or as to the end of the fourth quarter.

Thank you.