Bancorp Inc (TBBK) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 The Bancorp, Inc.

earnings conference call.

My name is [Glen] and I'll be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Mr.

Andres Viroslav, Director of Corporate Communications.

Please proceed.

Thank you, [Glen], and good morning, and thank you for joining us today to review The Bancorp's fourth quarter and fiscal 2009 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer, Frank Mastrangelo, President, and Paul Frenkiel, our Chief Financial Officer.

00 P.M.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 31280636.

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 certainties, 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?

Thank you very much, Andres, and thanks, all of you, for joining us this morning.

The fourth quarter and 2009, we feel marked a turning point for us in several ways.

During the quarter, we continued to see credit improve, certainly being contained and improved.

We saw an expansion of net interest income, both on a dollar basis and also rebounding after our capital [infusion] in the third quarter to 3.84 from the comparable quarter of 2008 of 3.69 and to the linked quarter at 3.74.

And so we believe that we're making progress once again toward the utilization of additional capital and funding toward a target of 400 basis points or net interest margin.

Interest on deposits decreased once again by 11 basis points on a linked-quarter basis and significantly greater than that when compared to the fourth quarter of 2008.

I might add that for us, the increase in transaction accounts and deposits is really part of a business plan that we've been pursuing for many years.

It is not merely a secular trend.

It's a program which derives growth from a value-added deposit program that Frank Mastrangelo will talk about in a minute, and is contractually based.

So we feel great comfort in the continuation of these deposits.

Transaction accounts also continue to represent over 90% of our total deposits.

And on the loan side, we continue to see a decrease in construction loans.

I think we estimated for you we thought they would decrease by about $19 million and that's about where they were for the -- on a linked-quarter basis and over 32% for -- on a year-to-year basis.

This decrease in construction loans masked really what was new loan origination.

We closed during the quarter approximately $50 million in new loans.

However, the decrease that were payoffs connected with our portfolio exceeded our expectation and so the loan growth is not yet visible.

On the earnings side, the major disruptive factor was the write-off of -- connected with OTTI and so that certainly provides a reason for us to talk with you about the competition of the remaining approximately $21 million of securities in that bucket.

They represented approximately half by a liquidating trust with a well -- a very well capitalized insurance company that is making progress in reconstituting that bucket of assets and liquefying them towards the end of liquidating that trust.

The balance are represented by four single names, all of which are well capitalized, and which give us no concern.

And the balance of $2 million represents investments in two pools, both of which are performing, but about which we have less clarity.

The core earnings calculation which is often an indicator of earnings power will be discussed by Paul Frenkiel, and Paul, if you could address that now?

Sure.

The net interest margin, as you can see from periods -- quarter, this quarter, to one year ago, increased to six -- net interest income increased to 16.8 million for the three months just ended compared to the prior year of $14.9 million.

That reflects significant reductions in interest expense and cost of funds.

And we're continuing to lower interest rates on many of our different types of accounts, even though they're relatively historically low, given the fact that real interest rates in the competition continues to modestly lower.

We have some room there and you're going to see the impact of that in the first quarter based on reductions that we made in the fourth quarter and you'll see a positive impact of that on the margin throughout the year.

If you look at the OTTI that Betsy mentioned, it was approximately $2.2 million and while we did have modest security gains that offset that, the impact of that net amount is still $0.05 per share for the quarter which, if you add it to the drag from the TARP of $0.04, that gives you $0.09 with which you can adjust, to kind of normalize the earnings for the quarter.

Thank you very much, Paul, and I think Paul touched on the TARP impact which is $0.04 a quarter on an EPS basis.

And we are proceeding with our discussions about repayment of TARP, but they're not always as speedy as one would hope, but we think that we're making progress.

We can't estimate the timing for you, unfortunately, since we don't control it.

I mentioned the growth in deposits and very well priced deposits, and Paul reinforced that by sharing with you that we think we still have room to add to our (inaudible) through the reduction of that cost.

And to give you further insight into that, I'll ask Paul -- I'll ask Frank Mastrangelo to come on the telephone.

Thank you, Betsy.

In the fourth quarter, our pipeline for new partners, new programs, continued to be very robust.

We closed 17 new agreements in the fourth quarter.

We continued to see -- we're typically looking year-over-year to measure deposit growth and we continue to achieve very healthy growth rates in all of our business lines -- Healthcare, for example, 42% year-over-year; Private Client, 141% year-over-year; and our Prepaid business which grew almost 37% year-over-year, growing off of a very, very sizeable number in Q4 2008.

Some of that growth does get masked from the seasonality of some of these businesses which you can see in a snapshot or period-end balance, but can be more appropriately viewed in the average balance sheet that's included in the earnings release.

(Inaudible) the average balance sheet in the earnings release, you would see -- you can see that the demand deposits increased on average almost $300 million year-over-year.

And those are some of the factors that continue to drive down the bank's overall cost of funds and increase net interest margin.

Thank you, Frank.

I'm going to ask for questions now.

[Glen], if you could open up the line?

(Operator Instructions).

Our first question comes from Matthew [Brieze] from Sterne, Agee & Leach.

Please proceed.

Yes, hi, guys.

It's actually Matt Kelley.

I'm sorry, Matt.

Yes, that's what I thought, okay.

I just wondered if you could give a little clarity on the expense line items, if there were any one-timers in there we should be aware of that will be coming out, or is that a good number from which to model upon?

Paul?

I would say it's -- there was nothing atypically large in non-interest expense this quarter, so I would say that's a reasonable approach.

Okay.

And the same question just on fee income.

Besides the OTTI, was there anything keeping that down or bumping that up?

I would say that's also a reasonable -- the fourth quarter is a reasonable going-forward number.

Now, you have to keep in mind we have certain items in there that don't necessarily -- aren't evenly distributed over the quarter.

We have leasing gains which don't happen on a very scheduled basis and we do have some other items like that, but I'd say that's a fair approach too.

Okay.

And do you have the loans 30 to 89 days past due, that balance?

Yes, we do.

We thought you'd never ask.

There are approximately $9 million this quarter, up a bit from the September quarter, but down significantly from the June quarter.

And they seem to migrate between about 6 and 10 or $12 million on a -- overall.

Okay.

But nothing in particular to give you concern --

No.

-- that things are stalling out on the improvement process?

No, absolutely not.

Okay.

And then what type of deposit and loan growth are you looking for in 2010?

Well, I think it's sometimes hard to predict.

I think that our deposit programs are growing in number and are growing in diversity, and we're not able to tell you at this time -- or we could, but we won't tell you at this time what we anticipate from the pipeline growth.

We do see continued -- if I may use the word "robust" deposit growth in the low interest rate categories, because all of the programs are growing, as are the number of programs growing.

Right.

On the loan side, we're looking even in a broader way (inaudible) the asset side, we think that we have an opportunity to come closer to our peers, because of our low cost of funding, in terms of securities purchases, which don't stress our ability to take advantage of an increase in interest rates.

We're keeping them modest in duration, and in fact, during the course of the fourth quarter, we pulled in our duration in terms of our securities.

And we'll continue to be very cognizant of that.

We have substantial opportunities on the loan side and we try -- we are working at sorting them through.

How quickly they will close is often -- is not something we predict.

Okay.

And then last question, Frank, could you give us a little bit of clarity on those 17 new relationships, across which business lines those fell and the nature of those?

Sure.

The new relationships were spread actually across Healthcare, Prepaid, merchant acquiring and Private Client.

The nature of the businesses were very much in line with the current composition of the partners and portfolios there.

Okay.

And any sizeable new accounts there or was it mostly granular, smaller type relationships?

There certainly were some programs that we have decent expectations for good growth in actually all business lines across the board.

Okay.

All right, great.

Thank you.

Thank you, Matt.

Our next question comes from Frank Schiraldi from Sandler O'Neill.

Please proceed.

Good morning.

Hi, Frank.

I've got a question, I guess, for Frank maybe, but on the deposits, deposit balances, core deposit balances, excluding CDs, linked quarter, were down significantly.

Now, I know 3Q is seasonally the strongest quarter probably for deposit inflows at the bank, but was there anything that you saw linked quarter other than seasonality there that would have led to the decrease?

No, it was all due to seasonality within the Prepaid business line, Frank, so the Prepaid business line had a significant tickdown in deposits which is seasonal and planned, but Private Client, for example, grew deposits quarter-over-quarter 32%.

Merchant ticked up about 13; Healthcare ticked up about 9, which are in line with previous year expectations in those business lines.

Frank, it's sometimes -- Frank Schiraldi, it's sometimes hard to be predictive of exactly where on a seasonal basis at period end those deposits will land.

And you'll see that we had short-term borrowings that we put in place because we had estimated, based on the prior year experience, that that period end might be even lower than it was.

So we're heartened by the fact that it was where it is and that the average, if you look at the average balance sheet, that as Frank said, that was up significantly over the prior year.

So it's very hard to be predictive on the exact number.

Right, and it's tough to look historically and then try to get a sense of where end-of-period deposits might fall linked quarter, say, last year or the year before, because obviously, the business is growing so quickly.

Absolutely.

So in that vein, is it possible to give some sort of guidance in terms of what would you expect, seasonally speaking, from 4Q to 1Q?

Does it pop back up sort of?

Is it seasonally high like the third quarter or flattish or --

Oh, you mean what is our seasonality within the current portfolio?

Frank, do you want to speak to that?

Sure.

Q4, Q1 are typically -- excuse me -- from a deposit standpoint, Q3 and Q1 are typically strong quarters for the bank.

In the third quarter, we have a run up in a number of programs in Prepaid.

In Q1, Healthcare funding is very, very strong, as new accounts related to calendar year open enrollments, FSAs and things like that begin to fund for the calendar year.

The Prepaid business itself, as I said initially, we really look at that year-over-year.

I think we've been projecting 30 to 35% year-over-year growth rate of that business.

If we look Q4 2008 to Q4 2009, that growth rate was a little shy of 37%.

And between 3Q and 1Q, are they seasonally stronger, or basically, they're both -- I mean, (inaudible) as being the strongest?

They're probably on par, 3Q, 1, on par.

There are different drivers in Q3 and Q1.

Correct.

Okay.

Different business line drivers.

Right.

And then I know it's (inaudible) common on TARP, you can't give a timeline because it's not in your hands, but what seems to be the issue in terms of -- I don't know if you call it a delay or what's taking time?

Is it just getting regulators on the phone?

Is it they're asking for stuff that has to go back and forth and there's just a lot of paperwork going back and forth?

What sort of is -- I guess --

I don't think there are any issues.

I think at the year end, there were lots of people on vacation and we started this process in the late fourth quarter.

I think we're making good progress, but we just -- it would be foolish for us to give you a date.

Okay.

Okay.

And then finally on the trust preferreds, I just don't know if I understood the breakdown.

First, I had thought that there were some mark to the equities already, so if the total portfolio is 21 million, there was a -- the fair value was lower.

Is that correct, and if so, do you have the fair value?

Well, the 20 million is net.

A couple of years ago, the bank transferred from available for sale to held to maturity, and so there was an adjustment at that time.

So we have a net amount.

The amount that the -- the 21.5 million, that is the net amount that's on the balance sheet now after those adjustments.

But you're right, Frank, that had, in fact, gone through equity.

Okay.

But I had thought it was even lower.

So that is the fair value, then, 21.5?

Well, no, because when you transfer it to held to maturity, you don't have to adjust to the fair value, because they're not impaired.

As Betsy said, the credits are good credits and so you don't -- if it's in held to maturity and you have the ability and intent to hold them until maturity, no further adjustments were required after they were transferred.

Right.

So that's the --

So hopefully, they'll stay on the balance sheets, and as they are, they'll get repaid and (inaudible) --

Okay.

But -- so that's the amortized cost, 21.5 million.

So is there an unrealized loss that would be part of that portfolio and would be net intangible equity?

Is there unrealized losses on that trust preferred?

Yes, it's about -- the amount to equity, we rough -- like maybe $2.5 million or so that went -- that was in the original adjustment to equity and accounting requires you to amortize that over the maturity.

And it goes back and increases book value over the maturity until you get to maturity.

So I think I'm a little --

So even though we don't -- we're not buying anymore, the amounts of book value will increase slightly every period until maturity, at which time they should be repaid.

Maybe I'll follow up with you after on that just to (inaudible).

Sure.

The accounting is somewhat complicated, but I think the point to remember is the credits are good and as Betsy said, they're well capitalized.

The biggest insurance company has an excess of capital, so they should be fine.

And the accounting will work itself out over the maturity with no big amount taken or recognized in any one period.

In fact, it's a plus because it's building back the book value and with offsetting credit to equity.

Okay.

And I think Betsy had said that there's four banks, four single issuer --

That's correct.

They're all well capitalized, performing well, and we said there were only two $1 million pieces that were in securities to which we don't have quite as much visibility, but performing.

And nothing is not performing.

Right.

Yes, there's no impairment and we do an impairment test and there's no impairment in those two securities as yet.

The four banks are about 10 million, is that right?

And then --

Right.

That's an approximate number, yes.

Right.

Yes, that's -- you can use that, yes.

That's rounded, right.

Now, some guys have started -- some institutions have started basically just listing their trust preferred securities in their Q or their or their release.

We --

Are you going to disclose those or no?

It's not our intention, Frank, although we hear you loud and clear.

And then can you just describe again the other pieces -- just it's -- of an insurance company?

Is that the --

Yes, it's a bucket of securities that were in their reserves less than liquid, and as to which they needed time to liquefy, and they set up this -- funded this liquidating trust.

We see through to what they're doing with the securities.

They're converting them into liquid securities in anticipation of the distribution.

And what do those securities look like, those are -- those individual securities on their books?

Those aren't trust preferreds or are --

No, no, they're not.

Okay.

No, they're converting to short-term securities and other securities, and they were subject to review of an accounting firm.

And the accounting firm, they should report and it shows just a huge excess of capital, so I don't -- we don't see any issues there.

Okay.

And just one last question on that.

I'm just wondering how does that -- so how did that come on the books, that insurance piece?

They're on the books about six years.

I've have to go back and find out.

I just don't have that information.

All right.

I'll follow up with the (inaudible).

Thanks.

Our next question comes from Bob Ramsey of FBR Capital Markets.

Please proceed.

Hey, good morning.

Hi, Bob.

Hey, I guess I'll start with Frank.

I just want to be sure I caught the numbers correctly.

Did you say the Private Client deposits were up 32% quarter-over-quarter, Healthcare, 9, and merchant, 13?

(Inaudible).

Quarter-over-quarter, Healthcare was 9%; Private Client was 32; merchant was 13, yes.

Okay.

Thank you.

And what was the Community Bank deposits at the end of the quarter?

Community Bank deposits at the end of the quarter was $422 million.

About flat with the prior quarter.

Okay.

And then I noticed that the non-performing loans declined a little bit in the quarter.

What portfolios are you seeing the improvement in quarter-over-quarter, and sort of where's the concentration at the end of the period?

And what sorts of resolutions are you seeing?

I think that we see them more or less across the board.

We are in an area -- and we feel very fortunate to be in the Mid-Atlantic area at this time.

Philadelphia seems to be in a period of recovery according to all the gurus who are out there, including the local Federal Reserve Bank.

And the Case-Shiller Index, which was just published the other day, showed that in the Philadelphia MSA, that year-over-year, leading housing prices were only down 1.7%.

So that's in line with what we see on disposition and we have some improvement in performance and some dispositions which make up that total.

So I think we're -- we find ourselves not yet in a market in which securitization has rebounded for commercial real estate or anything of that sort.

And so the resolutions come from either improvement in a particular factor or disposition of the loan or disposition of the underlying real estate.

Did the construction non-performers continue to decline in the quarter?

Yes, and we continue to see sales, so sales are an important -- individual house sales.

So sales are an important component of performance.

Okay.

And how much of the growth of the CRE book was loans moved out of the construction portfolio into mini-perm?

Was that a factor this quarter or not?

It was not.

If you look at the note in the press release, you'll see that the commercial construction portfolio was flat quarter-to-quarter.

Okay.

And sort of -- we talked a little bit earlier about 2010.

What is the tax rate expectation for next year?

Paul?

Sure.

We do -- we'll have somewhat less than likely than 34% because of our municipals.

We have -- for the better part of the year, at least half of the year, we had about a $38 million portfolio of municipals.

As Betsy noted, we're reducing duration on those, so we sold a number of those.

We may sell some more and we're buying municipals, but with shorter lives, to reduce duration in the event rates increase.

That said, we believe that there's still value in the municipal market, even if rates do increase somewhat, and we think it's an extremely safe way to build the margin.

Okay.

And then -- go ahead.

I'm sorry.

No, I was just going to say you can see in our assets that investment securities non-taxable had a tax equivalency yield of [8.20].

So we continue to think there's value in that segment.

Okay.

And then in terms of expenses, given this was a reasonably good quarter and a good place to build on, what sort of expense growth are you all modeling for 2010?

Well, of course, we're doing our best to control expense and these are conversations and planning that we've been doing to limit, to really limit the expense growth minimally.

At the same time, as you've gathered from looking at our history and our growth, we're very focused on investing into new programs.

And as Frank said, we're signing a lot of agreements and we have a lot of strong prospects.

So if we need to invest to make sure we -- to ensure those future revenue streams, we'll do that.

But as of right now, I think we're going to be able to hold the line fairly closely.

That would suggest slower growth than you all saw in 2009?

Yes.

Yes, yes.

Okay.

All right.

Thank you very much.

Thank you for your good questions.

Our next question is a follow-up from Matthew Kelley of Sterne, Agee & Leach.

Please proceed.

Yes, hi, guys.

On the credit costs going forward, given the trends in past dues and non-accruals, and just your commentary being fairly positive, how much additional reserve building do you think we'll see in 2010 beyond charge-offs?

Are you getting to the point where the provision may match charge-offs and there's not a lot of incremental build?

Well, if we anticipate growth in the portfolio, that will have to be covered, Matt.

So I think we think that 2010 is a year in which it would be a good thing to continue to invest in the reserve.

But regardless of growth on the existing portfolio, do you think there's much additional excess reserves and provisions needed?

Well, we will -- we believe that one should look at 2010, as opposed to 2011, as a year in which we continue to reserve robustly because we think that that's -- it has no downside.

If the -- if losses, as a result of economic improvement and performance improvement take place, then we'll have excess reserves in the reserve.

Okay, got you.

And just to clarify on the tax rate questions, you're saying less than 34% was the bottom line?

For the federal rate, we do have some -- we have Delaware State taxes, that's roughly 4 or 5%, and we have some exposures in some other states, but I thought that your question was directed at the federal tax rate.

So just for modeling purposes, relative to the 34 this quarter, what would you be using for 2010?

If you want a precise estimate, I'll actually have to look at the state taxes and back at my budgetary projections, which I don't really recall.

You can do that offline, I think, Matt.

Sure, sure.

Okay.

All right.

Thank you.

Our next question comes from Mark Davis of Davis Ross Investment Advisors.

Please proceed.

Yes, good morning.

How do things look as far as the American Home acquisition?

What is the status of that right now?

We haven't had any regulatory resolution on that yet, and if we don't soon, we'll find other ways.

We have several other plans of -- as alternatives since the primary focus of the acquisition was to provide a vehicle for safeguarding preemption for our customers.

So there are many other strategies.

We thought this was a good one, but we have not had regulatory resolution on it yet.

Okay, yes.

It was just one of those things where you just can't control it because it's out of your hands.

That is too true.

Yes, and I'm sure we can all appreciate that.

As far as the alternatives are concerned, how long does it take you to gear up to implement those alternatives?

They're not long-term lead-time items.

Okay.

And as far as the goals of that are concerned, I understand they're primarily in regard to your Prepaid cards.

Is that correct?

That's correct, the national customer base that we have and that we could access additional customers we could (inaudible).

And right now, as far as your Prepaid base, what's the geographic sort of breakdown of how that's distributed?

Well, I think we view our Prepaid business as a national business.

I mean, in essence, it really doesn't make any difference where the sponsor is physically located because the cards are distributed by and large across a national footprint.

Okay.

So you're just looking for additional ways to do that within the national footprint?

Right, right.

Okay, great.

That answers my questions.

Thank you.

There are no further questions at this time.

I would now like to turn the call over to Betsy Cohen for final remarks.

Thank you very much, [Glen], and thank all of you for your good and probing, as always, questions.

We look forward to reporting to you on the next quarter.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.