Bancorp Inc (TBBK) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 The Bancorp earnings conference call.

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

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

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

Andres Viroslav, Director of Corporate Communications.

Thank you.

Good morning and thank you for joining us today to review The Bancorp's first-quarter 2010 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer; Frank Mastrangelo, President; and Paul Frenkiel, 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 1 PM Eastern time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 31649563.

Before I turn the call over to Betsy, I would like to remind everyone that (technical difficulty) in conference call, the words believe, 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, 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 to forward-looking statements which may be made to reflect events or circumstances at 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 thank you all for joining us.

The first quarter of 2010 included many indicators of progress for TBBK.

On the credit side, on a linked-quarter basis, we reduced nonperforming loans to total loans from 1.66 to 1.44 and an even greater increase if you do it on an annual basis.

Next, nonperforming assets to total assets decreased on a linked-quarter basis from 1.26 to 1.08.

90-day loans (inaudible) still accruing, decreased to $4 million from about $13 million, and although NPAs were up slightly from $13 million to $17 million, the aggregate decreased by about 12%.

Further information on that bucket of loans indicates that $7 million of the approximately $21 million in 90 days-plus in non-accruals are under agreement of sale scheduled to close this quarter.

But we did not only do work on loans that were and are past due, also have generated new loans.

Some of the net loan growth is masked by our conscious runoff of residential construction loans and some other components of the portfolio, but new loans in the first quarter aggregated about $36 million, and they had been $50 million in the fourth quarter of 2009.

In addition to that, we closed the first $2 million of loans under our new SBA program which launched at the very beginning of April.

We have great hopes for that program in terms of loan growth, given the initial response that we've had from our partners.

We also increased, on the asset side, increased securities on a linked-quarter basis by over $50 million.

In part, we are responding to the significant growth in deposits.

If one looks at this on a seasonal basis, as it has been shown in the past, we have some uncertainty in the first quarter when deposits grow significantly as to the exact amount of the retention of those deposits, and so we have traditionally held them on a very short-term basis, primarily in Fed funds.

We are adding -- we gain more confidence on the average deposit levels in the second quarter and have been able to grow assets in a corresponding way.

That will offset, we believe, the decrease in net interest margin, which is totally a result of those excess deposits.

In a low interest-rate environment such as we have, it is very difficult to sustain the margins when the deposits first flush in.

Our deposit strategy continues to be successful.

As you know we are interested in market penetration within our several lines of business, one to have a better customer base and better customer opportunities but also to have what we think is better pricing control.

We've achieved a top 10 position in prepaid in healthcare.

Frank will talk more about these in a bit.

And we are making progress in merchant acquiring where we moved year-over-year from about 48th in the country to 21st, and in ACH origination where we moved to from 54th to 44th and joined as principal bank (inaudible).

The costs of the deposits, though, do reflect the influx of significant low-cost deposits.

Year-over-year, they moved, that cost moved from 106 basis points to 65 basis points.

On the income side, we have concentrated over the last year in moving the deposit strategy and the line of business strategy tipped slightly toward those components which increase our non-interest income.

As you can see, that has been somewhat successful in that non-interest income increased year-over-year by 46%.

This quarter, we've tried to add information to the press release by providing you with a reconciliation of core deposits, core operating deposits.

Again, if one looks at March 31, 2009 to March 31, 2010, there is an increase of from approximately $5 million to approximately $7 million, so we think we are making core earnings progress.

That is reflected in part in the improvement of our efficiency ratio, which on the basis of March 31, '09 to March 31, '10 decreased by some 500 basis points.

I would like Paul now to walk you through the TARP reconciliation.

As we had promised we -- and were anticipated -- we couldn't promise -- we repaid TARP this quarter and that has certain accounting implications simply for the quarter.

Paul, would you like to go through that calculation?

Sure.

When accounting rules required that when the TARP was originated that the accounting for it was to record $38 million to the balance of the bonds outstanding to the treasury.

The balance was credited to additional paid in capital.

Now, with the payoff, the accounting is to debit retained earnings and credit to preferred stock, which is now being repaid.

So the bottom line is that $7 million was transferred from additional paid in capital.

That debit now and that charge now is reflected in retained earnings.

So it was totally -- I think the thing to take away is that it was a totally non-cash charge and it was really just to transfer from retained earnings to additional paid in capital.

Thank you, Paul.

Frank is now going to give you a little bit more color on what we continue to believe has been a very successful deposit season.

Frank?

Thank you, Betsy.

As Betsy had mentioned, we have a goal to grow a number of the focus lines of business into recognized leaders in those particular niches.

In a number of instances, we have been able to do that where we are the second largest flexible spending account issuer today.

We have the sixth largest book of health savings accounts.

We are the third-largest prepaid issuer in the US today.

As Betsy mentioned, in a number of other business lines -- merchant acquiring -- we've made significant progress growing that business from let's say the bottom 50, around 48, 49, to 21 looking first quarter 2009 to first quarter 2010, and recently NACHA released their top 50 ODFIs for 2009, of which we were number 44, up from number 54, just outside of the top 50, the prior year.

The net-net of the growth of those businesses, as we look at how that affects deposits and how that affects noninterest income, you'll see that our affinity or our private-label business deposits year-over-year, looking at first quarter 2009 to first quarter 2010, were up almost $700 million over that period.

Those deposits comprised 69% of core deposits in the first quarter of 2009.

In the first quarter of 2010, they comprised almost 88% of core deposits and have been a significant contributor of decreasing the average cost of funds for the institution.

Further, the growth of those businesses, specifically merchant processing and a ODFI and the prepaid business has really driven noninterest income forward and is a key factor in that year-over-year increase in noninterest income.

Thank you, Frank.

I think now we'll open the floor for questions.

(Operator Instructions).

John Hecht, JMP Securities.

Congratulations on another successful year.

My first question is related to the deposits.

You had a large inflow of noninterest-bearing deposits that occurred.

I am wondering.

Is there some seasonality with respect to this and your new relationships, for instance with Heartland, Payment or AccountNow, or is this a good level to go off of?

Then the final question on the deposits is was this -- do these inflows of noninterest-bearing deposits occur later in the quarter, or was it sort of spread out over the quarter?

Well, let me start and then I will let Frank give you some more detail.

There is seasonality to many of our customers' businesses.

We reach a high point for the year -- or it may not be the high point but we have a surge of -- to use an Iraqi term I guess -- we have a surge of deposits in the first quarter as a result of many of our customers having businesses that are seasonally tipped to the first quarter.

We have a second level of surge in the third quarter and a more modest one in the fourth, and we're still looking for businesses that have seasonality in the second quarter.

This is comprised of healthcare companies like Heartland and Merchant Acquiring, but a whole variety of businesses which gather around the first quarter.

We don't always retain all of those deposits through on an average basis throughout the year, but we generally build up on an average basis in the fourth quarter to what may have been a peak in the first quarter.

I don't know if that's a helpful way for you to think about it.

Frank, would you like to add to that?

The only other thing that I would add to that -- remember, John, many of these new relationships -- since you mentioned specifically some of the newer relationships that we signed in a press release over the last quarter -- many of these new relationships are very long lead time, both in signing and then an impact from a balance sheet and income statement standpoint.

So a relationship that we might sign in the first quarter of 2010 really might not have any significant balance sheet impact or income statement impact for another two to three quarters.

You know, as the program is integrated and ultimately there is a ramp-up in penetration or conversion of book of business over to us.

So, many of the gains that you are seeing here today in the first quarter 2010 were really driven from deals that we signed sometime in 2009.

Okay.

Now, moving to credit, fairly consistent results, but you did have some commercial charge-offs.

Were these scattered about or was any just lumpy charge-offs or how should we look at that?

I think they are across the lines of the credit book, John, and I don't think anything startling.

There was a little less than $3 million in charge-offs, and they really were spread really not much in construction, about $300,000, and very little in consumer, but otherwise just spread across the book.

Okay.

My final question is related to the noninterest income.

You've obviously showed some very strong growth there, you know, when excluding some gains on the sell securities.

What -- is there some seasonal influences in this line item as well, or is there just because you broadened out your affinity partnerships, there's a much larger core number than we should assume going forward?

I think both.

That's why I think we made the comparison to the first quarter of 2009 rather than having you look at it on a link-quarter basis, because that's really the measure of new relationships, expanded relationships, etc., that we think is the appropriate way to -- or appropriate measure for prognostication.

But it is on an annual first-quarter to first-quarter basis because there is seasonality, so it's that combination that Frank referred to in answer to your last question, which is the combination of new relationships which are working their way into our business because they don't come on full strength on day one, and of the increase in our current relationships, but with all of those having a certain amount of seasonality.

(multiple speakers) quarter is a good way to assess the growth.

Great.

Well, thank you very much for the color.

Bob Ramsey, FBR Capital Markets.

Hey, I know we've talked a lot about the strong core deposit growth you all showed and some of the relationships you all have added recently.

If I look over the last year, it looks like, on a year-over-year basis, you've added about $500 million to core deposits pretty consistently.

Is that a good run rate for annual deposit growth, sort of stripping out the seasonality as we go forward, or do you expect some acceleration, given the new relationships?

Well, it's often hard for us to predict timing with any specificity or pinpoint specificity.

The reason for that is, again, something that Frank touched on, which is that when we announce, as we have, a number of new relationships, the time to implement and to convert and to ultimately get a full year of deposit relationship, which is what we need to have it be reflective, is a continuing process.

So, it's hard for us to say to you, for example, that we entered into ten new relationships and in the third quarter you'll see X amounts of growth -- because they each have a different set of technology issues and implementation issues and conversion issues.

So we like to think we are showing significant run-rate growth, but precisely what it is, we would hesitate to be predictive in that way.

Okay.

In terms of the new SBA loan program, it's great to see that's off and running.

Do you have targets for that program for 2010, and what are you seeing more broadly in terms of loan demand?

We do have internal targets, which we don't share with the market, but we are seeing enormous demand, and so we are very optimistic that this will contribute significantly to loan growth.

Okay.

More generally, loan demand, what do you got?

Oh, loan demand is there for the taking.

So it's a matter of our sorting through our current categories of loans and seeing how we want to either, how we want to balance or rebalance the book to reflect what we think are current economic conditions.

Okay.

Then maybe final question, you all did highlight the efficiency improvement you've made over the last year.

How are you thinking about expenses going forward, and will we see continued improvement in the efficiency ratio?

We are very hopeful.

We think that it is more tied, and that's one of the reasons we added core earnings, operating earnings, as another way for you to look at it in the press release.

We think it's more a function of our increasing now our core operating earnings, and that will drive the downtick in efficiency.

We don't see expense as a major difficulty.

Okay, thank you.

Frank Schiraldi, Sandler O'Neill.

Good morning.

Just a couple of questions, and my first question is probably -- I know it's tough to do, but I'm just sort of looking at last year and looking at deposits from the first quarter to the second quarter of last year and they're sort of flattish obviously because of the seasonality.

But my question is, this time around, do you sort of feel like we're going to see similar results, or is it that now you're so much larger, the new business will be trumped by seasonality, and we might see just total end-of-period deposits being down linked-quarter?

I don't think so, but I'm going to ask Frank to speak to that and then maybe I will come back on the line.

Frank?

Sure.

Frank, you're asking about the expectations for second quarter, (inaudible) Q1 to Q2 or --?

Right, just that deposit flow, I'm just looking at last year and saw end-of-period between 1Q and 2Q '09 (multiple speakers) deposits being flattish.

Right, some of the first quarter, with that, some of the first-quarter run-up in deposits is so fluid that a portion of it does run out in Q2.

Q2 tends to be our weakest quarter across all business lines.

It's the one quarter where we don't have anything that peaks or spikes from a seasonality standpoint.

So I think that is not a -- I think that's probably a good assumption, that deposits are flat or maybe minimal runoff, quarter-to-quarter.

I think I would only add to that that, this year, we have a bigger pipeline of new relationships which is coming onto the books, and so there may or may not be a downtick in this year.

Okay.

But there may be an offset.

Then just on the asset side, obviously loan growth is not going to be -- well, just looking real short-term, looking into the second quarter again, loan growth is obviously not going to be able to sop up all of that impressive core deposit growth.

So, in terms of the -- what are you guys thinking in terms of securities purchases to use?

Yes, well, we did -- I'm sorry, I didn't mean to cut you off.

I thought I had mentioned before that, on a linked-quarter basis, securities were up about almost $60 million -- that we are not suggesting there are up $60 million in every quarter.

But Paul, if you'd like to talk about second-quarter security purchases, that might be helpful.

Sure.

We clearly have capacity, in terms of our interest rate risk, to take some modest positions in securities.

We purchased the municipals that were kind of intermediate range, so they might range from 10 to 15 years primarily.

We are buying some very short-term structured mortgage-backeds, all agencies and all strong credit, so credit isn't an issue.

It's totally the interest rate risk that we look at.

But even if you can get, which we did on our mortgaged backs, around 3.5% for average lives of between 3.5 and 5 years, that seemed like, at least in a measured portion, a worthwhile deployment of our assets.

So while we do anticipate that rates will go up in about a year, the interest we would have lost by doing nothing seemed to justify those purchases.

Okay, I'm just wondering if we might not even see a larger program sort of this quarter, given all that is sitting in Fed funds, and if you think that the deposit balances may be sustainable, may be flattish linked-quarter, then move a lot of that, basically a chunk of that, from Fed funds into securities purchases.

(inaudible)

I think we are cautious, Frank, and we're trying to do it in a measured way, but I think that your basic point, which is that we are moving funds from Fed funds into securities and new loans, is in fact true.

Okay, thanks.

Then just turning to credit, I just wondered if you were able to give total delinquencies or just 30 to 89 days, that bucket, 30 to 89 days past due, what that did linked-quarter.

On an annual basis, from 3-31-09, 30 to 90 days was a little over $12 million, and it's now over $14 million.

It has been down in between, but the total of all 30 to 90, 90-plus in non-accruals is just down slightly over March 31, '09 and just about flat with 12-31-09.

Thank you.

Andy Stapp, B.

Riley.

Andy Stapp.

Good morning.

Nice quarter.

Could you give a little bit more color on what you might expect in terms of loan growth in just general terms?

In other words, flat to modest, moderate, whatever might be appropriate?

I think we hope to be able to show you loan growth as the year goes on.

The second quarter -- for the second quarter, we have agreements of sale in the residential book, which we anticipate will reduce that book by another $10 million, or provide us proceeds of $10 million.

We think that's the right thing to do, to reduce the residential construction book.

We believe that, by the third quarter, on an aggregate basis, because the second quarter is a big settlement time for residential, that we will, in fact, begin to show you loan growth, net growth.

But we continue to make new loans as we go along.

Andy Stapp.

Okay.

How close do you think you are to releasing rather than building reserves?

I didn't know that banking still contained the words "releasing reserves", so you take me a little by surprise.

But I think we think that, even as we grow the portfolio, there will be a requirement for more reserves even if the coverage becomes lower as the growth becomes more significant.

So I don't think releasing reserves in a growing environment is really within our strategy at the moment.

Andy Stapp.

But the reserve coverage of loans could be down by year-end?

I don't anticipate it, but I'm saying it's a possibility, depending upon how strong the net loan growth is.

Payoffs are often difficult to anticipate exactly.

Andy Stapp.

Okay.

Going back to the net interest margin, do you think -- is what I'm gathering that bills will certainly increase from Q1 but may not, won't likely get back to Q4 levels?

Well, if you take a look at the Fed funds level of Q4 to Q1 on a linked-quarter basis, you'll see that these are just approximate numbers, about $400 million of what we would call just for this conversation excess or unused deposits.

If you strip those outs, because in this interest rate environment we couldn't -- it is impossible to make much money on them.

If you strip them out and look at the remaining split, it's just about where it was in Q4.

So, it is both a use of those deposits and the more measured growth of the deposit book, not that kind of surge, that will reinstate the NIM.

Andy Stapp.

Okay, thank you.

Matthew Kelley, Sterne, Agee Leach.

Just looking over the last three or four months, you've had eight or nine press releases out announcing new relationships, kind of the team-up relationships with The Bancorp.

Can you just kind of go through and prioritize the top two or three that will have a financial impact, and walk us through a little bit of a prioritization of the ones that those announcements will have the largest impact?

Sure.

Frank, do you want to do that?

Sure.

I think the one that we've certainly seen impact from the quickest, Matt, and one of the more important relationships that we've signed -- not that any are unimportant of course -- was the relationship with Heartland Payments.

We actually signed that relationship in the fourth quarter, converted the book of business, a portion of the book of business, over to Bancorp sponsorship in February of 2010, and hope to continue to grow that, grow the services set that we provide to Heartland out from there.

So that has had an early impact on the income statement, much earlier than a typical relationship that we sign.

Another relationship I believe that we press released was one for the Prepaid Group, specifically the UniRush relationship, where we are moving issuing bins from another institution over to Bancorp at the same time that new issuing in program is ramping up there.

It's an important relationship that will grow nicely for us.

Past that, I would say AccountNow, another very nice new relationship for our Prepaid Group, which will make impact but is not making impact today will, because of its of integration and bins set up and things like that.

It will likely take a couple of quarters before there is any realized impact.

If I could just step back from what Frank said and maybe put it in two categories, which may make future releases sort of more understandable in this way, where we are taking a book of business from another institution, we have a much faster impact because the book is there.

Where we are growing our business, together with the growth of a newer offering or an offering where we are taking a piece of new business from an existing offer, the impact is slower.

So, I think that would break it down into the two categories that we see.

Okay, got you.

Then can you quantify the prepaid business in terms of balances and fee income contribution during the quarter?

I'm going to have to ask either Frank or Paul.

Which of you would like to do this?

Is there -- Frank, if not, we will get back to you on the allocation to prepaid of noninterest income and average balances, but do either of you have those numbers at hand?

I have the deposit balance but I would have to get back to Matt on the noninterest income contribution for the quarter.

So, let's do half a loaf!

Yes, so our Payment Services Group, which is -- which comprises prepaid and some other bank -- whole bank and debit sponsorship programs, which is what we have been reporting there, ended the quarter with $857 million in total deposits, up from $519 million, $520 million actually the quarter before, and up from $518 million in the first quarter of 2009.

Got it, okay.

Then just help for modeling that, that fee income component, the noninterest income component, any nonrecurring items in there, or what were the biggest drivers of that year-over-year increase of $2 million?

Of course, securities gains are nonrecurring, but -- and they are not included in those numbers, but I think that we have done two things, Matt.

One is to expand the number of relationships that we have, so there's a lot of new business growth in that.

But secondly, we've tilted it a little bit towards -- you've seen a lot of growth in ACH and in merchant acquiring which -- and not that you haven't seen big growth in other areas, but those two are more closely tied to noninterest income growth, and so one might consider the growth there disproportionate.

All right.

Thanks a lot.

There are no further questions.

And this time, I would like to turn the call back over to Betsy Cohen for closing remarks.

Thank you all for your very good and probing questions.

We are delighted that you joined with us today and hope to continue to make good progress as we go forward in the second quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.