Bancorp Inc (TBBK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 The Bancorp, Inc.

earnings conference call.

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

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

We'll be facilitating a question-and-answer session toward the end of this conference.

(Operator instructions.)

I'd now like to turn the presentation over to our host for today's call, Director of Corporate Communications, Andres Viroslav.

You may proceed.

Thank you, Josh.

Good morning and thank you for joining us today to review The Bancorp's second-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.

00 a.m.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 87682216.

Before I turn the call over to Betsy, I would like to remind everyone that when used in this in 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 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 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, Andres, and thank you all for joining us today for the second-quarter call for TBBK.

As we remind you each time, The Bancorp has seasonality implicit in its annual cycle.

And the second quarter of the year is the lowest quarter, both in terms of deposit and deposit growth from the various lines of business that we have.

So what we've provided you primarily in the release are what we think are the relevant comparisons to the second quarter of 2009.

We are pleased to provide you with what we think are not only achievements in this quarter, but markers for future performance.

We have had a growth in loans since the end of the second quarter of 2009 of 8%, 3% on a linked-quarter basis.

Our efforts within the SBA program that we have begun are beginning to be realized.

We are writing our first programs and we have a very full pipeline.

Our fleet leasing program, small fleet leasing program, which is primarily to school districts and universities and other such entities, has also shown growth.

We've had NIM expansion and we discussed on our first-quarter call the impact on NIM of -- [provided] by the inflow of significant funds on the relatively seasonal basis and therefore our inability to invest them long term.

That gets reflected in the movement from 3.09% for the first quarter to 3.44% for the second quarter.

And I think that's an annual pattern if you look back to 2009 as well.

We've had significant growth in noninterest income, 48%.

It reflects both new customers, plus growth in existing relationships.

And Frank will add more color to this when he speaks about not only our deposit growth but what might interest many of you, which is the impact, or for us lack of impact, of the regulatory reform provisions.

We're also delighted that we are very, very close to our healthcare deposit business reaching $400 million in deposits.

And, as you know, those are long-term, very sticky deposits.

We also had growth in interest income on a year-over-year basis and assets grew by 23% even after the repayment of the TARP fund.

On the credit side, there are several factors embedded in our current credit report.

One, we continue to be aggressive in terms of writing off loans.

We may have recoveries or may not have recoveries later, but we feel that we'd like to put this cycle behind us.

Embedded in the write-off number this quarter is a large, $900,000 in the nature of a check-kiting loss that we took.

And it's run through the loan loss numbers, under very peculiar circumstances, first such loss we've taken in eight years.

And we think it's in the nature of a nonrecurring event.

There is, at the end of the day, a higher provision coverage.

On the deposit front, transaction accounts are up 32% and we continue to grow in all lines of business.

Reverting now to credit, we had some movement from our 30-to-89-day delinquencies, which were roughly $15 million at the end of first quarter, 3/31/2010.

They're now $8 million, so they've been reduced by $7 million.

But that $7 million migrated to 90-days-plus in this quarter.

We hope and anticipate to get most of that resolved within this upcoming quarter.

Other than that the numbers remained relatively constant.

We continue to have a significant percentage of our nonaccrual loans under agreement of sale and are simply waiting for the judicial process to permit us to transfer those properties.

And, again, we hope that that will take place during this quarter.

Let me pass the call to Frank Mastrangelo to talk not only about our affinity programs and their growth, but also regulatory reform.

Frank?

Thank you, Betsy.

As Betsy mentioned, we continued to achieve strong growth rates in all areas of our business lines.

As we -- and I know I've mentioned this on previous calls, but we believe the right way, because of the seasonality in our business, to measure growth is by looking year over year.

When we look at noninterest income growth, 48% increase in noninterest income, primarily driven by growth in prepaid and merchant-acquiring business lines.

This is being generated through a combination of organic growth of current clients and the continued layering of new clients and partners onto our current infrastructure.

And we see something very similar on the deposit -- from a deposit-growth standpoint.

Healthcare deposits year over year up almost 47%, totaling $392 million at the end of the quarter.

Private client deposits up 110% year over year from the second quarter of 2009, totaling almost $320 million.

And prepaid deposits up slightly in excess of 60% year over year, totaling almost $700 million at the end of the second quarter.

And those low-cost deposits continue to drive down the total cost of deposits of the institution, tallying 77 basis points for the second quarter.

Thus the second quarter the bank was funded -- core funded at a clip of about 92%.

As Betsy mentioned, one of the things that we've been chatting about most recently is the potential disruption of the Dodd-Frank regulatory reform bill.

There are a number of aspects of that bill that we believe could cause great disruption in the market.

And with disruption [comes] significant opportunity.

When we look at certain provisions of Dodd-Frank, like, for example, the interchange provisions and overlay impact on our prepaid and debit card businesses, what we find is the vast majority of our income is actually specifically excluded from the Fed rulemaking in the Dodd-Frank bill.

More specifically, 70% of our noninterest income in prepaid is being driven by interchange.

78% of that interchange income is specifically excluded from Fed rulemaking in the bill.

So, as I said, it leaves a very, very small portion of noninterest income that could potentially be affected.

Nonetheless, we don't believe so.

Almost more importantly is the, to us, and in the potential disruption, is the changes in preemption in the Dodd-Frank bill.

And ultimately all banks will have to step forward, in our view, and comply with various state rules and regs, where other institutions were previously able to rely on preempting those state rules and regs.

As I said, in our view, the combination of the interchange modifications plus the changes in preemption could cause great disruption in the market and be very, very beneficial to us in the long run.

Thank you, Frank.

I apologize for that high-pitched noise.

As you can hear from Frank's report, we have both been growing and we feel very comfortable.

But the provisions that were very hard to read when we talked to you at the end of the first quarter -- very hard to anticipate -- in the regulatory reform bills have really been resolved to our benefit.

As Frank said, we will, in fact, we believe, benefit from any kind of market disruption among our large competitors and that will allow us to take market share disproportionate to a calmer period of time.

The disruption, combined with the lack of impact from, or diminished impact, from any preemption -- as a state bank, it's very good news for us.

It really spells a picture of growth on both sides of the balance sheet.

We've spoken to you about our asset allocation strategies and et cetera.

We saw -- over the course of this quarter we generated almost $90 million in new loan opportunities across the various lines of business that we had identified as appropriate for growth in assets.

We had some significant pay-downs, but they really in a way are good news, because the pay-downs were as a result of -- or the significant pay-downs were as a result of commercial real estate loans having access again to the capital markets.

So we think that that's a bit of a look at the health of that sector and, although it diminished our quarter-end numbers, we think it's a good thing.

With that, I will ask that Josh open the lines to any questions.

Certainly.

(Operator instructions.) John Hecht; JMP Securities.

First question is the noninterest expense -- there was a modest uptick there.

I know you've been hiring people in the SBIC program.

Is this a good run rate to use for the noninterest expense or were there some costs added along the quarter, during the quarter?

Paul, do you want to respond?

Yes.

I would say it's a reasonable run rate for your modeling on a going-forward basis.

We are doing everything we can to control expenses, but we're not doing it at the expense of new business generation.

And as Frank mentioned, there are continuous opportunities in the prepaid space and in other areas, so we don't want to be shortsighted.

But that being said, we are trying to control the noninterest expense and so you should be able to use that as a run rate.

Okay.

And then, Betsy, you discussed the modest increase in 90-day-plus accruing loans.

Can you give us -- characterize these, maybe loan composition, any activity that's taken place to work these after the end of the quarter?

The work -- I'm sorry.

I missed the last few words?

Any sort of resolution or payments subsequent to the end of the quarter to change this level?

Well, we're working with all of the customers who migrated from 30 (technical difficulty) -- sorry for this bad interference -- from 30 to 89 days to 90 days-plus.

They're new situations, obviously, since they just occurred, and represent a variety of situations, some of which are temporary we think in terms of some business interference or interruption, some of which we will resolve with -- in other ways.

But I think it's too early to give you -- it's only been three weeks and little bit early to give you anything more definite than that.

Okay.

Thanks much.

I guess is there any character of loans or is it more commercial?

Is it more real estate oriented, or is there any characteristic you could talk about --

Well, I think (technical difficulty), John, is across the board.

And it's not primarily real estate.

There's some small business distress in there.

But I think it's really across the board.

Okay, great.

And then, your margin -- you experienced a margin uptick from Q1 to Q2.

Is there any guidance you can give us of what drove that change and any persist- (inaudible - multiple speakers and technical difficulty) --

I think -- of course.

In the first quarter we had had a huge inflow of funds in the nature of about $400 million in funds that we paid very little for but we were able to earn very little on.

And so that distorted the margin.

If we had taken those funds out of the mix -- and, Paul, you'll have to help me here -- the number for the first quarter would have been somewhere in the, I'm going to say, in the 3.6% range.

But that's just an estimate, John, from memory.

It took time for those funds to run off, most of which run off in April, the first month of this quarter.

And so you began to see a recovering margin.

Paul, what was the margin, if you have it in front of you for June?

You may not have it and we may have to give it to you off line.

Right.

I don't have it at this moment.

But Betsy characterized it properly, that this margin that we had this quarter, about the 3-...roughly 3.5...3.44%, roughly 3.5%, that's somewhat more normal than the first quarter which reflected the higher deposits.

We are studying the deposits and attempting to deploy more of those short-term deposits in investments that earn a slightly higher yield.

But because of the yield curve and the low rates, we'll -- I mean, the current level is what we're going to have to expect.

I think that in June you had a much higher, probably by more than 25 basis points, higher net interest margin than in April.

But what it will be on average for the third and fourth quarter we really don't want to predict, John.

Fair enough.

But it sounds like you at least through the first half of the year, when you normalize for some of the seasonal trends and inflows, that it was somewhat flat and, given the yield curve and so forth, flattish.

No major changes would be fair to call right now.

I would say that's a reasonable --

Yes.

I think it's a reasonable approach.

Great.

Thank you guys for answering my questions.

Bob Ramsey; FBR Capital Markets.

Actually this is Mike [Lardis].

I work with Bob.

So, I know you had mentioned, Betsy, that you generated $90 million of loans across the various business lines, which is definitely encouraging.

I was wondering if you have any outlook or targets for the next 12 to 18 months on that figure?

Gosh, we really don't provide that -- [kind of give] guidance.

But I appreciate your asking for it.

I think we feel that we have a substantial pipeline in these SBA programs.

We see an uptick in security-backed lines of credit.

And, as you yourself could see on a year-to-year basis, we see, from a percentage point of view, a significant uptick in mostly automobile leasing.

And so those combined I think will allow us to continue to grow the loan portfolio over the course of the year.

Okay, great.

And I guess and kind of going without question, in terms of provision expense, is there anything that gives you concern kind of moving forward in the new loan growth area, where you would be more prone to be a little bit more watchful?

Well, certainly our experience in auto leasing and (inaudible) where we had virtually no losses would not give us pause.

The SBA lending is 75% government guaranteed and so we have that coverage as well.

And so those are really the underlying characteristics which we've been looking for in order to identify strategic components for loan growth.

This quarter the coverage went up from I think 1.33 to 1.42.

So we're mindful that we should be covering due to economic conditions, but our specific strategic asset allocations would not drive us in that direction.

Okay, great.

Thanks so much, guys.

Frank Schiraldi; Sandler, O'Neill.

Just wondering, Betsy, if you can go into a little more detail on that nonrecurring piece of the provision?

Oh, on the check issue?

Yes.

Yes.

You know, without violating someone's -- a borrower's or a customer's privacy, it's really hard to do.

I can tell you that it was a set of circumstances that in the 35 or 40 years I've been in banking I have never seen before.

And so it was -- that's why I characterized it as nonrecurring.

And I certainly could give you potentially a little more color off line, but I just don't think it's appropriate for the call, Frank.

Okay.

But so that portion was in the provision and it was charged off as well?

Yes, it was.

It went straight through.

Is there a potential for recovery do you think there or to early to say or should we (inaudible - multiple speakers) --

I really think (inaudible).

So I would not be optimistic.

And it's something that you really have to weigh the cost of the recovery versus the amount of the recovery.

And I don't have that information at this point.

Okay.

And then on sort of just modeling deposit inflows in this quarter, I mean maybe this is a question for Frank, but I mean I guess we could just look at last year, from the second to the third quarter.

But I know there's been a ton of new relationships and a lot has changed.

Sure.

Absolutely.

Frank, why don't you speak to that?

Sure.

I know you're aware, Frank, third quarter is typically a strong quarter from a deposit standpoint for a number of our lines of business.

Healthcare kind of hits its -- there are two periods per year of course, the calendar year renewals and enrollments, which is the strongest component, but then also the fiscal year enrollments which we'll see impact from in Q3.

And then also our payment services unit, that includes prepaid and debit card issuing and those business lines have a very strong deposit growth.

I think that from a modeling standpoint, I mean, I think we've talked about the year-over-year growth rates, Q2 to Q2.

We are layering in new clients all the time, but that's kind of included and baked into that current year-over-year growth rate.

So I think looking forward Q3 to Q3 and overlaying some of the growth rates that we've already achieved this calendar year might be a way to get in the ballpark for modeling.

Do you think it would be better to look at total deposits ex CDs year over year, or with CDs?

Without.

Okay.

And then --

You might remember (technical difficulty) -- I'm sorry again -- but you might remember, Frank, that we use the CDs only to even out -- and they're all short term, 30 days or 60-day CDs -- even out the deposit flows.

So I think you could look at them without it.

Yes.

So in many of our strongest deposit quarters we have very little to no CDs in the deposit book.

And that was true, for example, in the first quarter.

Right.

Okay.

And then I guess that leads me into my next question on if you look at CDs, not just end of period, but throughout the quarter, I mean, does the seasonality, does it strengthen in September so that CDs will sit on the books for a couple of months which will impact the margin?

No.

I think Frank -- excuse me, not Frank -- Paul could talk to that.

But in general, we're very -- try to be very precise within a week or two of our anticipated inflows.

But, Paul, would you like to --

Right.

All the CDs that we have had on the books at June 30th, virtually all of them are 30 days.

I think there was like $11 million that's slightly longer.

So they won't -- clearly they do impact the margin, but not nearly as much as the other deposit inflows that we can't control and that are temporary seasonal fluctuations.

And we're somewhat limited in this rate environment, which exacerbates the low yields that we get on those funds.

When rates return to more normal environments we'll have an immediate pick-up and benefit by even those shorter-term deposits.

But for now, that really is the main influence, when we get the short-term deposits in, over which we really don't have control.

Right.

I guess just I'm asking when in the quarter, when in the third quarter does the strong seasonality start?

At the end of August we'll start getting significant inflows.

And you'll see almost immediately.

I mean, if you looked at it on a daily basis, as we do, you would see almost immediately a run o-...a run down, not run off so much, but a run down in CDs and a pickup in demand deposits.

Okay, great.

And then sorry to keep you here, but just one more question.

Wanted to wonder -- wanted to ask, rather, Frank, if he could just go over those percentages again, in terms of noninterest income potentially affected by Dodd-Frank.

Right.

So if we look at the second-quarter prepaid income, Frank, 70% of our income was interchange-related.

That means 30% was noninterchange-related, fees for program management fees, transaction fees, things like that that -- not really the interchange.

78% of that 70% was specifically excluded from Fed rulemaking in the Dodd-Frank bill, meaning these were health benefits cards; these were reloadable prepaid cards that met various qualifications in the interchange amendment that were specifically excluded from Fed rulemaking.

Okay.

And then the remainder of that 70%, is that something that also you may not be impacted because of your asset size?

That is correct.

I think that's a fair assumption.

Okay.

And when you say 70% of prepaid income, what is that of total noninterest income?

For the second quarter that was $2.51 million.

$2.51 million.

Okay.

Thank you.

Okay.

Are there other questions?

Matthew Breese; Sterne Agee.

I'm sorry if I missed this.

I was just wondering about that $7 million that went from 30-to-89 to 90-plus.

What type of loan was that again?

It's not one loan.

It's a series of -- a couple of loans that went from 30-to-89 to 90-plus.

And they're across a variety of categories.

Some are individual personal residential mortgages.

Some are -- I mean, they just go across the category.

Okay.

And then, I know you guys had mentioned in a prior question that you had guidance on deposit growth rate from 2Q to 2Q.

Could you remind us of that?

What was that?

We didn't have guidance.

We had growth of 32%.

Okay.

Thank you for clarifying that.

And at this time we are showing no further audio questions available.

Betsy Cohen, you may proceed.

Well, again -- thank you, Josh.

Again, I'd like to thank all of you, not only for joining the call but, as always, for your great and probing questions.

We prepare carefully for these calls knowing that you're going to ask good questions and we hope we've provided you with adequate response.

We look forward to talking with you next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.