Bancorp Inc (TBBK) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2011 Bancorp, Inc.

earnings conference call.

My name is Brian and I will be your operator today.

At this time, all participant lines are muted and we will be facilitating a question-and-answer session at the end of the call.

(Operator Instructions).

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

Please proceed, sir.

Thank you, Brian.

Good morning and thank you for joining us today to review the Bancorp's second-quarter 2011 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.the bancorp.com.

There will be a replay of the call beginning at approximately 1 p.m.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with a confirmation code of 74045158.

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 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 on what I am sure for many of you is going to be quite a warm day.

The second quarter of 2011 continues to show the strong operating income that we have been talking about over the course of the last several quarters.

As we always remind you, our business has some seasonality in it and therefore we feel the most valid comparisons are those on a quarter-to-quarter basis year-over-year and so that is what I will be talking about this morning.

Our core fee-based businesses grew we think dramatically.

Non-interest income as a whole grew 62%.

In the prepaid division, that growth was 75% and the result of that is that core earnings grew by 30% June 30, 2011 over June 30, 2010.

Due to the seasonality, we tried to remove the seasonal elements and normalize the deposits and therefore check our own progress by looking at what we think of as a normalized net interest margin.

For the second quarter of 2011, that number was 3.54 and for the second quarter 2010, it was 3.59.

So you can see that we are within a consistent range on that second quarter-to-second quarter analysis.

And that removes those deposits that are excess deposits due to the implicit seasonality of the deposit business.

Some of this income, non-interest income that I have been discussing is certainly a subject of the Dodd-Frank legislation and the Durbin amendment and Frank is going to speak a little bit about that and what we see as our exposure to Durbin during his comments.

We also experienced balance sheet growth.

If you look at average assets on a six-month basis, for example and this is as valid for the three months, for 2011, it is $2.8 billion; for 2010, $2.2 billion, a continuing growth in average assets.

Loans also grew, although I know that we have continued to grow even through difficult periods.

It is gratifying to us that we can continue such growth through, as we slog through what continued to be difficult economic times for the country as a whole.

Average deposits grew 27%, but if you backed out CDs, and we talked last time about our pruning of deposits and taking out our highest cost deposits on a regular basis, our core deposits, as we think of them, grew by 40% and Frank will give you more detail on that.

The securities portfolio, which we have been using as a substitute for loans until the economy picks up, and we are able to develop growth within each of our targeted asset classes, grew from $230 million in 2010 to $370 million in 2011 and we are in the midst of a small repositioning of the portfolio.

And Paul, would you like to talk about that and the resulting gain?

Sure.

During the quarter, we sold approximately $25 million of our longer-term securities, primarily 30-year mortgage-backs and we didn't have large amounts to begin with, but we sold the majority of what we held.

We replaced and made other purchases of other mortgage-backs, but much shorter.

So those purchases tend to have average lives in the four-year range and while we don't see any pending increases, significant increases in rates in this quarter or the next, we thought it was prudent that, because we do see signs of inflation and we know that eventually rates are going to increase, we thought it was prudent to start pruning and reducing our average lives in duration.

Thank you.

I think that what we are focusing on is minimizing our extension risk, as Paul described and this quarter that repositioning resulted in about a $600,000 gain.

But we have identified various asset classes for growth.

You may remember us speaking about our push in the direct leasing portfolio, which is small fleet leasing, which year-over-year grew by 30%.

We have an effort within franchisors/franchisees under the SBA program where we provide guidance lines to the franchisors and they recommend their eligible franchisees to us.

$20 million of the $330 million in guidance lines that we have outstanding has landed on the balance sheet and we see a pipeline of continuing growth behind that.

And so the growth in the total loan portfolio of 7% really takes into account the areas of targeted growth, but also our efforts to reduce still further our residential construction exposure, which was down year-to-year some 10% plus.

We did not have the economy at our back, so to speak, in terms of wins and so we were proactive in identifying loans that we thought may be the subject of recoveries at some future time, but certainly where we should be out ahead of it and recognize loss.

And so we had an increase in our write-offs during this quarter, which really reduced the profitability on a GAAP basis from where I think we had all estimated it to be to $0.02 a share.

It was completely a function of the amount that was provided for those loans.

However, when you look back to 2010, June of 2010, nonperforming loans were, at that time, 1.82% and they have been reduced even in this quarter to 1.43%.

So although they are up on a linked-quarter basis, if you look across the last four quarters, except for the first quarter of 2011, the numbers, the number for the second quarter is the lowest that it has been in three or four quarters.

The consequence of providing more obviously is that the coverage has increased.

And so in June of 2010, coverage was 1.42% and for this quarter, 1.65%.

One of the indications that we look at to identify loan growth, because loans don't always hit the balance sheet within the quarter that they are originated, is the extent of the originations and this quarter, we originated almost $120 million in new loans.

So we believe that, over time, they will, in fact, find their way onto the balance sheet.

OREO was up this quarter and we actually look at that as a positive because it means that the very tedious and long process of taking a property through foreclosure for sale has been completed and we now see opportunity to sell it.

We mark those properties at 90% of the current appraisal, so we think that that is reflective of a reasonable opportunity to sell those properties at or perhaps above the appraised value.

I am going to ask Frank to both talk about that, Frank and -- Frank to Frank -- and also to give you some more detail on our fee income and our deposit growth.

Frank?

As Betsy had mentioned in her opening comments, year-over-year, which is really, we believe, the right way to look at the growth of the business given the seasonality of the business lines that we operate, on a snapshot basis deposit growth was only 18%.

But as Betsy mentioned, when you compare the deposit book last year to the deposit book this year and take into consideration that this year the bank is more than 99% core funded, there were $137 million roughly in brokered deposits that we allowed to roll off and did not replace.

And further, we actually decreased the deposits in one of our higher cost programs by $100 million during that period also.

So kind of normalizing on an apples-to-apples basis, you get to just about a 40% year-over-year growth number on the deposit book, while at the same time you have brought down the cost of funds substantially.

So all good things.

As Betsy mentioned, we continue to prune higher cost relationships, higher cost deposits out of the book.

At the same time, these new relationships that we are adding and the continued penetration of our current relationships are really driving not only that deposit growth, but also noninterest income growth and that is how we achieved 62% year-over-year total noninterest income growth with the pre-paid unit contributing 75% year-over-year growth to $4.4 million compared to $2.5 million in the second quarter of 2010.

A question that is often asked of us, and Betsy asked me to touch on of course, was the impact of Durbin on the bank's noninterest income.

I think as many of you are aware, banks under $10 billion in total assets of course were carved out of the legislation and both the association, Visa, MasterCard, have commented that they will build multitiered interchange rates based on bank asset size.

And that process has actually begun and is underway.

So you know, there is no direct impact.

We still look at the underlying products themselves and how we are generating revenue to see what qualifies and what doesn't from an exemption standpoint.

As we look across the total -- prior to securities gains -- $7.2 million non-interest income for the quarter.

What we find is that 29% of that today is driven through interchange.

We have about $200,000 in debit card income from our various non-pre-paid-related programs and then 44% of the $4.4 million in noninterest income related to the pre-paid business itself.

Now that 44% is actually down.

Two years ago, that number was 82%.

One year ago, that number was closer to 68%.

Roughly two years ago, the bank made a decision to move away from interchange-based pricing in the majority of its deals.

Just feeling, even pre-Dodd-Frank, pre-Durbin, feeling that globally interchange rates were under pressure, we began to move away from interchange-based pricing and actually shift to transaction fee-based pricing.

We felt that by taking an equivalent amount in transaction fee, we could protect our revenue from what we saw as global downward pressure on interchange.

We realized at the time that if we were wrong, if we had called that wrong and interchange rates began to creep up, that we might be giving up some future revenue, some future income, but we didn't think that was likely.

As we continue to book new deals, as we continue to renew deals, that 44% will continue to come down also.

Okay.

With that information, I would like to open up the floor for questions, Brian.

(Operator Instructions).

Frank Schiraldi, Sandler O'Neill.

Good morning.

Just a few questions if I could.

I wanted to ask first, Betsy, on the commercial loan pipeline, if you could just maybe quantify what the pipeline looks like today versus this time a quarter ago?

Community bank lending as a whole, I mean that is how we look at it as opposed to -- or did you want me to break out C&I?

I'm not sure, Frank, what --.

If you could -- just overall maybe.

Okay.

I think that we see an uptick in demand.

And we also see an increased willingness of borrowers to grow their businesses and to transfer their loan relationship.

Those are two elements or two aspects of sort of confidence in the market that we find very comforting.

And so we do have a much larger pipeline.

I don't have that number right in front of me on a June 30-to-June 30 basis, but do have a much larger pipeline than we had a year ago and we have been able to, in terms -- as part of growing the portfolio 7%, we have had some of that growth come from customers that we have done business with over a long period of time who are activating loan requests that may today be with other institutions and may involve some additional new credit.

So we do see that in the Philadelphia market and of course we are only talking about Philadelphia, we are not talking about other parts or the 12 county area surrounding Philadelphia, we are not talking about other parts of the country in that regard.

One place where we do see a little bit more confidence now, which results in a bigger pipeline, is in the securities-backed lines of credit, whereas, maybe last year around this time, people were still reluctant to expand their credit through the so-called margin loans or security-backed lines of credit.

We see growth from both our existing partners and our new partners in that regard.

We have added in the last couple of quarters a couple of substantial new partners and so we would not have expected to see any increased pipeline in that area for a couple of quarters or nothing that landed on the balance sheet.

What we have seen, even though it has not gotten to the balance sheet yet, is an expansion of our commitments and so that takes time for people to take it down.

But I think all of those are areas in which we do see growth.

Okay, great.

And then Frank, I just wanted to double-check with you the numbers you gave on interchange-related revenues.

So overall is it about -- interchange-related is about $2 million a quarter?

Do I have that right?

Yes, overall, it is about $2.1 million.

$2.1 million.

And you are either exempted from Durbin because you are under $10 billion or you are exempted from the new fees because it is prepaid cards, is that right?

Yes.

So when the Fed's final rules came out, they were actually a bit different than any of the proposed rules previously, so we are actually still analyzing, trying to figure out exactly what is exempted and what is not.

It is actually not quite as clear cut as was originally proposed in the initial rules.

So for example, if a general-purpose reloadable product offers certain types of cash-out functions, it is actually not exempt.

So there were some provisions in the final rules that had not existed in any of the previous iterations.

So Frank, as I said, of the $7.2 million total, $2.1 million is essentially interchange-based.

There is a portion of that that certainly is exempted, but it will actually take us a little more time to actually carve out which programs are and which ones aren't.

But even beyond that, as you mentioned, we are under $10 billion, so we are wholly exempted.

I think, Frank Schiraldi, the pressure that we have not yet seen, but I think is what we are trying, we have been trying and we continue to try to react to is whether there will be an across-the-board reduction in these fees whether you are over or under $10 billion.

We don't see it yet is all we can tell you and we don't see the market mechanism, which would be driving it.

So we can't report any facts.

We can only report that we are acting defensively and moving our dependence away from interchange as you could see from the reduction from 80 to 70 or 68 to 44.

And that with new contracts that come online will continue to go down because some of the 44 is embedded in older contracts.

So as we renew them, as new contracts come online and we reconfigure that income relationship, you'll see that number begin to come down even further and so it should be a nonevent.

Okay.

It doesn't mean we are losing the $2.1 million.

We may lose $200,000 of it or something of that nature.

Right.

Okay.

Is there other -- are there other fees that -- is it still going to be a focus on fee income?

Are there other fee income sources or places on these cards to get fee income other than interchange?

Well, for us, remember, our pricing structure to the third parties who we are typically contracted with is a transactional-based pricing.

That is the model that we have shifted to and from our standpoint, no, a transaction is a transaction whether that be a load onto a card, a direct deposit, a swipe or PIN at point-of-sale, a transaction is a transaction.

And that is ultimately how we have structured deals on a forward basis.

So it is the number of transactions rather than the dollar amount of those transactions.

Okay.

And then just finally, I wanted to ask on credit, just maybe if you could offer any color on the sequential increase in NPAs and maybe just give your thoughts on credit going forward?

Sure, thank you.

You may remember that we had an uptick in March.

It came about in March, but reflected in the first quarter of this year in delinquencies and it was a secured credit, but when it became delinquent, which was its first time in its history, we took a much closer look at it and decided to classify it differently and to write off a portion of it and to classify a portion of it as substandard.

So we wanted to take immediate action on that.

We do think that the lack of progress in the economy is not helpful, but we think that we have managed this portfolio through very difficult times and understand what the elements of risk are.

One factor that is often difficult to anticipate because the credit profile or the creditor profile in this recession is a little bit different than we have seen in the past, but it has gone on so long that some people get tired and give up.

And that is a very hard thing to anticipate.

We try to prop up our borrowers to the extent that we can and work with them and give them support.

And I think it is why we've fared so well for example in areas such as residential construction because, over time, our losses have been very, very modest in that portfolio.

So it is a constant interaction and we continue to work hard at it.

Okay, thank you.

John Hecht, JMP Securities.

Good morning and thanks for taking my question.

First question is related to margins, just trying to kind of model out near-term margins and certainly not asking you for specific guidance, but Q3, you have a seasonal inflow of deposits and I know that the average cost of those tends to go down given the mix shift.

And I know you have a pipeline of loans you are generating, but it sounds like you're going shorter on the duration in terms of investing in securities.

What would you suggest we kind of model for with the excess deposit inflow and for the type of returns into the investment securities portfolio for the near term?

First of all, we apologize for making the business so complicated.

But my suggestion would be, in a way, to ignore the seasonal inflows for P&L modeling and to assume them because the margin will be a factor of what the amount of the seasonal inflow will be and that's sometimes a very hard thing to be absolutely predictive about.

So if you look at the portfolio without the seasonal component and model on the basis of -- and I think I gave you what we call normalized net interest margins and I know that Paul Frenkiel could have a longer conversation with you about this, they were pretty steady June 2010-to-June 2011 at 359 versus 354.

So I think you can take guidance from that and we would be happy to provide you with normalized or anyone who would be interested in the normalized net interest margin for the other quarters as well.

Paul, do you have any --?

Sure.

Yes, in terms of the modeling problem, it is a very easy computation and you basically -- our reserve requirements are under $100 million, so if you takes X cash balances over $100 million and assuming they are earning 25 basis points, which is what the Fed is paying us, you can just subtract that from the asset side and the liability side because those excess deposits, it is extremely difficult to invest them at any spread.

So we basically leave them at the Federal Reserve Bank earning 25 basis points.

So as I said, if you subtract them from the asset and the deposit side and assume 25 basis point earnings on that, you can easily adjust the margin and as Betsy indicated, it has been running between 350 and 360 fairly consistently.

Okay, that's very helpful.

And one other minor question on the margin is your lease portfolio, which has been growing, it looks like there has been an expansion of yield in that, is that something going on in the marketplace or better pricing or is that a mix shift within that portfolio?

I think it is a re-emphasis on that portfolio.

The portfolio has been around for a long time.

We have had the opportunity to participate in RFPs for a variety of entities recently and that has provided a significant uptick.

I think there was a period about a year ago when municipalities, and they make up maybe half of the portfolio, not absolute municipalities, but subdivisions such as sheriff's offices and school boards and things of that sort, where they just were like deer in the headlights and they did nothing.

So they are back in business and they are ordering cars, new cars for their fleets.

So each portfolio of -- each fleet leasing portfolio has different characteristics.

But ours, which focuses in part on those businesses, such as sheriff's offices, the FBI, etc., are benefiting from the need now for those agencies to replace their vehicles.

Okay.

And then moving to credit, the question was asked earlier, but it sounds like -- so the increased NPAs and the charge-offs, the large commercial charge-offs, is that all related to -- well, predominately related to this one loan that you took in and you reclassified?

I would say a significant portion.

Okay.

The modest REO charge in the quarter, I am just wondering was that related to the kind of inflows that you mentioned --.

Yes, we took -- we sold some things, we took some things into OREO and we marked them at 90%.

We may have had some small expenses that we didn't anticipate when we did a previous mark, but it is essentially the marking to appraisal at 90% -- 90% of appraisal that resulted in that loss.

Great, thank you guys very much.

Andy Stapp, B.

Riley & Co.

Good morning.

Do you have the timing of the security sales over the course of the quarter, as well as the rate of the securities sold and securities purchased?

Oh sure.

I don't know that we have it immediately in front of us, but if that is of interest to you, we would be very happy to share that with you.

Okay.

And is it reasonable assumption that the provision should revert back to roughly $5 million per quarter?

I am going to tell you just the safest answer I can give you is that we don't make those predictions.

So you can take a look at our history.

This is an outlier, but I don't want to make a prediction.

Okay.

Do you have what early-stage delinquencies, 30 to 89 days, were at quarter-end?

I do.

And if you will ask another question, I have it, I just have to pull it out for you.

I will --.

That was my last question, so you can get somebody else on the line.

I will get back to you as somebody else asks a question, Andy.

Sorry.

Okay.

Thanks.

Or else I will e-mail it to you right afterwards.

All right.

Thank you.

Andy, I actually do have it.

Just based on a linked-quarter basis, 30 to 89 days for the quarter ending 3/31/2011 was about $18 million and it is approximately half of that for 6/30/2011.

Okay, thank you.

Matthew Kelley, Sterne Agee.

I guess first on the just the subject of expenses, the last couple of conference calls, we have been talking about generating positive operating leverage here.

You have had good revenue growth trends, but year-over-year expenses are up 20% and annualized running at a similar type of rate just looking at the sequential changes here.

So what do you anticipate for expense growth off the $18 million you had this quarter to begin with?

Paul, would you like to --?

Sure.

We have had some increases in expenses that you have seen, especially in this quarter and they were significant compliance expenses.

We are really building out a compliance department.

It is really a new division, but once we have got those people in place, and we already have a new third-party management person, a new general counsel and other related staff, that should be relatively fixed.

So we are trying to keep them a lot more flatter in the coming quarters.

And I think you will see that.

Any idea on a growth rate for expenses once that is fully implemented, that department is built out?

I can't really give you a percentage.

We are actually doing some modeling.

We have already started working on the budget and updating our projections right now, but I can say that they should be lesser increases than you have seen.

Single digits or double digits?

Low double digits.

Let me just help out by saying we are hopeful there will be half of the number that you have seen.

Okay.

All right.

And then on the credit front, can you just give us a little more detail on what the actual credit was, the nature of the project, where it started out in terms of the dollar amount you extended, write-downs over time, the type of collateral, just a little more color on what is going on there?

I will give it to you in general now and I can certainly give it in greater specificity, but it was a series of eight separate loans, all against real state.

This was a residential real estate instruction borrower, not someone who builds out a project, but who builds single-family properties and has had them rented out.

That is the nature of the transaction.

So what was the total dollar amount of those eight separate loans in aggregate?

Approximately $11 million.

Okay.

And the $5 million, or excuse me, yes, the $5 million charge-off this quarter, how much of it was related to this credit?

I'm telling you a substantial amount.

What we did was try to assess as if they were going into OREO what the projects -- what we thought the current appraisal was and right off the bat the difference.

Okay.

And how are you feeling about the rest of your C&D portfolio today?

Any other credits that have been downgraded recently that are on the watchlist today that weren't three to six months ago?

We are always looking and they can be on the watchlist for any number of reasons.

But I think the portfolio has been steady-state.

Okay.

And getting back to the eight separate loans, are those projects completed and vacant or where do they stand?

Yes, they are completed homes.

Okay.

And has the developer reduced costs in trying to move those at losses?

Yes, he is in the midst and we are together with him in the midst of trying to -- identifying buyers for these projects.

Okay.

But it has only been a short period of time.

Okay.

And then, Betsy, just over the last couple quarters, again, you have had some success in really moving the needle on profitability, the growth in revenues has been fantastic, but the big concern has been dropping it to the bottom line and generating real earnings improvement and so on on an EPS basis bottom line and ROA improvements, ROE improvements.

And so I think we have talked about eventually hitting kind of a run rate of $1 per share in earnings.

How do you feel about that today and the timeline for achieving that?

I think it is, in a way, a function of the relationship, the growth in two aspects -- one, the growth in the non-interest income resulting from our deposit portfolio as it relates to the length of the recession and the opportunity for borrowers to have some success in moving projects that they thought they would move much earlier.

So I think it is a complex answer and that is where -- the ability to -- we are very comfortable and confident that we have the ability to earn our way out and it is just a matter of whether it will happen on a consistent quarterly basis or not.

We think that based on what we would hope to be a normalized credit situation going forward meant that we have the capacity to earn that $1 a share.

Over what timeframe?

It has been quantified in the past.

That is why I asked.

Are you asking when we will start earning?

Yes, yes.

I mean in previous discussions I thought we have talked about getting to that type of profitability run rate over a 12 to 18 month time horizon.

Yes, I really do think that that is still true.

Okay.

And what other things have you concerned just on the credit front.

The tone here on credit is more of a concern than we have heard for the last couple quarters.

So maybe a couple other anecdotal examples of just projects that are not going as well or conversations with borrowers, but what else is occurring?

I think we have identified for ourselves those borrowers that we think are at risk.

I don't think it is an increase in concern.

I think it is -- the concern is about the length of the recession as opposed to the depth of the recession.

All right.

Thank you.

Brian Hagler, Kennedy Capital.

Hey, good morning.

I think most of my credit questions have been discussed, but just wanted to talk about the prepaid business continues to grow at a rapid rate.

I think one of your larger wins in the last few quarters was the net spend business.

Have we started to see any revenue from that yet or if not, when do you anticipate that happening because I know there is a lag?

Yes, there is a lag and I think we had anticipated seeing it in the second quarter and the integration of the net spend business took us longer than we thought it would take.

And so that was an optimistic estimate.

We now think, Frank, end of third quarter, beginning of fourth quarter, is that about right?

Yes, that's right.

We should start to see some impact in Q4 and hopeful we see fuller impact of that relationship in Q1 2012.

Okay, thanks.

At this time, there are no more questions in the queue.

I would like to now turn the call back over to Ms.

Betsy Cohen for any closing remarks.

Thank you and thank you all for, as always, your good questions and we look forward to speaking with you again next quarter.

Ladies and gentlemen, that concludes today's conference call.

You may now disconnect you lines and have a very nice day.