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The Bancorp, Inc. (NASDAQ:TBBK)

Q1 2009 Earnings Call

April 28, 2009 9:00 am ET

Executives

Frank Mastrangelo – President & COO

Martin Egan – SVP & CFO

Betsy Cohen – CEO

Andres Viroslav – Director Corporate Communications

Analysts

James Abbott – Friedman, Billings, Ramsey

Matthew Kelley - Sterne, Agee & Leach

Andy Stapp - B. Riley & Company

Operator

Good morning, ladies and gentlemen and welcome to the first quarter 2009 The Bancorp earnings conference call. (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; please proceed.

Andres Viroslav

Good morning and thank you for joining us today to review The Bancorp’s first quarter fiscal 2009 financial results. On the call with me today are Betsy Cohan, Chief Executive Officer, Frank Mastrangelo, President, and Martin Egan, our Chief Financial Officer.

This morning’s call is being webcast on our website at www.thebancorp.com. There will be a replay of the call beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 71976011.

Before I turn the call over to Betsy I would like to remind everyone that when used in 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 can 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 Cohen

Thank you very much Andres, and thank all of you for taking the time to listen to the review of our first quarter results. The Bancorp continues to successfully pursue its deposit strategies. As you can see it not only is increasing deposits within line to business and Frank will provide you with more details in just a moment.

But it also is restructuring its deposit ratios so that transaction accounts represent an increase of 62% over the first quarter of 2008 and 18% on a linked quarter basis making the total ratio of transaction accounts to total deposits a very robust number of 91%.

As you know we continue to mine our relationships with existing and a growing number of partners in order to sustain and grow low cost sticky deposits, deposits that are subject to contractual arrangements of usually in the three to five year range for their steadiness and low costs as a result of the added value and the negotiated rates within the contracts.

We have been focused on increasing the ratio coverage of our loan loss provision and this quarter increased it to a coverage of 1.29% from 0.83% at March of 2008 and from 1.20% at December so we continue to be mindful of the economic surroundings and to continue to provide and add to the provision.

I will speak about the credit side of the balance sheet after Frank talks about deposits but before that I wanted to focus on two items, one are our capital ratios and there certainly are today even more ways to look at those capital ratios then there have been in the past. But if we were to look at Tier 1 to risk, its increased from 11.38% to 11.85%.

Total capital to risk has increased from 12.53%, these are numbers as of 12/31/08, so its on a linked quarter basis to 13.11%. The net interest margin is another place that we seem to be getting some traction and although the increase year over year was only to 3.58% from 3.45% at March, 2008, this was an interesting quarter for us from that perspective.

During the, and we don’t usually go into such detail, but it was just so dramatic, during the month of January we were inundated by deposits. That doesn’t sound like a bad thing, but we recognized that they were not all going to remain with us over the long-term and so we had pressure on our margin in terms of the use of those funds.

During the month of February we came back to a more normalized situation and so that number that had been 3.28% in January became approximately [6.0%] and in March, was 3.98% and following it for April, we are close to 400 basis points in terms of net interest margin which has been our historical target although not achievable recently.

I think it comes from the recognition of borrowers that either for new credits or for the renewal of credits that the scarcity of funds may require an adjustment in interest rates.

I think with that, I guess the other, look at capital that people have been taking recently as tangible capital to tangible assets and its been done in a number of different ways. We would just provide you with two looks at it, one is on a what I’ll call straight up basis and its at 7.13%.

And if one were to include the TARP funds as a common equity equivalent it would be 9.70% so there’s, people have been doing this calculation in a number of different ways, and so we give you that variety of use of the capital structure.

Frank would you like to talk about some of the lines of business on our deposit side.

Frank Mastrangelo

Of course, thank you Betsy. As Betsy mentioned core deposits for the institution grew to 91% of total deposits, that was really driven by growth of a number of our affinity channels, affinity deposits as a percentage of total deposits grew to 64% the end of first quarter and affinity deposits represented 69% of core deposits.

That was driven by the number of business units, specifically our prepaid business line ended the quarter with just about $518 million of total deposits. That’s up $137 million from the end of the calendar year 2008, a 36% quarter-to-quarter increase and a 200% year over year increase in that business line.

Our healthcare deposits grew to $262 million, up $50 million in the quarter representing a 24% quarter to quarter increase and a 92% year to year increase in that business line.

We also grew as normal through the open enrollments process our total account base in the healthcare business line by 37,000 accounts in the quarter representing 27% growth in account volume and 74% year over year growth in account volume.

Betsy Cohen

Thanks very much, we feel that both of these lines of business despite our writing down the goodwill associated with one of those, the prepaid business, are very robust generators of low cost deposits and I think we’re beginning to validate that.

On the credit side, we had a slight increase in nonaccrual loans but the most dramatic increase was in loans 90 days past due and still accruing. There’s really three components there that drive that number. One actually is the Federal government which is about $1.2 million of that, a little bit more.

One is a loan, or two loans that may be that to a borrower, both of which represent first mortgages, both properties, these are commercial properties, are under agreement of sale and we’re simply waiting for the sign off for those to close.

And they represent about $5.5 million and $4.5 million or maybe it’s a little bit less, that’s represented by two first residential mortgages to the same couple and unfortunately one member of this couple about three months ago, two and a half months ago, was diagnosed with rapidly deteriorating cancer and with a very short life expectancy and their interests have been focused elsewhere.

But I think that will get straightened out, the loan will get straightened out within the next 90 days so we have adequate coverage and feel very comfortable there.

I think that with that, I will perhaps just saying one more thing, which is that we continue to be grateful that our lending portfolio is within the nine or 12 depending upon how you count it, count the area surrounding Philadelphia which has drivers of its economy which are still relatively healthy including education and hospitals and pharma and etc.

And so the unemployment is below the national level and the decrease has never been a wildly volatile area on the upside as well as the downside. Residential properties remains within a manageable level.

With that I would be glad to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of James Abbott – Friedman, Billings, Ramsey

James Abbott – Friedman, Billings, Ramsey

I wanted to ask a couple of questions to follow up on the new nonaccruals and just could you give us a sense what the loan to values were at origination on that and then just a little bit of insight as to what the new appraisal value is showing and therefore what the implied change is on the value of that property from the time of origination to present and give us a sense of how much cushion you have on the loss potential there.

Betsy Cohen

I’m not sure that I can do that here, but I’ll be glad to get that to you off line. We have found on sales of residential property, I’ll answer you in a broader was as opposed to these particular assets. Remember the commercial assets which I don’t think really have decreased significantly in terms of value are under of agreement of sale so that’s not with a lot of cushion so that’s not the way in which we’re looking at them.

And maybe your question is more directed to our residential property. We have seen maybe a 10% to 12% decrease over our initial estimates of value on the original underwriting on sale but the issue in our area is not the decrease in value as it is the velocity.

And that’s really, since we’re, I hate to say that we’re optimistic, we’re not optimistic but we’re looking at a portfolio that’s primarily first time home buyer and somewhat above but a price point that is a rent still a rental equivalent in our marketplace as our primary collateral or residential property type and so well within even if its not eligible for the first time home buyer credit, its well within the conforming numbers in terms of mortgage availability.

We ourselves started a, for in partnership with our affordable housing developers a mortgage program which has been successful in helping to move some of the properties, also has shown us that the average mortgage for which our developers customers are looking is approximately in the 250 range. So that might give you a view as to what it is that we’re, the kind of properties that are underlying our residential loans and also that they really haven’t decreased significantly in value.

James Abbott – Friedman, Billings, Ramsey

Can the same be said, this is, are you speaking about in some of your construction projects as well.

Betsy Cohen

Yes, I thought that’s what you were looking for.

James Abbott – Friedman, Billings, Ramsey

No it was, I just wanted to be clear that this is not the permanent portfolio, this is the construction.

Betsy Cohen

No.

James Abbott – Friedman, Billings, Ramsey

Because the permanent portfolio seems to be, at least when any of them go bad, they seem to be larger loans, sort of high net worth loans. And then, are you seeing much deterioration in asset value though on the commercial real estate assets when you’re within your footprint, we’re hearing at least in a lot of areas of the country a 25% decline in commercial property values. Would you be able—

Betsy Cohen

We really have not seen that. We haven’t seen a lot of disruption in our portfolio on the commercial side. If there’s, I guess anything which would support that its looking at this one commercial property, there are actually two commercial properties, one borrower, that is 90 days past due and still accruing and subject to agreements of sale.

We didn’t see any deterioration there.

James Abbott – Friedman, Billings, Ramsey

And one final question is on the reserve build, what, as we move forward throughout the year can you give us any color on how the increase should go. It sounds like you’re interested in increasing that. Would you expect it to be a fairly steady increase over time, is it a function of the nonperforming levels, is it a function of the charge-off levels, how should we—

Betsy Cohen

I think it’s a function of all of those and so its, the coverage number may change from time to time but we’re dedicated to recognizing whatever losses we have as early as possible and to while we’re not, while we don’t have losses that we need to recognize to adding that to the loan loss provision in anticipation of potential losses because of the state of the economy. So all of the above, and in varying components.

James Abbott – Friedman, Billings, Ramsey

Do you see it rising much more then 10 basis points in any given quarter or its hard to predict.

Betsy Cohen

You mean the coverage, its really hard to predict, it’s the matter of when we deem it appropriate either to take a loss or to add more, I mean its all of the components that you mentioned.

Operator

Your next question comes from the line of Matthew Kelley - Sterne, Agee & Leach

Matthew Kelley - Sterne, Agee & Leach

Just talking about the past due loans maybe we can get an update there on what the past due loans were at quarter end. I know they were about $23.9 million at year-end, just, how do you stack up at quarter end.

Betsy Cohen

About the same.

Matthew Kelley - Sterne, Agee & Leach

So right around $24 million there.

Martin Egan

Are we talking 30 days to 89 days.

Matthew Kelley - Sterne, Agee & Leach

Yes.

Betsy Cohen

Including 30 days to—

Matthew Kelley - Sterne, Agee & Leach

No just 30 to 89 days.

Betsy Cohen

Oh, I’m sorry, I misunderstood your question. I thought you meant if you aggregate the 90 days.

Matthew Kelley - Sterne, Agee & Leach

No I’m just looking at 30 to 89 days past due at year end was $23.9 and—

Betsy Cohen

Its about $12.2 of which about a little under $2 million is due to the Federal government.

Matthew Kelley - Sterne, Agee & Leach

Okay so they were down 50% then.

Martin Egan

That’s right.

Matthew Kelley - Sterne, Agee & Leach

The expense level in the quarter, $13.3 million, is that a good run rate and in that number what were your FDIC insurance premiums this quarter and where are they going next quarter.

Betsy Cohen

Martin, what were they this quarter I don’t know that number.

Martin Egan

They were—

Betsy Cohen

While he’s pulling that up I can say where they’re going next quarter—

Matthew Kelley - Sterne, Agee & Leach

Outside of that what’s the trend versus the 13.3.

Betsy Cohen

I think its pretty flat.

Matthew Kelley - Sterne, Agee & Leach

Okay.

Martin Egan

They were a little over $300,000 for the quarter.

Matthew Kelley - Sterne, Agee & Leach

And there were no one-time items or benefits in that expense number.

Martin Egan

No.

Betsy Cohen

Not to the best of my knowledge.

Matthew Kelley - Sterne, Agee & Leach

And then what about in the noninterest side, the $3.3 million there, any detail on the line items, any gains this quarter, any significant gains.

Betsy Cohen

No. Frank do you want to talk to that because they’re mostly driven by prepaid.

Frank Mastrangelo

Yes, it is mostly driven by the prepaid business line, a couple of other items feed into that, merchant processing, ACH origination, there are all business lines. We expect to continue to grow through calendar year 2009.

Matthew Kelley - Sterne, Agee & Leach

Okay so that’s a good core number and is there any seasonality there.

Betsy Cohen

It is a core number, any one-time numbers did you say?

Matthew Kelley - Sterne, Agee & Leach

Yes, I just want to confirm that there were no one-time items in there that we should be aware of plus or minus.

Betsy Cohen

I don’t think so.

Martin Egan

Yes, there was nothing one time.

Matthew Kelley - Sterne, Agee & Leach

Any seasonality in those businesses that we should think about as we model forward.

Frank Mastrangelo

There is certainly seasonality in the business lines, as you know the merchant processing business line will typically have a weaker second and third quarter, a stronger fourth and first quarter. The prepaid business line is a bit more spiky in that Q2 would be a weaker quarter but we would see a pronounced spike up in Q3, Q4 and then maybe a little tail off in Q1.

Betsy Cohen

But that, what you’re talking about are trends without, on a static portfolio or on a, but this is a portfolio that’s growing so they could be masked a bit.

Frank Mastrangelo

That’s right.

Matthew Kelley - Sterne, Agee & Leach

And do you anticipate profitability for the full year.

Betsy Cohen

If your prayers are with us, yes.

Matthew Kelley - Sterne, Agee & Leach

And how much total earning asset growth should we be looking at for the year.

Betsy Cohen

I think it’s a question of managing the portfolio. We have the opportunity to grow it I believe to some extent although we’ve been very cautious and I think we’ll continue to be cautious through the year. I think one of the reasons I focused on numbers and percentages of transaction accounts within the deposit portfolio is because without any total asset growth or total liability growth that’s a significant movement toward lower cost deposits and lowering the cost of funds.

And that’s what’s enabled us in part to re-achieve our margins. So I think there are ways and our strategies will be focused as much on maximizing the value of our current portfolio as on growing it.

Matthew Kelley - Sterne, Agee & Leach

Can you give us a sense of the largest projects in your construction commercial acquisition and development, the $150 million there, maybe just talk about the types of loans that are in that $150 million, the top two or three credits.

Betsy Cohen

In the residential? I’m not prepared to do that at this time but certainly would be glad to do that off line. I gave you the general characteristics and they apply to the top credits as well. The top credits are not different from the description that I gave you of the general residential portfolio.

Matthew Kelley - Sterne, Agee & Leach

Okay, I’m just trying to get a good understanding of your exposure to residential developments throughout the Philadelphia, Delaware market, southern Jersey etc. obviously that’s what people are most focused on still for potential high loss severity asset classes, that’s all I was hoping to get a little clarity on.

Betsy Cohen

Yes, what I’m trying to share with you are the financial or characteristics of those projects and they reflect the characteristics of the portfolio as a whole. I think, I’m sorry, I mentioned that they appeared to be in the first time homeowner rental equivalent primarily in those two categories. There are some outliers but not large projects. They’re not the large projects but most of our projects are within that $250 to $500,000 range, $450 range and so the point I was making is that what we see is the average mortgage for the properties that are selling now is in the $250 maybe $300,000 area, well within the conforming range.

And we believe that most of the projects, large or small within the portfolio are subject to, don’t require jumbo mortgages but are within the conforming area.

Matthew Kelley - Sterne, Agee & Leach

Okay, and just your assessment of the how the selling has been generally positive.

Betsy Cohen

Yes, we’ve seen a pick up, we really have. We have, we do our rounds with all of our borrowers in that portfolio every 10 days and we’ve seen substantial pick up in traffic and substantial pick up in the houses going under agreement of sale. You should see some impact from that in the second quarter.

Operator

Your next question comes from the line of Andy Stapp - B. Riley & Company

Andy Stapp - B. Riley & Company

In your prepared remarks you stated the dollar amount of deposits associated with your prepaid business line, I missed that.

Frank Mastrangelo

It was $517 million.

Betsy Cohen

And I think that its important in that its up from the $172 million in the first quarter of 2008 and even on a linked quarter basis up from 380 so we think there is significant growth available to us.

Andy Stapp - B. Riley & Company

And you mentioned that there were two residential loans that slipped into the 90 plus day category, were they for two properties or one.

Betsy Cohen

Two properties, they were two individual properties owned by the same couple.

Andy Stapp - B. Riley & Company

Right, and I did not get the dollar amount of those two loans.

Betsy Cohen

Roughly in the $4 million range in aggregate.

Andy Stapp - B. Riley & Company

Okay and can you give us an update on the home in the Hamptons that you have for sale.

Betsy Cohen

We prepared it for sale, I think we got it in November, December, we prepared it for sale and its signed an agreement with an agent 30 days ago.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Betsy Cohen

Thank you to all of your for your good questions as always and for taking the time to allow us to share this information with you. On to next quarter.

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