The Bancorp, Inc. Q2 2010 Earnings Call Transcript

Jul.22.10 | About: The Bancorp, (TBBK)

The Bancorp, Inc. (NASDAQ:TBBK)

Q2 2010 Earnings Conference Call

July 22, 2010 10:00 AM ET

Executives

Andres Viroslav – Director of Corporate Communication

Betsy Cohen – CEO

Frank Mastrangelo – President

Paul Frenkiel – CFO

Analysts

John Hecks – JMP Securities

Mike Laudus – FBR Capital Markets

Frank Schiraldi – Sandler O'Neill

Matthew Breese of Sterne, Agee

Operator

Good day ladies and gentlemen and welcome to 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 towards the end of this conference. If at any time during the call you require assistance please press star followed by zero and a coordinator will be happy to assist you. 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.

Andres Viroslav

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.

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 11:00 a.m. Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 8768221.

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 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'd like to turn the call over to Betsy Cohen, Betsy.

Betsy Cohen

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 encrypted in its annual cycle and the second quarter of the year is the lowest quarter both in terms of deposits and deposit growth. The funds of various lines of business that we have that what we provided you primarily in the release are what we think are the relevant comparisons to the second quarter of 2009.

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

We have had 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 – more Fleet Leasing Program, which is primarily to school districts and universities and other such entities has also shown growth.

We've had (inaudible) expansions and we discussed on our first quarter call the impact on (inaudible) provided by the inflow of significance on a relatively seasonal basis and therefore our inability to invest in long term and 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 at 2009 as well.

We had significant growth in non-interest income, 48%. It reflects both new customers plus growth in existing relationship and Frank will add more color to that when he speaks about not only our deposit growth but what might interest many of you which is the impact or lack of impact of the regulatory reform position.

We are also delighted that we are very, very pleased with our healthcare deposit business being $400 million in deposits and as you know, there is a long-term very (inaudible) deposits.

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

On the credit side there are several factors imbedded in our current credit report. One we continue to be aggressive in terms of writing off loans, we may have recovery or may not have recoveries later but we feel that we'd like to put this cycle behind us.

Imbedded in that 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 where such loss is taken at 8 years and we think it's even nature of a nonrecurring event. There is at the end of the day a higher position coverage.

On the deposit front, transaction accounts direct 32% and we continue to grow in all lines of business. We had reverting that to credit; we had some movement from our 30-89 day delinquencies, which were roughly $15 million at the end of 03/31, the first quarter 03/31/2010. 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 results within this upcoming quarter.

Other than that the numbers remained relatively constant. We continued to have a significant percentage of our non-accrual loans under agreement of sale and are simply waiting for this 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 reforms, Frank.

Frank Mastrangelo

Thank you Betsy. As Betsy mentioned, we continue to achieve strong growth rates in all areas of our business lines as we – 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 non-interest income growth, 48% increase in non-interest 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 response 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 deposits of the institution having 77 basis points for the second quarter plus the second quarter the bank was funded – core funded that's at about 92%.

As Betsy mentioned, one of the things that we've been chatting about most recently is the potentially 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 significant opportunity, what we look at certain provisions of Dodd-Frank like for example the interchange provisions and overlay impacts on our prepaid and debit card businesses.

What we find is the vast majority of our income is actually specifically excluded from the said rule making in the Dodd-Frank Bill. More specifically, 70% of our non-interest income in prepaid is being driven by interchange, 78% of that interchange income is specifically excluded from Fed rule making in the bill.

So, as I said it leaves a very, very small portion of non-interest income that could potentially be affected nonetheless we don't believe so. Almost more importantly is the – to us and 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.

Betsy Cohen

Thank you Frank. I apologize for that high pitch noise. As you can hear from Frank's report we have both been growing and we feel very comfortable that the provisions that were very hard to meet 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.

So 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 counter period of time. That combined – the disruption combined with the lack of impact from or diminished impact from any preemption as a safe bank is 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 etcetera. 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 and assets.

We had some significant pay down but they really in a way are a good news because pay downs was a result of – with a significant pay down was a result of commercial real estate loans having access again to the capital markets, but we think that that is a bit of a look at [inaudible] of that sector and although it diminished our quarter end numbers so we think it's a good thing. With that I will ask (Josh) open the lines to any questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And our first question comes from the line of John Hecks of JMP Securities, John you may proceed.

John Hecks – JMP Securities

Good morning guys, thanks for taking my questions. First question is the non-interest expense – there was a modest uptick now I know you've been hiring people in the SBIC Program, is this a good run rate to use for the non-interest expense or where there some cost added along the quarter, during the quarter?

Betsy Cohen

Paul, do you want to respond?

Paul Frenkiel

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 short sighted but that said we are trying to control the non-interest expense and so you should be able to use that as a run rate.

John Hecks – JMP Securities

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?

Betsy Cohen

To work, I'm sorry, I missed the last few words.

John Hecks – JMP Securities

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

Betsy Cohen

Well we're working with all [inaudible] 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 – if you – it's only been three weeks and a little bit early to give you anything more definite than that.

John Hecks – JMP Securities

Okay, thanks so much. I guess is there any character of loans or is it more commercial? Is it more real estate oriented or is there any characteristics you could talk about.

Betsy Cohen

Well I think there is [inaudible] across the board and it's not primarily real estate. There is some small business distress in there but I think it's really across the board.

John Hecks – JMP Securities

Okay, great. And then, you're margin, you experienced the margin uptick from Q1 to Q2, is there any guidance you can give us of what drove that change and that any.

Betsy Cohen

Of course, in the first quarter we had had a huge inflow of fund in the nature of about $400 million in fund that we paid very little for it 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 36 [ph] range but that's just an estimate John from memory.

It took time for those funds to runoff most of which ran off in April, the first month of this quarter and so you began to see a recovery, a 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 offline.

Paul Frenkiel

Right, I don't have it at this moment but Betsy characterized it properly that this margin that we had this quarter about the three, roughly 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 expect.

Betsy Cohen

I think that in June you had a much higher of probably about 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.

John Hecks – JMP Securities

Fair enough but it sounds like at least in the first half when you normalize for some of the seasonal trends and inflows, that it was somewhat flat and given the yield curve and so forth, flat, flattish no major changes would be fair to call right now.

Paul Frenkiel

I would say that's a reasonable.

Betsy Cohen

Yes I think it's a reasonable approach.

John Hecks – JMP Securities

Okay, great, thank you guys for answering my questions.

Operator

And our next question comes from the line of Bob Ramsey of FBR Capital Markets, Bob, you may proceed.

Mike Laudus – FBR Capital Markets

Actually this is Mike Laudus for Bob, good morning.

Betsy Cohen

Hello.

Mike Laudus – FBR Capital Markets

So I knew you had mention that you generated $90 million of loans across the various business lines, which has definitely encouraging. I was wondering if you have any outlook or targets for the next 12 to 18 months on that figure?

Betsy Cohen

Yes so we really don't provide that kind of guidance but I appreciate you asking for it. I think we feel that we have a substantial pipeline in this SBA Programs. We see an uptick in security backlines of credit and as you, see on an year-to-year basis we see a – from a percentage point of view a significant uptick in mostly automobile leasing and so both combined I think will allow us to continue to grow the loan portfolio over the course of the year.

Mike Laudus – FBR Capital Markets

Okay great. And I guess in kind of going with that question, in terms of provision expenses or 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.

Betsy Cohen

Well certainly our experience in auto leasing and [inaudible] where we had certainly no losses would not give us pause, the SBA lending is 75% government guarantee and so we have that cover as well and so those are really the underlying characteristics, which we've been looking for in order to identify a strategic component for loan growth.

This quarter the coverage went up from I think 133 to 142 so we're mindful that we should be covering due to economic condition but our specific strategic asset allocation would not drive us in that direction.

Mike Laudus – FBR Capital Markets

Okay great, thanks so much guys.

Operator

Our next question comes from the line of Frank Schiraldi of Sandler O'Neill, Frank you may proceed.

Frank Schiraldi – Sandler O'Neill

Good morning.

Betsy Cohen

Hi Frank.

Frank Schiraldi – Sandler O'Neill

I'm just wondering Betsy if you can go into a little more detail on that non-recurring piece of the provision?

Betsy Cohen

On the tax issue?

Frank Schiraldi – Sandler O'Neill

Yes.

Betsy Cohen

Yes, without violating someone's borrowers or a customer's privacy it's really hard to do. I can tell you that it was a set of circumstances put in those 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 non-recurring and I certainly could give you potentially a little more color offline but I just don't think it's appropriate for the conference [ph].

Frank Schiraldi – Sandler O'Neill

Okay so that portion was in the provision and it was charged off as well.

Betsy Cohen

Yes it was. It went straight through.

Frank Schiraldi – Sandler O'Neill

Is there a potential for recovery, do you think there or too early to say or should we hope.

Betsy Cohen

I really think.

Frank Schiraldi – Sandler O'Neill

Okay.

Betsy Cohen

Those, 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.

Frank Schiraldi – Sandler O'Neill

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, you know, from the second to the third quarter but I know there's been a ton of new relationships and a lot has changed.

Betsy Cohen

Sure absolutely. Frank why don't you speak to that?

Frank Mastrangelo

Sure. I know you're aware Frank third quarter is typically a strong quarter from a deposit standpoint for a number of our client's business, healthcare kind of which is, two periods per year of course the calendar year renewals, enrolments which is the strongest component but then also the fiscal year enrolments which will 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 really strong, very strong deposit growth.

But I think that from a modeling standpoint I mean we've – I think we 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 we're 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.

Frank Schiraldi – Sandler O'Neill

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

Frank Mastrangelo

Without.

Frank Schiraldi – Sandler O'Neill

Without, Okay. And then.

Betsy Cohen

You might remember – I'm sorry again but you might remember Frank that we used the CDs only to even out and they're all short-term 30 days or 60 days CDs even out the deposit flows, so I think we could look at them without it.

Frank Mastrangelo

So in many of our strongest deposit quarters we have very little to know CDs in the deposit book and that was true for example in the first quarter.

Frank Schiraldi – Sandler O'Neill

Right, okay and then I guess that leads me into a 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 margin?

Betsy Cohen

No I think Frank, excuse me not Frank, Paul could talk to that, but in general we're very – tried to very precise within a week or two of our anticipated inflows but Paul would you like to?

Paul Frenkiel

Right, all the CDs are virtually [ph] 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 a 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 pickup 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.

Frank Schiraldi – Sandler O'Neill

All right. I guess just I'm asking when in the quarter – when in the third quarter does the season – does the strong seasonality start?

Paul Frenkiel

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

Betsy Cohen

And you'll see almost immediately. I mean if you looked at it on a daily basis since we do, you would see almost immediately a rundown not runoff but a rundown in MCDs [ph] and a pickup in demand deposit.

Frank Schiraldi – Sandler O'Neill

Okay, great and then sorry to keep you here but just one more question. I wanted to ask rather. Frank if he could just go over those percentages again in terms of non-interest income potentially affected by Dodd-Frank?

Frank Mastrangelo

Right so if we looked the second quarter prepaid income, Frank, 70% of our income was interchange related that means 30% was non-interchange related, you know, fees for program management fees, transaction fees, things like that not really did interchange. 78% of that, 70% was specifically excluded from Fed rule making in the Dodd-Frank Bill meaning these were health benefits cards. These were loadable prepaid cards, that met various qualifications within the interchange amendment that we're specifically excluded from Fed rule making.

Frank Schiraldi – Sandler O'Neill

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

Frank Mastrangelo

That is correct, I think that's a fair assumption.

Frank Schiraldi – Sandler O'Neill

Okay and when you say 70% of prepaid income, what is that of total non-interest income?

Frank Mastrangelo

For the second quarter that was $2.51 million.

Frank Schiraldi – Sandler O'Neill

$2.51 million, okay. Thank you.

Betsy Cohen

Okay, are there other questions?

Operator

Our next question comes from the line of Matthew Breese of Sterne, Agee. Matthew, you may proceed.

Matthew Breese of Sterne, Agee

Good morning, how are you doing?

Betsy Cohen

Okay Matt.

Matthew Breese of 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?

Betsy Cohen

It's not one loan, it's a series of – a couple of loans that went from 30 to 89 to 90 plus and there are of course a variety of categories. Some are individual personal residential mortgages.

Matthew Breese of Sterne, Agee

Okay.

Betsy Cohen

And we're only in this [ph] – they just go across the category.

Matthew Breese of Sterne, Agee

Okay and then, I know you guys had motioned 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?

Betsy Cohen

We didn't have guidance, we had growth to 32%.

Matthew Breese of Sterne, Agee

Okay. Thank you for clarifying that.

Betsy Cohen

Okay.

Matthew Breese of Sterne, Agee

That's all I got.

Betsy Cohen

Thanks.

Operator

At this time we are showing no further audio questions available. Betsy Cohen you may proceed.

Betsy Cohen

Again thank you (Josh). Again I'd like to thank all of you not only for joining the call but as always for your good and probing questions. We prepared carefully for these calls knowing that you're going to ask good questions and we hope we have provided you with adequate response. We look forward to talking with you next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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