Bancorp Inc (TBBK) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2005 The Bancorp earnings conference call

[OPERATOR INSTRUCTIONS]

Before we begin I will read the following cautionary statement.

When using the conference call the words "believes", "anticipates", "expects", and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities the Litigation Reform Act of 1995. Such statements are subject to risk 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 see the Bancorp filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the day care of. The Bancorp undertakes no obligation to publicly release the results or 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.

At this time I'll turn the call over to the host Miss Betsy Cohen, Chief Executive Officer. Please proceed.

Thank you very much, Gina, and thank you to everyone who is on the call today. We are delighted to present to you today the fourth quarter and full year earnings for The Bancorp, and feel quite pleased with what we are presenting. As you read in the financial highlights, we have chosen to focus your attention on net income before the tax expense lines for several reasons, all of which had up to the fact that we think this is perhaps the best indicator of the earnings power of the institution overtime.

Between the years 2004 in 2005, we went from a situation in which we have roughly a $1 million tax credit, to one in which we had income tax expense for the year up about $4.2 million. Even after that $4.2 million, we had earnings go from a pre-income tax line of roughly $0.05 or $0.06 a share to $0.19 a share after tax. So we are focusing because of that, and as you know we spent a year in various quarters cleaning up the capital structure, and there were nonrecurring items in two of the four quarters. On that line which is net income from operations but net income before income tax expense. Clearly for 2005 as a whole before income tax expense but after the roughly $1.3 million that was a prepayment expense for the redemption for trust preferred, and so that is a nonrecurring item. So again, looking at the fourth quarter on a 2004 to 2005 basis, one can see that net income before income tax expense quadrupled plus. And so again we believe that we are getting the benefit of operating leverage, we are getting the benefit of net interest margin, maintenance, and both of those things are resulting together, together with growth in a sustained profitability for the institution.

We had estimated from time to time that we would grow approximately 60% this year, and if you take a look at total assets we were just a shade under, 59.3% from 2004. Loans grew also by that 59.3% since 2004, and deposits were a little bit ahead of us, at a bit over 80%. So we believe that we're tracking well to have a year, in this upcoming year, 2006, in which we continue to grow robustly.

One of the other markers of our continued growth is really on a year-to-year basis, the grow from about $17.5 million or $17.6 million to little bit over $32 million in terms of net interest income. And a growth from $2.8 million to $4.3 million in noninterest expense. So those kinds of growth rates are adding again combined with our scalability and operating leverage to increasing profitability.

We funded loans towards the end of the quarter, during this quarter as I think we did during the last, and gather deposits ahead of that, those two factors of timing help to result what was again a significant and stable net interest margin, I think ahead of what we had actually anticipated. I think when we last spoke last quarter we thought that that might have decreased from $477 million, which it was the third quarter to may be roughly between $450 million and $460 million. But we were able do slightly better than that we would tell you through brilliant management but also through the timing we often have less than perfect control of the inflow deposits and in loans.

The growth in deposits came across the board, from the Philadelphia Private Group, from affinity groups as well, and I am just going to pass the conversation over to Frank for a moment to talk a little bit about the affinity deposit growth in areas that you might not have seen before.

Thank you, Betsy. As a Betsy mentioned the affinity deposits continued a larger portion of the bank's overall deposits totaling almost 24% of the banks total deposits. One of our business lines are merchant processing business line actually has exceeded and sustained now the $100 million mark in total deposits, so it is a significant contributor to the total deposits of the institution. And specifically the business line inside of our merchant group that continues to contribute the most to sustain deposits and deposit growth is our ACH processing group. Since the first quarter of 2005 we have actually quadruple the number of quarterly transactions that we are originating. We are originating about 2.6 5 million transactions in the fourth quarter and we have grown in noninterest income from that line in business nine fold from the first quarter, comparing first quarter to fourth-quarter. As I've said, it is that business line which has continued to grow, the merchant at an even keel of almost $20 million a quarter across calendar year.

Our healthcare group continues to perform very, very well, I will say that he open enrollments period and the volume that we are seeing from that has been sustained longer than we anticipated. It was not as spiky as last year were there was a four-week spike, and then a leveling off of volume. We are actually still in what we consider it very heavy volume mode with applicants continuing to pour in from our carriers. We are over the 25,000 account mark that we had suggested that we would need through open enrollments and still have a very strong pipeline we feel of about 5000 to 6000 accounts still in pipeline that we will open before open enrollment ends.

Since the end of the third quarter 2005, the deposits generated from these accounts have almost doubles now exceeding $27 million in total deposits. So again HSAs are continuing to contribute as we thought significantly to the deposit growth of the organization.

Thanks, Frank, and I think that this mix of deposits also drives the fact that although in a rising interest rate environment the cost of deposits went up from 307 basis points to 335 basis points or 28 basis points. Loans also went up by 29 basis points and so we remained in parity and therefore were able to sustain our net interest margin. You may remember that our major thrust is to have 75% floating-rate loans and of the balance, 25% hedge against 75% of the 25%, approximately, by way of loan gradated CDs. So it seems to have been a successful strategy thus far.

I think that I would be delighted to answer questions because I think that is probably the best way to get at your other concerns.

Gina, if you could open it for questions.

[OPERATOR INSTRUCTIONS]

We will take our first question from [Tom Doheny] of Sandler O'Niell, please proceed.

Hi, good morning everyone, thanks really detail on deposit costs and loan yields. First of all, you went through a lot of drivers of deposit growth this quarter, I'm not sure if I got the overall but deposit numbers from the Philadelphia Private Bank this quarter.

I don't know if I have those in front of me Tom, but I'd be glad to send them to you, we're looking mostly at some of the affinity groups that people generally asked for.

And you said that affinity was about a quarter of the total deposits at this point?

Yes, 24%.

As you look at the whole statement, the kind of deposits obviously, the growth is pretty strong this quarter, would you expect that -- some of that is obviously seasonal, would you expect that to slow down in the first and second quarter of '06?

I wish we could give you a definitive answer, we think that what is occurring in the field is that there are -- some of our partners, it's a national trend as well, did not complete their definition of their offering account savings accounts in time for the January 1 funding cycle, the plan year. And so within those groups, many of them are pushing that plan year back for individual customers, not individuals but groups of customers to some price a little bit later the April 1. So we may see, and that's what we're saying which Frank spoke about, what we're seeing today, we can't predict because we haven't gone for the cycle before. But what we see our account openings that are as strong as in December.

Right, going onto your, obviously, you touched on the balance sheet growth in 2005 versus your expectations, any thoughts about expectations for balance sheet growth in 2006?

Well, we do shy away from giving guidance, but we do see robust growth coming behind the robust growth that we have already experienced. And I would not like at this point to put a number to it that maybe when we get to the second quarter.

And then with regards to the reserve, as you continue to grow the loan portfolio for the year, should we respect your reserve ratio to be creeping up at some point, and obviously, there are not in a nonperforming assets here, so it's somewhat difficult to provision for future losses, but I guess, would be fair to model that? I think we talked about at some point, 120 reserve to loans, is that something that you see yourself moving towards in 2006?

I don't know if we'd be there in 2006, would like to increase the ratio every time you take a breath and try that the loans grow, and we haven't had the experience, even more than five years out of losses to support an outside provision, so we are using every methodological mechanism we can to grow the loan-loss provision, but the loans continue to grow very quickly.

And then, obviously, you are still at it pretty high capital level at this point, obviously, you're still growing at a pretty healthy clip, but any thought as you move along in 2006 of an introduction of a dividend, even a modest to dividend or update us on your thoughts are?

I don't know that that has been decided, and certainly couldn't share that with you until a work to be decided, we're certainly amenable to capital management, although we do believe that within the foreseeable future we will be going into a capital. I think that you take a look even on return on average equity we are making some progress.

And then with regards to the efficiency ratio, any expectations there, obviously, you kind of future goal and 2005, you are looking for the high 50s as I recall for the end '05, and thoughts today for 2006?

Well, I would hate to think that we could not bring it down further, and so if we were look at roughly 50% as either a goal we think that is probably not unrealistic.

And then a final question, ask a lot of questions here, but on your options expense is that coming into effect in 2006, should we see a significant impact in terms of accepting stock options in '06?

We would hope to keep them manageable, and have a reflect the value that the people receiving the options certainly provide. The per share option cost at this time is Marty? 790.

And that's a pretax annual number?

No, that's per share, so at the end of the year were approximately had 70,000 options, that's a fairly small number.

Got you. Great thanks for the call and quarter, I appreciate it.

We will take our next question from Eric Swergold from Gruber and McBain, please proceed.

That's Gruber and [inaudible], thanks. Morning Betsy.

Hi, how are you?

Doing fine, thank you. I appreciate the extra color on the affinity deposits programs, could you talk a little bit more about the SCI and Advanta. And sort of, I don't know if you break your business out this way, but if you were to break the business out between traditional banking and in fee-based business, what percentage of your income is now coming from fee-based side, thanks?

Thanks, we don't break out that way, because the model that we have is to generate low cost strategic deposits and loan referrals from these relationships, not all of them in equal measure, but from these relationships which result in higher net interest margins, than is being experienced by our peers and therefore outside earning potential. To the questions of SCI on the loan generation side, Frank came to be those numbers now, and then I will go back to Advanta.

Then Eric these numbers are really for our entire private client group which encompasses SCI and other wealth management firms we have relationships with. During the quarter total outstanding loans originated by this group grew $15.3 million to $38.6 million in total, we have a very, very strong pipeline out of this group in excess of $44 million. In deposit generation continues to be strong exceeding roughly in the same range.

How many SCI-like relationships you have on that side?

Well, we don't have one quite that large, but we have 23 asset managers. And I assume that you are really talking about SCI-like group?

Yes, exactly, 23 asset managers.

And I think they manage a total of just under $40 billion altogether. On the Advanta side is as you can see by the press release, that is an agreement that we believe will initially be focused on the provision of deposit services to Advanta business credit card customers. And that is intended to add a second, if you think of credit cards as one bank product, a second bank product to that customer base. Advanta has 900,000 business credit card customers so this is a project that could take a substantial number of months or years to play out. We think of the program will be launched at the end of February, that's our target date, and we were report back to you in the second quarter as to the progress that we've made.

Is the deal with Advanta exclusive or should it prove to be a good format so you can sign similar deals with other credit card companies?

There are elements of exclusivity, but we think on the plus side of exclusivity we're looking at a 900,000 customer base, and we think that that is quite a challenge.

I would agree and congratulations on a very solid quarter, thank you.

We will take our next question from Sy Jacobs of Jacobs Asset Management.

Hi Betsy.

Hi, how you doing?

Good, I want to ask you some questions about HSAs, first of all, how much, what percentage of their deposits of from your HSA product? And then secondly more generally, with all the attention suddenly focused on by the previews of the State of Union: for relaxation of some of rules that would make it easier for Americans to use HSAs, do you think that that is going to accelerate the growth of your business, because you're there with the product, or are you concerned about competitive factors whereby everyone will start offering them, and your ability to grow in your margins might get squeezed, is it a net positive for a net negative?

It's a multilevel question that you've asked Sy, let me just tell you what our thinking around without entering each piece of it directly, what are thinking around its business is. We view the time that we have spent doing two things, as really barriers to entry from other organizations, not complete barriers but certainly in terms of time to market, a barrier to entry. And so we have spent significant amounts of time developing the platform, it is that you know a self-directed platform akin to an IRA, that is not the norm in the marketplace, so we stand out in that regard.

In the second element of market penetration do we have spent time on and I say it's almost 18 months on this is really the development of client relationships. We have 31 HSA partners not all of whom are in the same price in terms of the development of their own products, but we have spent the time in gathering what I think is now approximately 20 million lives plus under management through our relationships. So that is what we've been ahead of the market, if in fact we told you that we had just under 30,000 accounts and they are running roughly $1000-$1100 on a funded basis, if the President gives us a present in raises that limit by $2000, we have the opportunity to grow those accounts, and happened to be more significant. Our own goals the end of year is 100,000 plus accounts, and so certainly another $2000 in account or even $1000 in account would raise our yield from $100 million $200 million in deposits. So all of that I think is working in our favor. If I have left out a piece of what you've asked me, if you could ask it again I would appreciate it.

Just the first, the percentage of your deposits is related to HSAs right now?

If we were to look a deposits today because the accounts we opened in December could only get funded after January 1, we be looking at roughly 5% of our deposits.

Okay, so given the growth rate, the huge growth of 30,000 to your goal of 100,000 accounts, it is fared to say to you would expect 5% in lieu of higher.

Absolutely, it's hard for us to estimate what it is going to be.

Right, thanks Betsy.

Okay.

We will take our next question from Brad Ness of FBR.

Hey, how are you doing?

Fine, how are you?

Doing good. A quick question on the margin going in to 2006. You are normally given guidance over the last couple quarters what you think the margin is going to be like in the next quarter, you plan to do this quarter also?

Well, we can tell you that as we leverage the company, we continue think is brilliant as we are, we cannot sustain a $475 million margin, so to our $450 million to $460 million range in terms of what we think it will be. If you look at that, although we were growing, margin across the whole 2005 were the full-year margin was $457 million may be that is not a bad place to look.

Okay, regarding the private client crew, and the kind of backed into a deposits, and it looks like the group was rather flat in the fourth quarter compared to the third quarter, and when I look at loans in a group, it looks like there were not huge increases over the fourth quarter last year, I would've thought was just the rolling out of the SCI platform, that you probably would have seen more growth in that area. Can you just tell me some of dynamics that you are seeing?

Sure, remember we talk about outstandings, and these are lines by and large that we have to look at total commitments [inaudible]. I'm just try to get a piece of information for you excuse me.

For the fourth quarter of 2004, the total outstanding loans actually from the private client group was zero. Actually all $38.6 million in total outstanding loans for private clients was developed during calendar year 2005.

And we may have had some commitments.

That's right during the fourth quarter, there were new commitments made of about $22.3 million with $15.3 million and in total paid down for the quarter.

But that is just new commitments, and that's added to the $65 million in commitments, so you are looking at roughly $80 million in commitments, $40 million in the pipeline of commitments that are in process, but a takedown that takes time to mature.

Got you, last question here, can you just update me on the status of the banking insured interest-bearing demand account, that's the one that's on the NSCC platform?

Sure, we'd be delighted to do that, we have received NSCC approval, we have earmarked approximately $25 million in deposits that are ready to go on that platform, we expect the platform actually to go live tomorrow.

Wow, exciting, great. Thank you.

[OPERATOR INSTRUCTIONS]

We have a question from [Jack Gore] of [Sonoma Capital].

Hi, thanks for taking my question, I apologize but you probably already been asked this question, or what percentage of your deposits [inaudible] product.

If you look at the accounts they get opened in December, can't fund until January 1, so we're trying to give a number that relates to the accounts that were opened in December, and 4% to 5% would be that number, if they had been they will open the accounts.

I apologize for the redundancy, thank you. And if the limit gets raised, is there any more investment that you needed to do that you wouldn't have done anyway?

No, we are delighted to have the accounts increase, but from the technology whatever, we are indifferent. We have opened 15,000 accounts in the last 45 to 60 days through an automated deposit opening program would we spent a tremendous amount of time developing the program opens roughly three quarters of the accounts, so we should be able to get that up to a 85% or more. So we are focused on doing things which allow us to open a dense number of accounts in an efficient manner, and therefore be able to help further decrease the efficiency ratio.

Thank you.

We have a question from Tom Doheny of Sandler O'Neill.

Just one quick follow up, as I look out to 2006 you mentioned that the margin may not be sustainable at this level, is that expectation predicated on loan growth not keeping up with the deposit growth.

No, not at all Tom, we think that there is a certain amount margin that as a result of our having an outsized amount of capital, so we are just trying to leverage our way through that and normalize as we think it will normalize.

Great, thanks very much.

Your welcome.

We no other questions on the phone lines. I will turn the callback over to the presenters for closing remarks.

Thank you very much, Gina, and thank you to everyone for as always you're very good questions, your continued interest and we look forward to being with you next quarter.