Bancorp Inc (TBBK) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 The Bancorp Inc. Conference Call. My name is [Torlisha] and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

Before we begin the conference I have been asked to read the following statement. When used in this conference call, the words believe, anticipate, 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 discussions of these risks and uncertainties, see The Bancorp Inc.'s filings with the SEC.

The listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as the date hereof. The Bancorp Inc. 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.

I would now like to turn the call over to your host for today, Miss Betsy Cohen. Please proceed.

Thank you, Torlisha, and good morning and welcome to The Bancorp call. This was a quarter in which we continued to show excellent balance sheet growth. Total loans for the year increased some 56.2%, close to the 60% that we had anticipated, and our efficiency ratio once more went down to just about 50%. That means that we've continued to make the bank even more efficient at the rate of approximately 1.5% a quarter. So I think that we're on target for our estimates in that line.

During this quarter we had an outsized tax -- income tax charge which I think masks to some extent the true earning power of the institution going forward. The tax rate for this quarter reflects two elements that are not actually period specific, one being a so called true up of taxes for a reason that I'll have to let Marty explain to you because I have no idea, and secondly, the unexpected for us I think 123R taxation as a result of exercised options. Without those elements involved the earnings of the institution would reflect an ROE of 9.27%.

And I think if you take a look at the year as a whole in terms of the ratios, being 1.19% return on average assets and 8.89 return on average assets -- I'm sorry, average equity, I'm sorry, I said assets before, I think that you'd get a reflection of probably what the year was about.

It certainly was a year of growth for us in which we continued our deposit growth. And, if you take a look at transaction accounts during the quarter, they continued to grow at about a rate of $100 million a quarter from -- excuse me, transaction accounts grew to $611 million from the, and I don't have the link quarter here, from the prior year, which they were $467 million. So again, we think continuing growth.

One of the areas of interest for us, and certainly effort, has been in the Health Savings Account area where again we see significant growth. We added four relationships year, excuse me, this quarter and it brings us to a total of 22.1 million lives covered at the end of the fourth quarter as compared to on a link-quarter basis to 21.3 million.

What we have learned about the Health Savings Account business is that the insurers, who are our high deductible healthcare insurers who are our partners in this venture for whom we private label, sign up their accounts primarily in the fourth quarter, but do not always get those accounts to us that we're seeing as of December 31st.

So we're seeing continuing flow from that line of business and as of last week, I think it was -- we had about 60,000 accounts in hand, about 20,000 that we could see in the Q and $74 million in deposits. If in fact the Q bears out and we're at 80,000 accounts for this season that would bring us to over $90 million on the average that we see in terms of deposits. And so those deposits being low-cost deposits, we think that that will be helpful to the margin going forward.

Again if we look on a link quarter basis, we have growth in interest income with respect to loans of just under $2 million for the quarter and we continue to generate significant loan growth. Part of the loan growth is a result of a private client, as we've discussed before, those asset managers for whom we private label. And we have a lot of activity in that area in terms of new relationships and building out old relationships that should bear fruit in the second or third quarter of 2007.

And we have been focusing over the last year, recognizing that there could be some softness in loan demand in the construction area, which has always been a particular specialty of ours in terms of our knowledge and certainly the experience that we've had which has been no losses over a many-year period. We have focused on commercial loans and you can see significant growth in that area.

But we believe that this is a year in which we need to penetrate the markets and relationships that we have and so we've been investing in ourselves. As we like to think about it, although they turn up on the P&L as expenses, it's really an investment in ourselves and you'll see a little tick up in the non-interest expense category.

We have virtually expensed, unlike a bank with branches, virtually all of the expenses that we incur go through the current accounts. They're not spread over a ten-year lease period or anything else of this sort. So what you're seeing is really a reflection of what we anticipate over the course of the next year in terms of staffing needs, and they may tick up further because we think that we have opportunities that we have not yet built out.

Just as a matter of interest, we have been talking about what we call branch-in-a-box, the remote deposit gatherings device which we think will both increase deposits, because our geographic reach will be irrelevant, and decrease expenses.

And so far we have reintroduced it in the second quarter and had about $14 million flow through that source and in the fourth quarter over $90 million, so we think that is a good indication. I just learned that we in fact reduced expenses on the charges for sending deposits to us by some $65,000 for which we had been paying for UPS to do that.

So all of those, again on a going-forward basis, are good indicators of our capacity to both grow the institution and hopefully to maintain and better the efficiency ratio. On the tax side, our tax rate as of this quarter, during this quarter, was 45%, outrageous, as opposed to what we anticipate, which will be someplace around 38 to 39% going forward. So we hope that provides some indication of what were not period-specific tax expenses.

With that I'm just going to open it for questions and Frank Mastrangelo and Marty Egan are both here with me and we will all be glad to answer your questions. Torlisha?

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from the line of David Rochester with FBR. Please proceed.

Hi, good morning guys.

Hi, how are you?

Good. Great balance sheet growth there and it's good to see the improvement in credit as well.

Thank you.

Just a quick question on the loan growth. It looks like from the average balance sheet data that the growth was weighted maybe in the second part of the quarter, if you could provide a little color there that would be great, and maybe some additional color on the pipeline at the end of the quarter and update your estimates for loan growth and EPS growth for '07?

Well we don't give you EPS growth estimates, David, but it was a good try. You had to slide it in there, but we do say that we see continuing growth, significant growth, the pipeline is very strong in the loan area.

And I would like to tell you that we can change human behavior and have all the loans close at the beginning of the quarter but it just doesn't work that way, and so we're stuck with borrowers who in fact exhibit that behavior. I don't think that there's really anything more to it.

Often the loans are loans in which we're not responding to a need that somebody has to have a loan tomorrow, or else we probably wouldn't make it, but it means that there is a certain amount of time which is hard to estimate in terms of commitment to closing.

And that's particularly true in the commercial loan area, which is really more a reflection of taking market share with existing borrowers and replacing an institution than responding to the need of a borrower to acquire a piece of land and build a project and with weather considerations as it would be in construction. So it is a piece of the business that's really hard to control and we're no better at it than anybody else.

Okay, fair enough. In terms of expenses, they were up 6.5% link quarter, were there any one-time items in there at all? I know you mentioned that you're kind of building for increased capacity there, but --?

No, no one-time items.

Okay. And then moving into the first quarter of '07, should we expect to see just the normal, I should say seasonal increase with taxes and merit increases and whatnot?

No --.

Yes on that.

But not merit increases, those are [multiple speakers].

Payroll tax.

He should know, payroll tax.

Okay.

Yes.

So definitely an uptick in the first quarter as well outside of the normal growth that you're trying to fund?

You know we're human resources heavy.

Right. I mean would you expect to see a comparable increase to what we saw in the fourth quarter? Or something potentially more than that?

I don't think so, but I'll let Marty answer that question.

Quite comparable.

Comparable, okay.

[inaudible - microphone inaccessible]

Okay.

To the fourth quarter or the first quarter of last year?

From the fourth quarter to the first quarter of this year.

Okay great. And --.

Wait, I just wanted to clarify for a minute what your question was.

Oh sure, the growth that we saw in expenses in this quarter, from the third quarter to the fourth quarter should we expect to see a comparable increase from the fourth quarter to the first quarter?

Yes you should.

Okay, good. Great. And in terms of margin, if you could provide a little color on the progression during the quarter, maybe the December margin? And what your outlook for the year for '07 is?

Marty, do you have the December? I don't know that we have that right here, but we'll be glad to get it for you, David.

Okay. And you mentioned a private client contributed to the loan growth, I was just wondering if you by any chance knew what the breakout was there as to how much of that loan growth was attributable to the private client?

I think that we have just under $100 million in aggregate outstandings and that the pipeline is over $200 million in the fourth quarter for the private client group.

Okay, great. I will step back and let somebody else ask questions, thank you very much.

Okay.

Our next question comes from the line of Kathy Jassem with Sturdivant & Company. Please proceed.

Thank you. Can you give us a little more color on your fee growth, that seemed to be slower than expense growth, and discuss the auto leasing business?

Sure. Fee growth in the fourth quarter I think trailed because our merchant group did not -- our particular merchants did not have as much volume as we had anticipated. Frank, do you want to provide some more color there?

Right, I think there are really two aspects there, the first of which was there is a smaller seasonal uptick than we had anticipated from our merchant processing group. And then we also continued to -- I think we've talked a little bit in the past about risk that we've been laying off in that particular portfolio, moving that portfolio upstream. That had a larger impact than we anticipated in the fourth quarter as we continued to move that portfolio upstream.

What do you mean by upstream?

We weed out on a quarterly basis merchants whose patterns make us believe that they have more risk embedded in them than potential reward. But since they are viewed from inception as having some risk, they by and large have a higher interchange fee and other fees associated with the business. When we reduce the risk of the total portfolio, we disproportionately reduce the fee income.

We think it's a good trade off, it certainly is not a good trade off in the quarter that it occurs, but our goal is to, from a volume point of view, replace those merchants with higher volume but lower risk profile merchants in order to continue to increase the fee stream.

I understand. And the auto leasing business?

Auto leasing continues on. I think that we're doing both a Municipal, Federal government, and commercial leasing as much as we have always done. I don't think we generally experience an uptick in the fourth quarter in that business, that business is done in the third quarter, first and third, first and second, the first and second quarter is when a lot of the budgets for Federal and Municipal governments are filled out. So we might see an uptick in that business in the first quarter again.

Okay. But the other fees in the other areas besides merchant processing are pretty much where you thought?

Well the ACH processing fees were up because --.

[inaudible - microphone inaccessible]

Frank is giving me the exact number, it's 20% quarter-to-quarter, so it's a growing business. And you know this is a portfolio of processing businesses that we try to manage to reduce risk and increase fee income, but recognize that there's a balance.

So we've been moving the volume, we've been focusing on ACH processing and experience and really as electronic funds movement changes, and that's why I mentioned the branch-in-a-box because that's really a beginning of a new trend. So we are pleased to see that quarter-to-quarter those ACH processing fees are up by 20%. They're up over last year by 117.9%, so it's a growing area for us.

Thank you.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Jed Gore with Sunova Capital. Please proceed.

Good morning, thanks for taking my question.

Sure, Jed.

Hi. I just was interested in the components of the movement of the net interest margin, and basically in essence I guess I'm asking for a rate yield analysis?

Sure we can provide that to you.

[This walks] around whether loans repriced up and what you're seeing in deposit repricing and future dynamics of deposit repricing?

Okay.

Other than that nothing else.

Nothing else? Well if you think of something, please interrupt me. It was equally split between loans and deposits, deposits were up 6 basis points over the prior quarter and loans were down 6 basis points overall. So I think if that's helpful --.

Because you had your savings and money market in the third quarter at about a 491 rate and I would assume that that would level off over the next quarter or two, meaning your deposit repricing should slow down.

It is slowing down. I think you just didn't see the impact of it in this quarter because generally, within the area of the CD portfolio, we're going often beyond the quarter, so you're seeing the impact of some CDs, which were purchased in the third quarter or the second quarter or the first quarter of 2006. So that will run off and we do see a down tick in that and we think that we will get the benefit of that, but it will take two or three quarters.

And your average rate on loans still coming in around the 860 level? Or --?

854, yes.

Okay, very good. Thank you very much.

You're welcome.

And there appears to be no additional questions at this time. I would now like to turn the call back over to Miss Betsy Cohen for any closing remarks.

Thank you and thank you all for really what are very good questions and helpful questions to provide everyone with good information. We look forward to continuing to grow as we have and to reaping the rewards of that with higher earnings. We'll talk with you again next quarter.

This now concludes your presentation. You may now disconnect and have a wonderful day.