Bancorp Inc (TBBK) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 The Bancorp, Inc.

earnings conference call.

My name is Carmen and I'll be your coordinator for today.

(Operator Instructions.) I would now like to turn the call over to your host for today, Mr.

Andres Viroslav, Director of Corporate Communications.

Please proceed.

Thank you, Carmen.

Good morning and thank you for joining us today to review The Bancorp's fourth quarter and fiscal 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.

00 p.m.

Eastern time today.

The dial in for the replay is 888-286-8010, with a confirmation code of 16943233.

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 a 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?

Thank you very much, Andres, and thank you all for joining us.

At least for us on the east coast there seems to be a great deal of snow outside, and so we're particularly grateful for your making the effort to join us this morning.

The fourth quarter was one in which we began to perhaps see some light at the end of the tunnel.

The drivers of increased earnings per share continue to be [conflicted] elements of our business model.

So non-interest income, which I know many of you remember that we have been focusing on as an important element of growth over the course of the last 18 months, was up on a year-over-year basis by 64%.

The net interest margin on a linked quarter basis was up by 13 basis points.

Net interest income reflecting a growth in the asset portfolio, partially in investments, but also in loans, was up on a year-to-year basis.

And non-interest expense was relatively flat, as one compares it with the growth in--on the income side.

Salaries actually were flat for the entire year.

Core earnings, which we view as an important test of our--at least that our earnings power is--continues to be vibrant, grew from $5.8 million to $7.2 million, what we consider to be a significant growth on a year-to-year basis.

There were also important advances in the credit metrics.

We call them advances even though they are reflected as increases.

Asset quality improved significantly.

And I guess one of the major measures is that over the course of the year we were able to reduce to 1.08% of assets, all loans that are in the non-performing category, from 1.66 on a linked quarter basis and higher over the course of the year.

Loan originations, and this is why we're seeing this as an important quarter--loan originations for the year continued at what we think for this economy was a relatively brisk pace of $320 million, about $90 million, a little bit better than $90 million in the fourth quarter.

And we think that that's important because you don't always see that in the net numbers, but the business continues to be vibrant and that number we anticipate will ratchet up with the SBA loan portfolio, which is beginning to get traction and which should produce a significant contribution to originations in the first quarter of 2011.

Non-interest income grew across our lines of business.

But for greater detail, I'm going to ask Frank to talk a little bit about how that [fanned] out.

Sure.

Thank you, Betsy.

The stored value non-interest income for the fourth quarter came in a little shy of $2.9 million, up a little over 46% year-over-year from the fourth quarter of 2009, up 3.5% from the previous quarter, Q3 2010.

Merchant income ended the quarter at about $520,000, up almost 200% year-over-year from Q4 2009, primarily due to large additions we made during the calendar year of new clients.

That's also up 8.9% on a quarter-to-quarter basis from Q3 2010.

Overall for the year, non-interest income Q4 2010 to 2009 was up almost 60% year-over-year and on a quarter-to-quarter basis, Q3 to Q4, up 9.1% in total.

Actually, I think you can hear our emphasis on the growth in what we consider to be a quality stream of income--non-interest income on a repeat basis has continued to be robust.

But I think we can't forget the contribution that our various programs make to the cost of the funds, which during this quarter was 61 basis points, I think a low for us in terms of this cycle.

That being said, the opportunity to effectively and efficiently use all those funds in a meaningful way given this interest rate environment is somewhat compressed, and therefore, is well balanced by the emphasis on non-interest income.

Our deposit programs are very energetic and growing and have tremendous traction.

And maybe, Frank, you just want to spend a few minutes talking about how each of them has grown.

Yes, of course.

So in the fourth quarter of 2010, of course, we always realize some seasonal runoff.

Beyond seasonal runoff we actually also exited out from some higher cost deposit sources, both of which led to slightly larger than normal, I would say, from Q3 to Q4 runoff, than normally occurs in the seasonality in our business, but at the same time continues to drive the cost of funds in the organization lower.

Nonetheless, healthcare deposits for example were up 20% year-over-year, private client deposits 70% year over year.

Prepaid deposits were up 54% year-over-year.

Prepaid division, keep in mind the industry growth rate there is about 35% year over year.

So we're continuing to grow both deposits and non-interest income in that vertical segment faster than the industry average.

Hello?

Hello?

Yes, Betsy, we're here.

We're here, Betsy.

Oh, I'm sorry.

I got cut off temporarily.

Can--I hope everyone can hear me and I apologize.

That's what happens when there's too much snow and you can't get to the office.

Anyway, I think that as you can hear from--again, from Frank's statistics, there continues to be significant growth in our deposit programs.

We have a strong pipeline and we have announced or completed contracts for new programs, which you will see an impact in the first, second, and third quarters, depending upon the size of the program.

With that, I'm going to ask that we now ask Carmen to ask for questions.

(Operator Instructions.) The first question comes from the line of John Hecht from JMP Securities.

Please proceed.

Good morning, and thanks for taking my questions.

The first one is related to the increase in margin during the quarter.

Frank, you did refer to some seasonal runoff of higher cost deposits.

And I'm wondering does that itself explain the increase in margin or was there change--was it somehow related to the changing composition of earning assets or that--is there any changes in margins on new loans written?

Thanks, John.

I'm going to ask Paul Frenkiel, if you don't mind, to respond to that.

Sure.

The change in margin was significantly helped by our deposit mix, as Frank was alluding to.

And it also benefited somewhat from the seasonality of our deposits and movement out of our averages for some of the funds that are invested in fed funds.

And additionally, we are--we made some progress in investing those short term seasonal funds in securities.

So we got a little bit of help from several different sources.

Okay.

And any color on the $90 million of Q4 loan originations?

I know it's mostly commercial.

Was it largely SBIC or anything else in there?

Is it largely SBIC?

No.

As I think you'll see in the first quarter, I think it's our traditional businesses, C&I loans, other kinds of commercial loans.

It's leasing, automobile leasing, fleet leasing, which we do and which ticked up a bit this quarter.

So I think it's really across the board of our traditional lending.

Okay.

Frank, forgive me if you kind of--if you referred--I know you referred to annual loan or deposit balance increases, but could you break out the quarter-to-quarter growth rates on prepaid merchant and HSA?

Sure.

Merchant quarter-to-quarter rate--growth rate was 16%.

Prepaid--now keep in mind, this is a--this is the seasonal runoff--.

--Yes--.

--In that business line, so that was down actually sequentially 36%.

And healthcare, specifically the business line where we exited out of the entire cost deposit sources, so there's a decrease in deposits quarter to quarter of 10% actually in the healthcare unit.

Yes.

And those seasonal trends are consistent with prior seasons?

The--.

--Well, I think, John, that the last is not necessarily in accordance with the trends because we specifically exited a block of business.

Yes.

Higher cost business.

Okay.

Other than that event, seasonal trends were normal?

Yes, absolutely.

Okay.

And then, last question is can you tell us of the interest--non-interest income increase from quarter-to-quarter, how much of that was related to the general purpose reloadable card fee income?

There was a--so the quarter-over-quarter increase in prepaid overall was 3.5%, year-to-year was 46.4%.

GPR programs were a significant portion of our--of the growth of our prepaid business in calendar year 2010.

I don't have exactly what percentage of that group is made up by GPR there, John.

That's something I can get for you.

Great.

Thank you guys very much.

Thank you, John, for your good questions.

And the next question comes from the line of Frank Schiraldi from Sandler O'Neill.

Please proceed.

Good morning.

Good morning, Frank.

Just a couple of questions on--Frank, I was wondering on the higher cost deposits that were exited out of near--I guess in the fourth quarter, is that sort of a one-off or should we maybe see some slowdown in the total growth of deposits year-over-year going forward, as you guys focus maybe more on garnering the fee income side of the business?

Yes.

I mean, I think there's certainly going to be substantial focus on generating fee income and we'll be opportunistic to continue to exit out of higher cost deposit relationships, if there's--if we have the ability to do so, the generation of lower cost business lines.

I think, Frank, that it's something we've been doing over a couple of years, not particularly in healthcare.

But we manage our portfolio like a manufacturing company does its inventory.

And so, you may have noticed that over the course of the last three years we exited a lot of higher cost what we call generally community bank deposits, because the opportunity to replace them with programmatic relationship deposits that were lower cost was in fact in front of us.

And I think we do that--periodically, we look at all of our lines of business and try to pare where possible, as Frank said, the higher cost deposits.

So it's a bit of--it doesn't really speak to the growth of a line of business, but really the management of that line of business.

Okay.

But it sounds like we could still plan to see similar year-over-year growth, 30% year-over-year growth in the--in just the--.

--Net deposits--.

--Total core deposits, yes.

Yes, absolutely.

But I'm just trying to highlight the fact that they may have different [weightings] within the lines of business because of opportunity.

Okay, right.

And then, I wondered if maybe you could give any guidance or hazard a guess to where SBA lending--what sort of balances could we see on the booked at the end of the first quarter?

Well, we can tell you that as of this time we have set for closing within a short period of time someplace between $25 and $30 million, but what will come in to be closed before the end of the quarter is a little bit hard to predict.

But we'll be prepared because some--SBA has a little bit longer lead time than the normal lenders.

But we can tell you where we are today.

25 to 30.

And then, a big portion of that will be securitized out as well?

Is that--?

--No.

I mean, I think one of the attractions for us of SBA lending is that we can hold it on our books and securitize it at a later time, or we can securitize it as soon as we buy it.

So I think we have that choice.

Okay.

At the moment, I would think our choice--our predilection would be to hold it on the books.

Okay, great.

Thank you very much.

The next question comes from the line of Bob Ramsey with FBR Capital Markets.

Please proceed.

Hey, good morning.

Hi, Bob.

I guess I'm just curious.

It seems like the credit commentary is pretty positive, but you all still had sort of a sizeable reserve build in the fourth quarter.

How are you thinking about credit costs in 2011?

We're thinking about them very deeply and hard.

And we're trying to not get overly enthusiastic about what we see to be good trends.

So we would like to be cautious.

We'd like to take the opportunity to reduce the credit costs as the quality improves, but within the context of remaining cautious about taking an opportunity to continue to build a little bit on the multiple.

So I think it's a down-the-middle approach in which you will see--I think the credit costs for this quarter were lower than they've been--Paul, you'll have to help me out--for maybe three or four quarters is what I would--.

--Well, certainly our coverage--the allowance for loan losses to total loans is--has increased to 1.49%.

And so, we actually--and as you'll see within the K, we actually allocated a little bit more to unallocated.

So the strength of that reserve increased.

And in terms of the provision itself, it was $4.2 million, so it--at least I think you can say it's leveled off.

Yes.

It was flat to the fourth quarter of last year and lower than it's been during 2010.

Bob, one of the things that I think will help us and will determine a bit of the timing of that reduction in credit costs is really our ability to dispose of loans or credits through the foreclosure system.

We've just finally, for example, got listed for a sheriff's sale--I think it's either March 5 or April 5, I don't remember--for a property that--as to which we started foreclosure proceedings in the fall of 2008.

Oh.

Yes.

So there has been a drag that doesn't really reflect current deterioration, but reflects the fact that you have to keep it in the portfolio.

We just retrieved, so to speak, two properties this quarter when we saw them going to OREO that--one of--as to one of which we already have an offer.

But as to the other, it just came in last week or something, or last month.

So until we get the opportunity through the court system to dispose of these things, which are very disposable, it becomes a bit of a guessing game in terms of timing.

But we begin to see that loosening up.

That's very good news for us.

And we will continue to follow that trend.

Great.

And then, maybe one other question.

Could you guys provide us a little bit of an update on the municipal securities portfolio and then maybe how we should think about tax rate in 2011?

Is there any benefit from that strategy or it's still--like a 35% effective tax rate reasonable?

Paul?

Yes.

I think you can use a 35% tax rate.

That's clearly in our planning and would seem to be a safe assumption.

Okay.

And then, sort of in terms of where you are with the muni securities portfolio, I think we've got the average balance, but maybe not quarter end.

Kind of where are you in terms of what's been added and what is the goal sort of looking forward?

We're about--we're in the $100 million range.

A portion of our portfolio is in short term municipal securities.

We have an independent credit analyst who passes on every municipal that we buy.

So we are in a position that we could conceivably add more, but we've actually taken a pause.

And so, we don't have a plan right now to continue to add to that portfolio, but we may change that.

I think that Paul's hit on an important point, which is that it's opportunistic, that the rate environment is very attractive.

But our portfolio is virtually 100% in securities that are related directly to a stream of revenues from a particular district water, sewer, et cetera.

So when we speak about municipals, we really shouldn't speak about municipals.

We should really speak about tax exempts, and that as there is opportunity, we may or may not take it.

But we will continue to look at it.

Okay.

Thank you.

The next question comes from the lien of Matthew Breese from Sterne, Agee, Leach.

Please proceed.

Yes, hi.

It's actually Matt Kelley at Sterne Agee.

How are you doing?

Okay.

How are you?

Good.

So on the margin line, in a stable rate environment and given your views on growth for the year on the earnings assets side, what would you anticipate the margin doing over the course of 2011?

Paul, do you want to answer?

Yes, sure.

I think it's stabilized at this point.

And if you look at the margin for the fourth quarter, it's fairly consistent with the margin for the whole year.

We do have seasonal deposit fluctuations that have--that reduce that in certain quarters.

But--so that's a factor that we still might have in the coming year.

But on the plus side, number one, we continue to lower interest rates and look at--as Betsy said, look at some of our higher individual pockets across the funds.

So we are looking at those, so that should have a positive impact.

And we're trying to keep loan rates and add loans in consistent--consistent with the growth we showed in the fourth quarter.

And we also have the SBA loan growth that we're looking to.

So without making a prediction, there are positives that are working to actually increase the margin.

Okay.

And when you look at year-over-year average deposit balances, they were up 32% in Q3, 30% in the current quarter, and the fourth quarter you just reported.

What types of growth rates do you anticipate for average deposit balances?

I know there's a lot of seasonality.

But when you look at the year in its entirety, do you see a deceleration off of the rates that we saw in the back half of 2010, or do you think those could be maintained?

I think that we think we're in a series of areas or business lines that are nationally growing at 30 to 35% annually, Matt, and that there are lines of business where we exceed the national growth.

I mean, it doesn't--it's not the whole portfolio.

So we think that we're in a very robust growth environment for our deposits portfolio.

Okay.

And the stored value fee income that is tied into that business line or some of that growth, that's been growing at a little bit faster clip.

Are there any changes in the profitability or the dynamics of the relationships with the--your partners there that could change the growth rate on that?

Or do you anticipate growth rates being maintained there as well?

I think we anticipate strong growth there, but let me pass that question along to Frank.

No.

Matt, were you asking specifically about prepaid GPR or--?

--Yes, total stored value income.

If you look at year-over-year, probably up 30, 35% or so in 2010.

And I assume that as the balances grow and your relationships grow in the stored value business that your share of the fees will grow commensurately over time.

But I wanted to make sure that was still a tight correlation.

Yes, it absolutely is.

I mean, as you know, we not only grow the portfolio from--we talk a lot about layering on new clients and growing volume and adding it to the infrastructure, creating efficiencies from an operating perspective.

But the bottom line is the current portfolio clients we have also grow their businesses, their portfolios, organically at a nice double-digit clip also.

All of that is additive to the total growth of our business.

There are always competitors entering the space.

There are obviously some who have had issues or problems and that creates some disintermediation, which is good for not picking up new clients, but margins overall probably are getting compressed slightly just through normal competition and some consolidation in the prepaid value chain, but not much.

And it's being made up for many times over just in overall growth of the business.

Okay.

All right.

Any update on new relationships you've developed or entered into in that business, in the stored value?

Well, what I can tell you is that we entered into 18 new relationships in total across the bank in the fourth quarter, which is a pretty sizeable number for us.

There are a number of very nice relationships we expect to perform in there.

About half of those were actually in our stored value business line - nice adds to the roster there that will augment volume, deposits, and income very nicely.

Right.

Got you.

Okay.

And then, on the expense line item, off of a $65, $66 million kind of annualized rate that you were experiencing in Q3 and Q4, what type of growth in operating expenses should we anticipate for 2011?

I can speak to that.

We're actually trying to keep it flat, relatively flat.

And we have a few items that we're looking at where we think we can get some improvement.

And --but I don't anticipate significant increases in that--in non-interest expense.

Okay.

And I think if you look back on 2010 versus 2009, some of the growth in our non-interest expense line was due to non-controllable, one might say, expense such as the doubling of the FDIC premium and other things that we can't control.

So where we have those kinds of expenses that we can't control we're trying very hard to make the rest of the expense picture as tight as possible so that we can offset them.

Okay.

But bottom line, there should be a good deal of operating leverage in 2011 as you grow at double digits and keep expenses relatively flat?

We're very hopeful that that's the case.

I think one can remember that The Bancorp is really significantly ahead of many other institutions certainly of its size or larger.

In terms of building the infrastructure for what we think is the "growing" deposit products of 2011 and onward, you've read a significant amount about movement from checking accounts to prepaid accounts to out of cash and into plastic and all the rest of the trends that underlie our business.

And we've been working at this infrastructure now for a very significant period of time.

So we would hope that the pure investments that we need to make in the infrastructure are less on a competitive basis than some other institutions.

Got you.

All right.

Thank you.

And we have no further questions at this time.

I would now like to turn the call back over the Betsy Cohen for closing remarks.

Thank you very much, Carmen.

And thank all of you for joining with us.

We hope to continue to bring you good quarters.

This concludes the presentation for today, ladies and gentlemen.

You may now disconnect.

Have a wonderful day.