The Bancorp, Inc.
Q4 2010 Earnings Call Transcript

Published: 27 Jan 2011

[Operator:]

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2010, The Bancorp Inc. Earnings Conference Call. My name is [Carmen], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (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, sir

[Andres Viroslav:]

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. 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

[Betsy Cohen:]

Thank you very much, Andres and thank you all for joining us. On the east coast there seems to be a great deal of snow outside and so we are particularly greatful for you 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 continued to be inflicted elements of our business model. The non-interest income which 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 investment, but also in loans was up on a year-to-year basis. And non-interest income was relatively flat, as one compares it with the growth on the income side. Salaries actually were flat for the entire year. Quarter earnings which we view as an important test of our lease that our earnings continues to be vibrant, moved from $5.8 million to $7.3 million, what we consider to be a significant growth on a year-to-date basis. There were also important advances in the credit metrics. We call them advances even though they are reflected as leases. Our assets 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 or 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 which is why we are seeing this as an important quarter. Loan origination for the year continued at what we’d think for this economy with a relatively brisk pace of $320 million, about $90 million – a little better than $90 million in the fourth quarter and we think that that’s important because generally we see that in the net numbers, but the business continues to be vibrant and that number we anticipate we’ll ratchet up with the SBA loan portfolio, which is beginning to get traction and which should reduce a significant contribution to originations in the first quarter of 2011. Non-interest income grew across our lines of business, but for a greater detail I am going to ask Frank to talk a little bit about how that banged out.

[Frank Mastrangelo:]

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 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.

[Betsy Cohen:]

As I think you can hear our emphasis on the road (inaudible) non-interest income on (inaudible) basis has continued to be with us. But I think we can’t forget the contribution that our various programs make to the cost of our funds, which during this quarter 61-basis points. I think a low for us in terms of its cycle. That being said, the opportunity to affect the agreement efficiently used all those funds in a meaningful way, given this interest rate environment. It 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 shipment has grown.

[Frank Mastrangelo:]

Yeah of course. So, in the fourth quarter of 2010, of course we always realized some seasonal run-off, beyond seasonal run-off. We actually also exited out from some higher cost deposit sources, both of which led to slightly larger than more and I would say from Q3 and Q4 run-off than normally occurs in the seasonality in our business, but at the same time continues to drive the cost of funds of 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 are continuing to grow both deposits and non-interest income in that vertical segment faster than the industry average.

[Betsy Cohen:]

Hello?

[Frank Mastrangelo:]

Yeah Betsy we’re here. Go ahead Betsy.

[Betsy Cohen:]

I am sorry, I got cutoff temporarily. I hope everyone can hear me and I apologies. What happens when there is too much snow and you can’t get to the office? Any way, as you can hear again from Frank’s statistics, there continues to be significant growth in our deposit programs (inaudible). And we have announced or completed contracts for new programs which you will see impact in the first, second and third quarters depending on the size of the program. With that I am going to ask that we now ask Carmen to ask for questions.

[Operator:]

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

[John Hecht:]

Morning and thanks for taking my questions. First one’s related to the increase in margin during the quarter. Frank you did refer to some seasonal run-off of higher cost deposits. And I am wondering does that itself explain the increase in margin or was there a change. Was it somehow related to the changing composition of earning assets or is there any changes in margins on new ones already.

[Betsy Cohen:]

Thanks John. I am going to ask Paul Frenkiel, if you don’t mind to respond to that.

[Paul Frenkiel:]

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. Additionally 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.

[John Hecht:]

Okay. Any color on the $90 million of Q4 loan originations. I know it’s mostly commercial. Was it largely SBIC or anything else there?

[Betsy Cohen:]

Is it largely SBIC? No. That I think you will see in the first quarter. I think that it’s our traditional business at C&I loans, our other kinds of commercial loans; it’s leasing, automobile leasing, fleet leasing which we do and which ticked a bit. So I think it’s really across the board of our traditional lending.

[John Hecht:]

Okay. Frank, forgive me if you referred. I know you referred to annual loans or deposit balance increases, but could you break out the quarter-on-quarter growth rates on prepaid Merchant HSA?

[Frank Mastrangelo:]

Sure. Merchant quarter-to-quarter growth rate was $16 prepaid. Now keep in mind, this is the seasonal run-off in that business line, so that was down actually, sequentially 36%, and healthcare was specifically the business line where we exited out our entire cost deposit sources. It was the decrease in deposits quarter-to-quarter of 10% actually in the healthcare unit.

[John Hecht:]

And those seasonal trends are consistent prior seasons.

[Betsy Cohen:]

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

[John Hecht:]

Okay. Other than that event seasonal trends were normal.

[Betsy Cohen:]

Absolutely.

[John Hecht:]

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

[Frank Mastrangelo:]

It was a quarter-over-quarter increase and prepaid overall was 3.5%, year-to-year was 46.4%. GPR programs were a significant portion of the growth of our prepaid business in calendar year 2010. I don’t have exactly what percentage of that growth is made up by GPR. That’s something I can get for you.

[John Hecht:]

Great, thank you guys very much.

[Betsy Cohen:]

Thank you John for you good questions.

[Operator:]

And the next question comes from the line of Frank Schiraldi from Sandler O’Neill. Please proceed.

[Frank Schiraldi:]

Good morning.

[Betsy Cohen:]

Morning Frank.

[Frank Schiraldi:]

Just a couple of questions. Frank I was wondering on the higher cost deposits that were exited out 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 focused may be more on garnering the fee income side of the business.

[Frank Mastrangelo:]

Yeah, 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 we have the ability to do so via generation of lower cost business loans.

[Betsy Cohen:]

I think Frank 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 [pro-dramatic] 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 pair where possible as Frank said, the higher cost deposits. So it doesn’t really feature the growth of a line of business, but really the management of that line of business.

[Frank Schiraldi:]

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

[Betsy Cohen:]

Yes, absolutely. But I am just trying to highlight the fact that they may have different ratings within the lines of business, because of opportunities.

[Frank Schiraldi:]

Okay, all right. And then I wondered if may you could give any guidance or hazard, I guess, to where SBA lending. What sort of balances could we see on the books at the end of the first quarter?

[Betsy Cohen:]

Well we can tell you that as of this time, we have set for closing, within a short period of time, some place between $25 million and $30 million. Though 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 SBA has a little bit longer lead time (inaudible). But we can tell you where we are today.

[Frank Schiraldi:]

25 to 30. And then a big portion of that will be securitized out as well, is that –

[Betsy Cohen:]

No. I mean I think one of the attractions for us is through lending is that, we can help it on our books and securitize it a later time, or we can securitize it as soon as we [file]. So I think we have that choice.

[Frank Schiraldi:]

Okay.

[Betsy Cohen:]

At the moment I would think our choice; our federal [action] would be to hold it on the books.

[Frank Schiraldi:]

Okay, great. Thank you very much.

[Operator:]

Next question comes from the line of Bob Ramsey with FBR Capital Market. Please proceed.

[Bob Ramsey:]

I am just curious. It seems like the credit commentary is pretty positive, but you all still had a sort of sizeable reserve build in the fourth quarter. How are you thinking about credit cost in 2011?

[Betsy Cohen:]

We are thinking about them very deeply and hard, and we are trying to not get overtly enthusiastic about what we would seem to be good trends. So we would like to be cautious, we’d like to take the opportunity to reduce the credit cost as the quality improves, but within the context of remaining cautious without taking an opportunity to continue to build a little bit of all in the multiple. So, I think it’s down-the-middle approach, in which you will see -- I think the credit cost for this quarter were lower than they have been – Paul you’ll have to help me out for maybe three or four quarters is what I know.

[Paul Frenkiel:]

Well, certainly our coverage, the allowance for loan losses to total loans has increased to 1.49%. And as you will see in the K we actually allocated a little bit more to unallocated. So the strength of that reserve increased. In terms of the provision itself, it was $4.2 million. At least I think you can say it’s leveled off.

[Betsy Cohen:]

Yes, it was flat in 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 a timing of that reduction in credit cost is really our ability to dispose off loans or credits through the fore-closure system. We’ve just finally, for example, got listed for a share of sale, I think it’s either March 5 or April 5 that I remember, for a property for which we started fore-closure proceedings in the fall of 2008. So there has been a drag that doesn’t really reflect current deterioration, but reflects that just keep in the portfolio. We just retrieved, so to speak, two properties this quarter you saw them going to (inaudible) that to one of which we already have been offered. But as to the other it just came in last week or last month. So until we get the opportunity through the court system to dispose off 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.

[Bob Ramsey:]

Great. And then may be one other question. Could you guys just provide us a little bit of an update on the municipal securities portfolio and may be 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.

[Betsy Cohen:]

Paul

[Paul Frenkiel:]

Yes, I think you can use a 35% tax rate, that’s clearly in our planning, and would seem to be a safe assumption.

[Bob Ramsey:]

Okay. And sort of in terms of where you are with the muni securities portfolio. I think we’ve got the average balance may be in our quarter end. Kind of where are you in terms of what’s been added and what is the goal sort of looking forward.

[Paul Frenkiel:]

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. So we don’t have a plan right to continue to add to that portfolio, but we may change that.

[Betsy Cohen:]

I think that Paul hit on an important point, which is that it’s opportunitistic; that the rate environment is very attractive, that our portfolio is virtually 100% in securities that are related directly to a stream of revenues from a particular district, water, sewer etcetera. So when we speak about municipals, we really shouldn’t speak about municipals, we should really speak about tax [extent]. As there is opportunity we may or may not take it, but we will continue to look at it.

[Bob Ramsey:]

Okay, thank you.

[Operator:]

Our next question comes from the line Matt Kelley from Sterne, Agee & Leach. Please proceed.

[Matt Kelley:]

It’s Matt Kelly with Stern, Agee. So on the margin line, in a stable rate environment, and given your views on growth for the year on the turning assets side, what do you anticipate the margin doing this quarter 2011.

[Betsy Cohen:]

Paul, do you want to answer.

[Paul Frenkiel:]

Yeah. 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 reduced that in certain quarters. 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 of cost of funds. So we are looking at those, so that should have a positive impact. And we are trying to keep loan rates and add loans consistent with the growth we showed in the fourth quarter, and we also have the SBA loan growth that we are looking to. So without making a prediction there are positives that are working to actually increase the margin.

[Matt Kelley:]

And when you look at year-over-year average deposit balances, they are up 32% Q3, 30% in this current quarter, the fourth quarter you just reported. What types of growth rates do you anticipate for average deposit balances, I know there’s 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.

[Betsy Cohen:]

I think that we think we are in a series of areas or business lines that are nationally growing at 30% to 35% annually, and that there are lines of business where we’d see the national growth, I mean that’s not the whole portfolio. So we think that we are in a very robust growth environment for our deposits portfolio.

[Matt Kelley:]

Okay. And the stored value fee income that’s tied in to the business line of some of that growth, that’s been growing at a little bit faster clip. Are there any changes in the profitability or dynamics in the relationships with the partners there that could change the growth rate of that, or do you anticipate growth rates to be maintained there as well.

[Betsy Cohen:]

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

[Frank Mastrangelo:]

Matt were you asking specifically about prepaid GPR or

[Matt Kelley:]

Yeah, total stored value income. If you look at year-over-year, probably up 30% to 35% or so in 2010, and I assume that as the balances grow and your relationships grow in the stored value business, your share of the fees will grow commensurately overtime. I want to make sure that we are still a tight correlation.

[Frank Mastrangelo:]

No, it absolutely is, as you know, we not only grow the portfolio from, we talk a lot about layering on clients and growing volumes and adding in to the infrastructure and creating efficiencies from an operating perspective. But the bottom line is, the current portfolio of clients we have also grown their businesses, their portfolios working directly 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 just intermediation which is good for picking up new clients. But margins overall, probably are getting compressed slightly just through normal competition and some consolidation in prepaid value chain, but not much and it’s being made up for many times over, just in the overall growth of business.

[Matt Kelley:]

Okay. All right. Any update on new relationships you’ve developed or entered in to in that business in stored value.

[Frank Mastrangelo:]

What I can tell you is that we entered in to 18 new relationships in total across the bank in the fourth quarter, which is pretty sizeable number for us. There are a number of very nice relationships we expect to form 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.

[Matt Kelley:]

Right, got you. And then on the expense line-item; of our $65 million, $66 million kind of annualized rates that you were experiencing in Q3 and Q4, what type of growth in operating expenses should we anticipate in 2011.

[Betsy Cohen:]

Paul.

[Paul Frenkiel:]

I can speak to that. We are actually trying to keep it flat, relatively flat, and we have a few items that we are looking at, where we think we can get some improvement, and though I don’t anticipate significant increases in non-interest expense.

[Betsy Cohen:]

Matt 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 others that we can’t control. So where we have those kinds of expenses that we can’t control, we are trying very hard to make the rest of the expense picture as tight as possible, so that we can offset.

[Matt Kelley:]

Okay. The bottom line, it should be a good deal of operating leverage in 2011 as you grow at double-digits and keep expenses relatively flat.

[Betsy Cohen:]

We are very hopeful if that’s the case. I think one can remember is that The Bancorp is really significantly ahead of many other institutions certainly of its size and volumes. In terms of building the infrastructure for what we think is the growing up within floatation marks, deposit product of 2011 and onward, you’ve read a significant amounts of our movement from checking accounts to prepaid accounts to out-of-cash and in to plastic and all the rest of the trend that underline our business. And we’ve been working at this infrastructure 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.

[Matt Kelley:]

Got you. All right, thank you.

[Operator:]

And we have no further questions at this time. I would now like to turn the call back over to Betsy Cohen for closing remarks.

[Betsy Cohen:]

Thank you very much Carmen and thanks all of you for joining with us. We hope to continue to bring you good quarters.

[Operator:]

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day. Copyright policy