Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2020 The Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Andres Viroslav. Thank you. Please go ahead, sir. Thank you, Operator. Good morning, and thank you for joining us today for The Bancorp's fourth quarter and fiscal 2020 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; 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 12:00 PM Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 8952947. Before I turn the call over to Damian, 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, performance, or achievements 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 The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andres. Good morning, everyone. The Bancorp earned $0.41 a share on revenue of $75 million, and expenses of $42 million. For the full-year 2020, TBBK generated $1.37 a share. This exceeded our original guidance range of $1.25 to $1.34 a share and our revised guidance target due to COVID of $1.25 a share. Revenue climbed 35% driven by a year-over-year increase in net interest income of 47% and non-interest income of 14%. Cost of funds was down 61% year-over-year illustrating the benefits of our payments funding model. For the full-year 2020, revenue increased 14% over 2019. Expenses declined 12% for the quarter and 2% year-over-year. Cost control and efficiency continues to be a main focus of management. Net income from continuing operations grew 132% quarter-over-quarter and 34% year-over-year after adjusting for prior-year civil monetary penalties. In the fourth quarter, we saw continued business momentum, led by gross dollar volume, GDV, and our cards business of 18%. This quarter GDV growth was lower than previous quarters likely due to the elections. We experienced a depression in spend in November prior to knowing the full outcome of the Presidential Election. This mostly restored in December, and does not appear to be a long-term trend. We also added assets led by 56% year-over-year growth in our securities and insurance lending platforms. Additionally, our commercial business has continued momentum with SBA excluding PPP growing 3% and leasing growing 7% quarter-over-quarter. We have completed our strategic business plan, strategic agenda and budget for 2021; main focus continues to be on product and platform expansion, with a rigorous focus on building the best payments ecosystem in the financial services industry. Our plan includes a comprehensive and integrated analysis of market and competitors and the needed investments to build towards the future and create scalable core competencies that our partners can use to innovate and grow. We also continue to invest heavily in anti-money laundering and compliance, have best-in-class capabilities to meet regulatory guidance and expectations. As previously announced, our board has authorized a buyback of shares to commence in the first quarter of 2021. We're currently in the market repurchasing shares. The bank can purchase 10 million TBBK shares a quarter for the balance of 2021, totaling 40 million shares repurchased. At this time, the bank believes that its shares are undervalued and buybacks will be the most efficient way to return capital to investors. Dividends were considered as an alternative. With the current bank stock valuations and TBBK business prospects, buybacks were deemed economically advantageous. Dividends could be added to buybacks in the future as valuations rise, or TBBK approaches its long-term return goals. Lastly, our guidance target for 2021 is $1.70 a share or approximately $100 million in net income. The earnings per share estimates do not include share repurchases. I'll now turn over the call to Paul Frenkiel, our CFO, to give you more color on the fourth quarter.

Thank you, Damian. Return on assets and equity for the quarter were respectively 1.6% and 17% compared to third quarter asset and equity returns of 1.5% and 17%. The increases were driven primarily by a $16.5 million increase in net interest income. The increase in net interest income reflected a lower cost of funds, growth in higher yielding small business SBA and leasing, and the retention of the commercial real estate portfolio we previously had been securitizing. The vast majority of that portfolio is comprised of multifamily loans, i.e., apartments, with cumulative COVID losses estimated by a nationally recognized analytics firm at 1.2%. These loans which totaled $1.6 billion generally are on our books at a $99 price or lower and have a weighted average rate floor of 4.8%. SBLOC and IBLOC loans also amount to approximately $1.6 billion, and while their yield is estimated at 2.5%. Those portfolios have not experienced credit losses due to the nature of the collateral. Our next largest portfolio of small business loans is comprised primarily of SBA loans with a year-end total of $822 million, which reflected $42 million of fourth quarter repayments of short-term PPP loans. The remaining $166 million of PPP loans should be repaid by the Treasury over the coming quarters, and approximately $1.4 million of fees will be recognized primarily in the first quarter of 2021. Legislation enacted in December provides for additional PPP loans and we intend to participate in that program. In the new program, borrowers will have to exceed lost revenue thresholds to qualify for new PPP loans. Accordingly, we believe the amount of new PPP loans will be less than the $208 million generated in the first program, which yielded $5.5 million in fees. Our SBL portfolio has an estimated yield of 4.9%. While SBA commercial mortgage loans have origination date loan to values of 50% to 60%, SBA 7a loans are generally 75% guaranteed by the U.S. government. In addition to the six months of government payments on those loans authorized by the CARES Act, which mostly ended in the fourth quarter, the December legislation authorized an additional three months or longer of payments on those loans. The U.S. government will also make up to eight months of additional payments for businesses determined to be more impacted by COVID, including hotels and restaurants. Unlike the six months of CARES Act payments, these additional payments will be capped at $9,000 per month. In addition to SBA loan growth, we increased leasing balances to $462 million from $431 million at the prior-quarter end. Leases have an estimated yield in the 6% range. We emphasize diversification in our small business and leasing portfolios, which is detailed in the tables in the press release with segment loan portfolios by loan type, collateral, and geography. Deferrals increased to slightly over 3% of loans from 1.2% at September 30. The increases were primarily in commercial real estate loans and SBA loans. SBA increases reflected deferrals for customers until the additional three or eight months of government payments begin on February 1. They also include increases for commercial mortgage 504 loans, but note that those loans are 50% to 60% loan to value. Commercial real estate loans increased by approximately $20 million, consisting of a new hotel and movie theater complex deferral. It should be noted that those loans are fair valued and we're not concerned with the overall increases in deferrals. For this quarter, we nonetheless expanded disclosures to detail the diversification of loans for which borrowers have requested those deferrals. The $16.5 million increase in net interest income reflected increases in average quarterly CRE loans to $1.6 billion, while related interest income increased $11.7 million. Interest on SBA loans increased $2.1 million, including approximately $1.5 million of recognized PPP fees. While combined SBLOC and IBLOC loans increased 55% over those periods, related interest income was approximately equal reflecting the Federal Reserve interest rate reductions in 2019 and the first quarter of 2020. SBLOC loans are secured by marketable securities, and IBLOC are secured by the cash value of life insurance and credit losses have not been incurred. Interest expense was $5.1 million lower and the cost of funds was 24 basis points for the quarter, reflecting the impact of those Federal Reserve interest rate reductions. Most of our deposit interest expense is contractual and tied to market interest rates. The net interest margin in Q4 was 3.58%, up from 3.37% in Q3, reflecting higher securities income. Q3 reflected the impact of premium amortization on prepayment fees, which was less pronounced in the current quarter. The continuing impact of reductions of higher yielding securities either through prepayment or maturity will likely continue the overall trend of yield reductions. Additionally, the margin benefited from reductions in lower balances at the Federal Reserve Bank which earn a nominal rate and which will likely eventually return to historically higher levels. The provision for credit losses was approximately $550,000 and resulted primarily from growth in leasing and advisor financing balances, as the company experienced net recoveries during the quarter. Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance and have not incurred losses, management excludes those loans from the ratio of the allowance to total loans in its internal analysis. Accordingly, the adjusted ratio is 1.4%. Prepaid accounts, our largest funding source, are also the primary driver of non-interest income. Fees and related income on prepaid cards were up 5% to $17.8 million in Q4 compared to $17 million in Q4 2019. On an annual basis, those fees increased 14%. Card payment and ACH processing fees include rapid funds revenue and decreased $174,000 to $1.8 million, reflecting the exit of non-strategic higher risk ACH customers and an exit due to a change in ownership. Non-interest expense for Q4 2020 was $41.8 million, which represents an increase of 4% after adjusting Q4 2019 for an FDIC settlement of $7.5 million. That increase resulted primarily from higher salary expense, which reflected higher incentive compensation expense. We continue to focus on expense management, especially in relation to revenue growth. In December 2020, the FDIC issued regulations which should result in the classification of a portion of the Bank's deposits as non-brokered. The regulation takes effect in Q2 2021 and we intend to pursue the steps required for the reclassifications. Such reclassifications could result in a future reduction of FDIC expense. Book value per share increased to $10.10 compared to $8.52 at December 31, 2019, reflecting earnings per share and the increased value of the investment portfolio in the current rate environment. The Q4 2020 consolidated leverage ratio, which is based upon average quarterly assets, exceeded 9% and risk-based ratios approximated 14%. In closing, there are certain characteristics of our loan portfolios as further detailed in the tables in the press release, which I would like to highlight. As previously mentioned, the vast majority of our $1.6 billion of commercial loans held-for-sale are multifamily loans specifically apartment buildings, for which a nationally recognized analytics firm has estimated cumulative loss of 1.2% in their COVID projections. Those loans are already on our books at levels reflecting that discount. SBLOC and IBLOC portfolios are also approximately $1.6 billion and have not incurred credit losses notwithstanding the recent historic declines in equity markets. Approximately 62% of the $822 million small business loan portfolio, including PPP loans, is U.S. government guaranteed. The majority of the other small business loans consist of commercial mortgages with 50% to 60% origination date loan to value. For leases experiencing credit issues, we have recourse to the leased vehicles. While there's uncertainty related to the future, we believe these are positive characteristics of our portfolio, which demonstrate lower risk than other forms of lending. I'll now turn the call back to Damian.

Okay, thank you, Paul. We're going to open up for questions. Operator, would you open the line for questions?

Your first question is from William Wallace with Raymond James.

Thank you. Good morning, guys.

Hi, Wallace.

I have a few questions. Let's start with the GDV trends. You mentioned a decline leading up to the Election followed by a recovery in December. Regarding the recovery in December, do you think you will be able to make up for the spending losses from before the Election, or is that amount essentially gone? What are your overall expectations for 2021 in terms of spending growth, and what do you anticipate for the margins?

I’m not sure about the first part of your question. I would expect that unless the savings rate increases on a larger scale, people will eventually spend their money. However, I can't predict whether the 130 million cardholders will spend that money. Regarding the second question, we are now operating from a significantly larger base. Last year, we experienced phenomenal growth, with an increase that I believe will outpace any other competitor in the market. We are targeting at least 20% growth in gross dollar volume, and I think we are on track for that. Our pipeline remains robust, and we have recently added several large programs that are yet to reach full momentum. Certain segments, such as healthcare and commuter cards, haven't contributed significantly in 2020 due to the COVID situation. As the economy begins to reopen in the summer, I believe we will be on target, possibly exceeding our double-digit growth goal. If there is additional stimulus or similar factors, we could see even higher growth.

Okay. If you achieve over 20% growth in GDV, could that result in over 10% growth in revenue, or does it seem like it might be slightly less than half of the GDV growth?

I'm sorry.

In essence you burning in revenues?

Well, we had 33% growth and 14% fee growth. So it's roughly half, it bounces around, depending on which programs are growing at which time. So 45% to 50% of the GDV growth seems like right now, with our mix, that's likely because we have a lot of new programs coming on, and they're tiered. So the higher fees come in, the earlier part of the program. So right now, it looks more like to the 50% if we did 20% to 25%, you would be half that right now with the mix that we have.

Okay. Okay. Okay great. Thanks. Appreciate that color. And I'd like to ask you about the rapid funds product.

Yes, we lost you there, Wallace. Operator?

He has disconnected.

Okay.

Your next question comes from Frank Schiraldi with Piper Sandler.

Good morning.

Good morning, Frank. How is everything?

Good, thanks. You guys are well. I wanted to start with the guide, just want to make sure I didn't miss in the release you pointed to the $1.70. In the past, you talked about the $1.65 to $1.70 for EPS for 2021. It doesn't include buybacks. What else is not included there? So is a second stimulus I guess even the one that went out the direct payments to individuals in January, is that included in guidance?

No, we did not factor in any of this stimulus. We're anticipating a challenging environment until mid-summer when the economy is expected to reopen. We haven't incorporated that into our projections; we've primarily relied on trend analysis. The previous stimulus was minimal, and the key question is whether we will receive a larger stimulus in the coming month, which would have a modest impact. Generally, based on our current situation, we model dynamically, considering both negatives and positives. At present, there seems to be more potential positives, specifically the stimulus and the economic reopening. We're seeing solid GDP growth reported at 4%. If we receive a significant boost in the summer, above that, it could positively affect not only payment spending but also our lending operations. However, we haven't included that in our expectations. Currently, we are at about $0.41 per share, which reflects a sustainable run rate. Our book growth suggests that, even without substantial tailwinds, we can meet our guidance. That's why I adjusted the guidance down to $1.65; I feel confident about $1.70, and we will revise it as more economic information becomes available. If we do see favorable developments, we'll update that guidance accordingly.

Okay. And then just on the change in designation on the deposits, or at least some of them from brokered to non-brokered, any sort of, I'm assuming that's not in your guidance, because we don't know how much you're really going to save there, I guess. But any sort of thoughts in terms of, what percentage of your deposits will fall-off that or, become non-brokered versus brokered?

It could be as much as 40%, or 50%. And it's right, it's not included. That's one of those tailwinds. But I'll give that to Paul. He's been working on the process in order to give you a reply.

Yes, if we achieve a sufficient percentage of our deposits, there are potential reductions with the FDIC. We need to evaluate each program individually, and an application must be submitted for certain programs. The FDIC will then make the final decision. Since this is up to the FDIC, we won't provide an estimate of what we expect. However, we will submit the applications and follow the necessary processes. We believe there will be some savings, but we cannot predict the amount at this time.

Okay. And then, just back to GDV growth. I don't know if you have it, or you can, just any color, you gave your thoughts for the full-year, just wondering how it's trending to start the year, over last year's results.

It's trending exactly, like I said. So even over with all the enormous growth we've had, it's still trending very positive with a very strong pipeline in the range of our target. So I think if we, obviously if we get the stimulus that it's going to match up, if they wait any longer, it's going to match up perfectly with the last year. So we'll see what happens if they do that or not, but we're not counting on it. Like I said, we think we're still going to be in a really good position this year, regardless if they do that or not.

Right. Last year's results were challenging to compare, especially since you had growth of 40% year-over-year in some quarters. So, is the expectation this year to aim for growth of over 20%?

Yes. The long-term target is 20% or more.

Okay.

These things are challenging because they are very seasonal, so one month might be weaker. We had to slow down in November, which was a trend seen throughout the entire economy. However, if you look at it from a systemic perspective, it’s very positive due to virtualization and our partnerships. We have long-term contracts with key partners, along with new partnerships we are currently developing and implementing. The long-term trend shows that even though we ranked eighth on the Nielsen list last year, we could rise to fifth or fourth this year, only trailing the three major money center banks. The foundation is solid, and all the necessary conditions are in place for long-term growth at that level.

I wanted to ask about something VISA mentioned in their earnings call. They noted that debit growth was three points lower in the December quarter due to a reduction in unemployment benefits distributed through prepaid cards. Do you find that to be significant? Would the potential return of those unemployment benefits, similar to what we saw in 2020 or early 2021, represent meaningful growth for you?

Yes, that's another tailwind again; because we see the same things where we deal with obviously, a lot of those payments go into our cards from our debit partners. And so yes, that's correct. I don't know exactly the percentage, VISA is very accurate, I think. I don't know the exact percentage on that, but it's a few percent probably.

Okay, so that is important. But I guess the way stimulus is not baked into your expectation that those unemployment benefits coming back online are not baked into your expectations of long-term growth; is that fair?

We focus on planning our own pipeline of programs and base our budget on that. We do not rely on potential government intervention in the industry since its impact is uncertain. We see those factors as additional benefits.

Okay. Fair enough. I'll re-queue there, let somebody else ask the question. Thanks.

Hey, thanks a lot, Frank.

Your next question comes from Mr. William Wallace with Raymond James.

Good morning.

Welcome back.

Yes, thanks, I don't know what happened. I'll try again. And I apologize if I asked a question that Frank asked, you can just refer me to the transcripts. But what I was going to ask was, if you could update us on trends in the business in the rapid funds product, and you're experiencing good, good onboarding of new customers, I look at the ACH line down for the year, and I was hoping you could just kind of give us an update?

Yes, we expect this year to be very positive. We assessed all our activities in ACH and developed a plan for our merchant acquiring business, which was impacted by our consent order. We anticipate over 20% fee growth in that area, primarily driven by rapid funds and acquiring partners. As you may remember, we previously exited some payroll business and lost a partner due to an acquisition, but that was not a key part of our operations. We have restructured the business to eliminate riskier elements, which is why we saw a decline this year. However, we continue to experience growth in indirect rapid funds with major partners, and we are beginning to generate volume with direct rapid funds, where we are integrated with a processing system. Therefore, we expect significant fee growth in that area this year.

Okay, great. Thank you. And then I noticed there was a $1.5 million gain on loan sales. What was that from?

When the loans we previously held for securitization are repaid or refinanced to another institution, we earn an exit fee.

Okay.

Yes, I just want to add that we have a future because these are transitional loans, and we still have around $250 million of future fundings. While some loans may refinance, we will have new fundings to replace them. This gives us strong income stability in that portfolio over the next two years. Whenever there is a refinance, we will collect those fees. Also, remember that they remain on our balance sheet at 99, so if they are paid at par, we will also benefit from that.

Yes. We should expect some recurring revenue, which may vary from quarter to quarter, but over the next three to five years, it is likely to be a consistent line item.

Yes. For the next couple of years, you can expect a decrease in fees because we cannot accurately predict how many people will choose to refinance. This uncertainty is influenced by various factors. It’s unlikely that there will be enough additional future funding for those projects. After two years, as individuals reach the three-year mark, you will not receive the exit fee. However, keep in mind that these amounts are recorded at 99. Therefore, as people make prepayments, you will start to see those fees come in.

Okay. And then, excuse me, as you see any change in the credit metrics of any individual loans, like you mentioned, the hotel and the theater that went on to deferral this quarter, does the 1% mark on the whole portfolio cover translate that, or these loan-by-loan marks?

They're loan-by-loan mark. So we have basically 1% on each loan. But if you look at it over the next two years versus potential losses, I think it's significant that, if we have the COVID losses that are predicted, and by the way, we don't think we will. We've underwritten these loans much more carefully than just would be represented by a blanket estimate of charge-offs for all multifamily. They're not like the high-end, and so forth. They're really working class type apartments. But even if you assume that 1.2% if you look at the mark overall at 99 to $1.6 billion portfolio that really offsets over the long-term, although the point you're making is true, that if you had a credit event that full 1% discount would not offset that one-time credit event, initially.

Thank you for the clarification. Regarding the FDIC insurance, could you explain how the situation changes when a deposit shifts from broker to non-broker?

There are many factors that make it unwise to estimate the FDIC insurance solely based on capital levels or the percentage of non-performing loans. It's influenced by numerous elements. The takeaway is that if we can reclassify a sufficient number of loans, we believe that expense line item should decrease, and that is our objective.

Okay. To help us think about it, should we expect that all of this will contribute to the bottom line, or does it open up the possibility to invest more in existing businesses or new ventures?

No, it's straightforward. We already have our plan. Everything we're discussing regarding stimulus, the reopening of the economy, FDIC insurance, and unemployment payments is not included in the base case. We're currently operating at a run rate of $0.41 per share. If you multiply that by four, you arrive at $1.64 per share. So, while there is an upward bias, we cannot predict the impact of COVID. Last year, when others withdrew their guidance, we maintained ours and approached it from a run rate perspective. We're applying the same caution now; we’re not completely out of uncertainty. The bias may lean positive if favorable events occur, but we cannot be certain due to the current circumstances.

Okay, yes, good. Thanks, that’s good. Good to know that there's some potential upside drivers not considered. On the net interest margin, Paul, you gave a lot of color in the prepared remarks. And I can read back through that. But I'm curious; I didn't catch anything about what any potential impacts from PPP fee acceleration on forgiveness, could you quantify that, if not said?

Well, clearly, it's going to help like, if the loans are repaid, the PPP loans are repaid quicker, and I'm talking about the new round in 2021, then we recognize those fees over a short period of time. But if you look at the original one, we estimated it would take 11 months. And we saw the first wave of $42 million in the fourth quarter, but that still leaves us with $166 million. So we're not planning on any acceleration. We have about $1.4 million that will take in the fourth quarter, which is the last of the old PPP. And then of course, the new PPP as I said in the comments, we expect it to be less because the borrower has to show that they had a quarterly drop of 25% in revenue, so that all else equal that should reduce the $5.5 million, we got in fees on the first PPP.

What is the current status of the second or third round of applications? What is the dollar volume of applications so far?

Yes. We are not ready to comment on that yet. They need to be properly funded and go through due diligence. Once we have a reliable number, we will share it.

Okay. And did you say, $42 million were forgiven in the fourth quarter?

$42 million were repaid by the government out of the $208 million; the government repaid us $42 million in the fourth quarter.

And what was the fees that accelerated into it then?

We've been straight lining them over 11 months, so we didn't really have any acceleration factor. They're slightly slower. We're hoping that in the first quarter, we get the rest of it back.

Okay. Okay. Last question just on capital management. So you're in the market now buying back shares, your earnings stream is strong and seemingly predictable? What are the considerations about implementing a dividend, if any?

We believe our multiple is still low. With a 17% return on equity and over 1.5% return on assets, we consider ourselves undervalued in terms of price-to-earnings ratio and market-to-book. We believe we should be positioned in the low 20s. We are committed to buying back shares until we reach our full valuation, which we anticipate may happen in the mid-term, around 18 months. At that point, we will definitely evaluate the possibility of maintaining buybacks and potentially initiating a dividend. The market typically sees returns between 40% and 50%, and around 85% of banks in that range return dividends. These banks typically have lower growth and return on equity in the 10% to 12% range. However, we have a different outlook and view our stock as undervalued. Once we achieve the appropriate market multiple, the board will consider introducing a dividend alongside a buyback strategy.

Great. Thanks, Damian. Appreciate all the color; I’ll step out in case there's any other questions in the queue.

Thank you, Wally.

I'm showing no further questions at this time. I would now like to turn the conference back to Damian Kozlowski for closing remarks.

Thank you so much, operator. I appreciate everybody joining us today. We really had a really great year this year, coming into the unfortunate circumstance we had with the pandemic. And the company is I think is in a very solid footing for 2021 and beyond. We're going to continue to work very hard to build value for our shareholders, take care of our business partners, make sure they can grow and innovate and always keep an eye on making sure we enrich and build the careers of our people. So thank you everyone for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.