Andres Viroslav - Director, Corporate Communications Betsy Cohen - CEO Frank Mastrangelo - President Paul Frenkiel - CFO

John Hecht - JMP Securities Matthew Kelley - Sterne, Agee Frank Schiraldi - Sandler O'Neill Brian Hagler - Kennedy Capital

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 The Bancorp's earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Andres Viroslav, Director of Corporate Communications. Please proceed.

Good morning and thank you for joining us today to review The Bancorp's fourth quarter and fiscal 2011 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 10:00 AM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 45116921. 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 risk and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, 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.

Thank you, Andres, and thank you all for joining us today for the fourth quarter and fiscal yearend financial results for The Bancorp. This quarter in a very dramatic way showed not only the continuation, but the success of the strategy which we began some three years ago and shifting during a low interest rate environment our pricing and emphasis on non-interest income in contrast to the gathering of deposits. And so non-interest income on a total basis increased by 54%. And again, we invite you to look at this not on a linked-quarter basis, but rather on a quarter-to-quarter, because there is seasonality in all of the businesses that we facilitate and that seasonality gets reflected not only in deposits, but end spikes, but also in the production of non-interest income during that quarter. So based on that quarterly basis, the 90% increase we think shows significant progress in the increase in prepaid non-interest income, and 50% is a significant increase in total non-interest income. But total non-interest income not only includes prepaid, but several other major lines of business such as merchant processing and our HSA portfolio. All of those contribute significantly to the non-interest income line. You'll hear from Frank in just a few moments about the pairing of that non-interest income growth in merchant processing with a growth in deposits in that area as well. However, we did grow on a dollar basis. Net income, measured year-over-year and measured fourth quarter to fourth quarter, if we take a look at the aggregate of non-interest income and net interest income 2011 over to the 2010, the growth was 32%. If we focus on net interest income without reference to our exiting affinity group, the net interest margin was 3.59% versus 3.62% on a linked quarter basis. I think it's important to look at the company and its growth without that component, because in a way it's like a discontinued operations line, which is less visible because not broken out. As of December 31, 2011, assets continued to grow and I think that was a contributor to the growth in net interest income. And again, our deposits growth was significant. You saw in the core earnings or as we are calling our adjusted operating earnings, it's hard to find the right word for this non-GAAP configuration, but for December 31, 2011, grew to approximately $9.4 million from $7.2 million of that 30% growth eventuated in a 71% increase in net income for the year and if done on a quarterly basis, 61% increase in net income for the quarter. All the initiatives, the asset initiatives that we've discussed in the past continue to make progress. And of total, therefore, we had a total growth in assets of some 18%. On the expense side, we've been building what we hope will be a competitive advantage in our Compliance Group, a best-in-class Compliance Group, which is critical in the business and which we are. Some of the expense that is attributable to this department was reflected in the third quarter, but we think that the fourth quarter has captured all of that increased expense, so it's a good quarter to use as a baseline. But we're continuing to exploit the market, both from the standpoint of the benefits that we have gotten as bank under $10 billion from the Durbin amendment and from the general disruption in the marketplace in the prepaid line of business. The launching of the individual programs within our very robust pipeline have not yet hit the balance sheet or the P&L. And therefore, what you see again are some expenses attributable to garnering that business ahead of the impact of the income from having that business on the book. And Frank is going to talk about the opportunities that we have recognized over the course of this last quarter and the impact that we hope that they will. Both announced and of course we can't talk about those that are as yet unannounced, but in general terms I'm going to ask Paul just to talk a little bit more about the expense component and share with you the various elements that made up the increase. Paul?

Sure. As Betsy said, the single prominent increase in expense was in the salaries and expense line, but we were actually able to fully staff all of our new compliance infrastructure, so that happened more quickly than we had expected. But as Betsy said, that staff is fully in place and fully reflected in the fourth quarter, so that compliance won't show any further increases in future quarters. Additionally, we did have some one-time expenses, but they were for resolving some of the loan issues, so that's actually a good thing, and we expect those expenses to decline next quarter. Looking forward, we are very focused on scrutinizing of the staffing. But if you look at the different areas where we added, one area was prepaid and in that area that we have to add the people in advance of the contracts and in advance of the production of income. So again, I know it's hard to conceive of expense increases as a positive thing, but it actually is a precursor to significant revenue in the future.

Thank you, Paul. Another way to look at that relationship is to share with you that of the increases in prepaid non-interest income, roughly 83%, 85% of them were due to organic growth and new entrance into the market. And only 8% of that growth was due to what we called disruption or Durbin-related customers coming on Board. So we yet have a lot of prepaid non-interest income expansion attributable to the current expense that you'll see rolling out over the next several quarters, some of which we've talked about in the past and some we haven't. Frank, would you like to provide more color on the non-interest income and on the growth of the various lines of business.

Sure, absolutely. Thank you, Betsy. As Betsy mentioned prepaid non-interest income up 90% year-over-year, of that year-over-year growth, 17% was related to Durbin and disruption of competitors that are 83% really focused on organic growth of current programs and Bancorp just continuing to take its share of new entrance into the market underscoring that. As Paul suggested, there is still a very healthy opportunity for forward revenue growth related to Durbin and those disruption of competitors that really hasn't hit the P&L yet, the expense certainly has but not the revenue. Beyond the prepaid business, our HSA business, as we talked about earlier in the year, where we reformed some of the fee structures related to those accounts is up almost 69% year-over-year. And our merchant business continues to perform very strongly, up 25% year-over-year, being propelled by very, very strong growth in our ACH origination and card acquiring businesses. And in hand with that merchant deposits are actually up 99% year-over-year. So as we look to strategize on how to replace volatile deposits that it might be exiting, we have business lines like wealth management, up 27.5% year-over-year; merchant 99%; prepaid generating 45% year-over-year; deposit growth essentially to replace those other low cost deposits. One of the reasons of course, the NIM was squeezed a little harder in this particular quarter for the preparation for that exit. So as you heard earlier, I think from both Betsy and Paul, upon a linked-quarter basis normalized without that third-party relationship, NIM was essentially flat.

Thank you. I'd like to underscore something that Frank said, which is that we have been preparing for the exiting of our most volatile customer with the generation of additional low cost deposit. So you will see over the course of the next, perhaps, three to four months as we prepare for that final exit at the beginning of May or the end of April, I don't remember this. A bit of a search, which will compress the NIM temporarily, but then rectifying of it thereafter. One way to look at that and look at it from a liquidity point of view as well as a NIM point of view is to take what is in cash and cash equivalents, what's at the Federal Reserve essentially, and deduct it from the total resources and then compute the NIM on that basis, because there is zero income attributable to that component. And it also will give you a sense for the liquidity, which is in fact not only available on demand and we look at liquidity everyday, but also being built over time, so that we can smoothly make the transition. With that, I would like to invite question.

(Operator Instructions) And our first question with come from the line of John Hecht with JMP Securities. John Hecht - JMP Securities: First question is, Betsy, in conjunction with some of your discussions about the organic growth of the income from store processing fees relative to where you might benefit from some of the disruption on the Dodd-Frank Act. Where are we in the cycle and when do you think some of those benefits will come in, and how long it will take for that cycle concludes?

Well, I think you've seen some of it come in, John, because 8% of the increase for the fourth quarter was attributable to that kind of new contract. So you begin to see it in the fourth quarter. I think one of the things that we feel very strongly about, we'll benefit as a bank and our customers over a long period of time is doing a significant amount of upfront work, so that compliance and reporting and proper attention to regulation will go more smoothly on an ongoing basis. If I would predict, since we have a very significant pipeline of signed contracts that you will be seeing the impact of those over the next two quarters in an important way. You know, we have been planning not only the increase in new business, because that's a very healthy element and we can benefit from various external factors at this time, but also as part of our transition out of a volatile affinity group, and so makes the bank more understandable to all of you. John Hecht - JMP Securities: And as we evolve here, is it a composition of reloadable versus non-reloadable versus benefit cards shifting and all, is it pretty consistent with what has been historically.

I'll let Frank answer that.

Yes, John. So I think we've talked about in the past where back in 2007 award portion of the business was comprised of benefits and non-reloadable programs. Only a very small portion of the overall portfolio was reloadable of general purpose and payroll in a card to that nature. So that is the fastest growing segment of the Bancorp's prepaid business today. And now comprises, I think in excess of 45% of our non-interest income in that line item. John Hecht - JMP Securities: Second question is just in terms of Q1, I know you'd mention us the disruption with the affinity relationship. In addition, you tend to have seasonally a lot of inflows of deposits. Just from a margin perspective what types of securities and what kind of yields in those securities should we think about you guys deploying that into?

The biggest growth that's here has been in MBS, in residential mortgage-backed securities. That's yielding close to 3%. We can't get quite those yields with assured maturities. But we may be in that range, but somewhat less than 3%. The other thing we've been purchasing is some commercial mortgage-backed securities, only the very best to top quality. And we actually underwrite those just as we would commercial loans. You can get stronger yields on those and in fact yields that our very supportive, if not accretive to our NIM. But we're only doing those in measured amounts. And as I said before only the very, very best quality, which are not easily found, so it will take a while to build those. John Hecht - JMP Securities: What types of yields are you talking?

Let me answer that in a little different way, John. And I think it's the underlying question that you're asking, which is will any compression due to this buildup of deposits and the short-term nature written in the exit, a continuing trend or should we look at it as a one-time event. And I think that if you look in that regard, I believe that we will find that NIM on an adjusted basis will remain constant, as we adjusted now for excess liquidity due to volatility, but may not be on a nominal basis, what you want to project.

And our next question will come from the line of Matthew Kelley with Sterne, Agee. Matthew Kelley - Sterne, Agee: Just getting back to the expense first. What was the one-time expense related to the credit issues there?

I think there was a buildup of disposition costs, legal and other disposition cost related to exiting credit. Matthew Kelley - Sterne, Agee: What did that amount to?

$300,000, Paul is that what you said?

That's approximately, right. Correct. Matthew Kelley - Sterne, Agee: So I mean if you take a look at that annualized type level of $76 million, what type of growth on that should we anticipate going forward? In the last quarter, you guys talked about 10% type growth. I guess that would get us to call it (A2, A3). Is that what we're looking at for full year expenses?

Well, again, we had underestimated the growth. For this quarter a chunk of that was compliance. The largest chunk of that in fact was compliance this year. However, the other additions were to prepaid group and related expenses that are necessary to grow the revenues and to finalize the structure, to add these, the new contracts and the new customer. So I think we're still targeting that level and we're going to try to live into it. But obviously, if we see opportunities and we have even more growth on the revenue side or potential growth, we'll make those investments.

I think it's important, Matt, to underscore the fact that we really do separate expenses into the category of ongoing costs, necessary to do the business and do it well, and do it safely in a risk-managed way, and those that we consider to be investments in future income production. Matthew Kelley - Sterne, Agee: So I mean, on the revenue side then, on the stored value income, 2011 that was up 70%. I think it was up 40% in 2010. Are we looking at similar types of growth rates or accelerated in 2012?

We don't generally project those items with you. Matthew Kelley - Sterne, Agee: On the margin and exiting those businesses, what was the balance of the affinity business that you're exiting on a period and on average basis of deposits?

Well, Paul, do you have those figures offline?

Yes, we can do that offline. Okay. But I would reference Betsy's comment that if you want to see the excess impact, you go to the average of balance sheet and you look at the interest earning deposit for the Federal Reserve Bank, 90% of that is attributable to that third party.

I mean, that's your line. It's the easy way, Matt, just take a look at it. Look at it on average. Look at on interest bearing deposits line and just deduct it. Matthew Kelley - Sterne, Agee: Right, Okay. I mean if you take that number, it does imply that there is some non-interest expense related to that business as well. I mean if you're getting 25 bps, paying insurance 15, 16 basis points would be $1 million. Is that coming out?

Yes, it will come out of the non-interest expense, but remember we're replacing it with other deposits. So that's not what we're focused on. Matthew Kelley - Sterne, Agee: What was the dollar amount of GDV processed in 2011?

I am sorry, say that again. Matthew Kelley - Sterne, Agee: The dollar amount of just GDV, where are you at now in gross dollar volume in your debit card business?

Yes, Matt, GDV was $13.3 billion for calendar year 2011. Matthew Kelley - Sterne, Agee: Where do you want the excess liquidity to cash to be once you've exited that affinity relationship and that volatility has been reduced? When you look at just cash and cash equivalents as a percentage of earning assets, where do you want that number to be after May once you're done with higher one?

What do we need to keep? Matthew Kelley - Sterne, Agee: Yes, what do you need to keep?

It's fairly minimal. It would be our Federal Reserve Bank reserve requirements which without that third-party are fairly minimal, $50 million, $60 million, $70 million depending on the time.

I mean if you want to use a growing number and you use 100 as a deduction, that's probably okay. Matthew Kelley - Sterne, Agee: Okay, so that will come down. Do you anticipate adding securities at the same rate that you added in 2011 as deposits payments?

If there are opportunities, we may do so if we have stronger asset growth. I mean we identified a series of asset strategies for you. They have in fact grown. If they grow sufficiently, not to require the price holder of securities, we won't. And if they don't, we will.

And our next question will come from the line of Frank Schiraldi with Sandler O'Neill. Frank Schiraldi - Sandler O'Neill: In terms of some of the larger relationships you guys talked about, you've already signed and you talked about revenue coming in the door from, I'm thinking of, NetSpend and Western Union. Did we see a much of that coming the door in the fourth quarter now or is there still of that that you're going to see for the first time in 1Q?

17% of Q4-to-Q4 growth was driven by relationships that shifted to Bancorp, because Durbin and disruptive-related issues at our competitors, Frank. So without naming names, there is certainly a portion of the growth in Q4 that was attributable to that. As I think I mentioned on previous call that you believe, we'll boarding business and seeing spikes in revenue all throughout calendar 2012. The first quarter is certainly no exception to that.

I think you have to remember that the pattern, Frank, is not that you transfer 100%, and bingo on day one, the revenue is at a constant rate. It really is fed in over time. And so even if we launched and began those relationships end of Q3 and all through Q4, we couldn't possibly realize a complete quarter from that. And those companies themselves, those relationships, as they impact us and the companies themselves are in fact growth. It's reflective in the external factors of the prepaid market being a market that continues to have significant growth. So it's impossible to have. It's not a snapshot. It's a continual flow. Frank Schiraldi - Sandler O'Neill: And then on expenses, given some of the growth expectations you're seeing on the revenue side, I guess that's ongoing. So is it possible we could see another ramp-up in expenses just in the first quarter to sort of get these new relationships signed as well?

No, we think that the revenue will begin to show up first quarter, second quarter, third quarter this year. In the first and second and third quarter of 2012, as we shared with you before, the expenses proceed that because the lead time for sales, contract negotiation and signing remains even though it's being shorter with some of the Durbin-related or disruption-related customers, it still remains a six-month beta process to get the program integrated and then launched. So you have the expense in that prior three to nine months and the revenue then follows. So we think that not that we're not going to add another person in this, but if we see opportunities, we will add people, because we consider them investments. But we don't anticipate a significant increase in that component of expense. Frank Schiraldi - Sandler O'Neill: Is there a percentage of that expense other than $300,000 in one-time cost that Paul mentioned? Is there a percentage of that expense that will actually go away in the first quarter or are we basically at the right run rate here?

No, you not only have to put the customers, you only have to service them. Frank Schiraldi - Sandler O'Neill: So one-time cost, we're just looking at that $300,000 really in the fourth quarter?

Right. Frank Schiraldi - Sandler O'Neill: And then finally, Betsy, I think you might have talked about this before. What are your thoughts on a fair efficiency ratio once everything is ramped up, once the expenses and the revenues are both in the earnings statement?

I'd rather not be predictive in that regard. But there are studies that have been done of our peer group that we certainly could share with you in which our expense ratios both on the salary and other basis appeared to be at the low end of the range. Now that's not the total and maybe the traditional efficiency ratio is not the best ratio for measuring whether we're being successful and watching our expenses. But we think that we continue to be able to generate significant income with the expense investments that we have. Frank Schiraldi - Sandler O'Neill: The current expense ratio is below peers, where is it now?

Paul, maybe you have that on your screen which I don't. We are talking about the study that was done of us and our peers. I can't recite too, Frank, here who the peers were. But my best memory of this is that there were 10 or 12 peers and that we were on the good side number, two or three.

That was actually a measurement of non-interest income to assets. I'll have to go back to that to get you the details, Frank, and I'm happy to do that.

Non-interest expense, right?

Right. But if you see, the 90% growth quarter-over-quarter, we should continue to improve in that in any kind of related statistic.

And our next question will come from the line of Brian Hagler with Kennedy Capital. Brian Hagler - Kennedy Capital: Just had a couple of follow-up questions, first of all on the transition of the large deposit relationship out of the bank. Just wanted to make sure I'm thinking about that correctly. It seems like that will be more of an optics issue than actual increase in income unless you're carrying an amount of excess liquidity above and beyond the current size of that relationship. And I think earlier you mentioned that you think on kind of a normalized cash level for you guys. I thought you said maybe around $100 million. And it looks to me on a period-in basis, that was around $750,000. Am I anticipating that correctly?

Almost. There are two elements to see here. One is that as we replace our primarily volatile deposits, which we do not feel comfortable converting into longer-term assets because we don't want to mismatch, our opportunity is replacing those with stable deposits. And so that $750,000 or $650,000 we take out of $100 million, that $650,000 which you mentioned which is excess liquidity will then be able to find an asset home in a longer-term asset and therefore contribute significantly to net interest income. Brian Hagler - Kennedy Capital: So it sounds like today you're earning 25 bps or less after taking out expenses. But after you replace that, you will be able to put it in some securities you talked about.

Let's assume 2.5% to 3%. I'm just using a very low number here. We'd then be increasing on that component that's existing by whatever you want to choose, 200, 250, 300 basis points. Brian Hagler - Kennedy Capital: I guess, Frank, you mentioned, and Betsy, that there is a certain amount of expenses that are built up ahead of the revenue, and it sounds like we're set up to see that revenue hit in the next couple of quarters. Can you guys estimate kind of what percentage of your expenses are kind of in anticipation of upcoming revenues?

What percentage of the expenses. I don't think we've looked at it exactly that way, but we can break it out and get back to you, if that would be helpful, sure.

And our next question is a follow-up question from the line of Matthew Kelley with Sterne, Agee. Matthew Kelley - Sterne, Agee: I wonder if you could just talk about just bottomline profitability. I think a lot of observers in the stock have been watching some progressions in the last couple of quarters after some frustrations in 2010 and the first half of 2011 on just bottomline profitability. One of the conversations we have had in prior calls is just about your ROA potential. And we're back and kind of looked at what you guys are talking about at the beginning of 2011 and achieving a 75 to 100 basis point ROA. I wonder if you could just revisit that. I mean you've had some nice improvements over the last three quarters here. But bottomline profitability ROA 40 bps, returns in equity 5%, that's still a point of frustration for a lot of people who are watching all this revenue growth, all this great deposit growth, but it's just not dropping to the bottomline like I think a lot of people believe is the potential. And so can you talk about the bottomline profitability of the institution ways of today in achieving some of those goals?

Absolutely. As Matt just pointed out, we've seen significant growth in operating leverage. I know that's a term that can be defined in many ways. But we are thinking about it in terms of the adjusted operating earnings. Part of the adjusted operating earnings analysis is in fact of a credit cost associated with this current round of the economy. We both see those at a minimum stabilizing and maximum improving. And so we think that over what you're seeing is significant incremental profitability even with assuming credit cost at that steady state, which would be high for the bank on a two-year forward going basis. The potential for the increase in profitability of the bank is shown in part by the relationship between the increase in that adjusted operating earnings analysis, which for fourth quarter to fourth quarter was 30%, resulting in a 61% increase in net income. So there is leverage implicit in that. And we think that that will accelerate. Matthew Kelley - Sterne, Agee: Okay. Yes, I mean everybody can see that the revenues have been growing, but the expenses have offset a large portion of that. And so do you think you can achieve the 75 basis point to 100 basis point ROA type of range that was discussed earlier in 2011?

I think that our goals remain consistent. Matthew Kelley - Sterne, Agee: Is 2012 a year of more topline revenue growth, acquiring the relationships, or is it marked by bottomline profitability and improvements in ROA and ROE?

I think it's actually both.

Ladies and gentleman, this concludes the question-and-answer portion of today's call. I will now turn the call over to CEO, Betsy Cohen, for any closing remarks.

Once again, I thank all of you for your good and helpful questions and look forward to reporting additional progress next quarter. Thank you, again.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.