Good morning, ladies and gentlemen, and welcome to the Bancorp First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Andres Viroslav. Sir, you may begin.

Thank you, Bridget. Good morning, and thank you for joining us today for The Bancorp's first quarter 2019 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 p.m. Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 1496107. 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 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 the 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 and thank you for joining us today. For the first quarter of 2019, The Bancorp earned $0.32 a share on revenue of $64 million and expenses of $39 million. Per share earnings grew 27% over the first quarter of 2018, reflecting an increase in revenue of 9%, while expenses remained approximately flat. Net interest income improved to $34 million from $30 million year-over-year. Reflecting this increase the net interest margin improved to 3.41 from 3.12 year-over-year and 3.32 quarter-over-quarter. Annualized ROE for the quarter was 17.3% while the Tier 1 leverage ratio was maintained at approximately 10%. In 2018 we sold our Safe Harbor IRA business that generated approximately $1.5 million in fees in the first quarter of 2018. Excluding that impact, revenue was up 12% year-over-year with non-interest income climbing 10%. Non-interest income reflected a significant improvement in year-over-year GDV growth from our payments business. Year-over-year GDV grew 26% and prepaid fees increased 13%. Volumes increases came not only from our prepaid and debit programs but also our rapid funds push to card partners. ACH card and other payment processing fees increased 36% to $2.3 million reflecting rapid funds growth. In addition, net interest income growth was led by our CRE securitization business, for which average quarterly balances grew 51% year-over-year. Our non-purpose securities lending activities and SBA period end balances grew 4% and 16% year-over-year respectively and also contributed significantly to net interest income growth. We also realized an approximate $11 million gain on a first quarter securitization of approximately $518 million of CRE floating rate assets. This was our largest securitization to-date. And the significant gain was driven by better dealer economics due to size, offsetting some deterioration in market spreads. Looking forward, our strategic agenda for 2019 encompasses nine items that should further position our institution for revenue growth and profitability. Most of these initiatives focus on new products or the reengineering of our platform to be best-in-class and highly efficient. Our other strategic initiatives include finishing our remediation process with our regulators and building a stronger community with all our Bancorp partners. Impact from these initiatives should mostly be felt in increased revenue growth, as expenses remain rigorously managed and reengineering has improved productivity and reduced unit costs in many areas. I’ll now turn the call over to Paul Frenkiel, our CFO, who will detail more about the first quarter.

Thank you, Damian. A 27% increase in year-over-year net income to $17.9 million from $14.1 million reflected an increase of $3.9 million in net interest income. The increase reflected continuing growth in Bancorp's largest lending line -- lending lines including CRE loans originated for securitization. Average CRE loan balances which peak in the quarter that are securitized increased approximately $184 million or 51% to $546 million. As a result of the related increase in originations, Bancorp securitized $518 million of loans in Q1 2019 compared to $304 million in Q1 2018. The 2019 securitization gains of approximately $11 million were slightly exceeded in 2018 as a result of higher spreads at that time. Growth in other lending lines reflected respective 4% and 16% increases over prior year balances for SBLOC and SBA loans. The $3.9 million or 13% increase in net interest income to $34 million reflected an increase interest income on commercial real estate loans for securitization of $3.3 million to $8.6 million. Interest on SBLOCs increased $2.2 million to $8.6 million and interest on SBA loans increased $1.4 million to $6.6 million. We anticipate the second quarter 2019 will show a decrease in CRE interest income as securitized loans are replaced with new originations for the next securitization. That securitization is planned for September 2019. In addition to loan growth, the increase in net interest income reflected the impact of the Federal Reserve rate increases in 2018. Approximate yields on the loan portfolios were 4.4% for SBLOC, 5.6% for SBA and 6.3% for leasing. While the yields on CRE loans originated for securitization has recently approximated 5.9%, that yield varies with market spreads and timing of securitizations. These lines of businesses -- these lines of business have historically had low charge offs. Overall cost of funds increased 46 basis points to 98 basis points in Q1 2019 compared to 52 basis points in Q1 2018 and 87 basis points in Q4 2018. The increase reflected the impact of the Federal Reserve's 2018 rate increases. Prepaid card deposit accounts are our largest funding source and should continue to adjust only a portion of future increases in market rates. The net interest margin was 3.41% for the quarter compared to 3.12% in Q1 2018 and 3.32% for fourth quarter 2018. Compared to Q1 2018, the yields on interest earning assets and continuing operations increased 74 basis points, while as noted, the cost to funds increased 46 basis points. Prepaid card accounts, our largest funding source, are also the primary driver of non-interest income. Fee income on prepaid cards was $16.2 million in Q1 2019 compared to $14.3 million in Q1 2018. Card payment and ACH processing fees include rapid funds revenue and increased 36% to 2.3 million. Non-interest expense for first quarter 2019 was $39.2 million, which approximated first quarter 2018. Salary expense was $2.8 million higher during the quarter, and reflected higher BSA in compliance, commercial real estate, institutional and incentive compensation expense compared to Q1 2018. That increase was largely offset by reductions in legal, data processing and other expenses. Our goal for 2019 is to keep non-interest expense relatively flat to current levels and below $40 million per quarter. Additional expense reduction opportunities in other categories continue to be pursued. Book value per share increased to $7.70, primarily reflecting the $0.32 of earnings per share, and the increased value of investment securities resulting from lower longer term market interest rates. The consolidated leverage ratio was maintained at approximately 10%, notwithstanding seasonal balance sheet increases from first quarter tax refund and gift card balances. Our increased capital provides a solid base from which we conduct our operations and take advantage of opportunities in our lending and payments space. Our goal for 2019 is to significantly increase loan balances over 2018 levels through initiatives which are specific to each lending line. Our goal for payments revenue is to achieve at least mid single-digit growth. The overall goal for 2019 non-interest expense is to keep those expenses in total relatively flat. The combination of flat non-interest expense, higher loan interest from lending lines with historically low losses and growing payments revenue will be key in achieving our return on asset goals. Our short-term return on asset goal is 1.2% with a multi-year objective of 1.75% as presented on Bancorp’s website. Q1 2019 return on assets was 1.65% reflecting the impact of CRE loans originated for securitization. Their impact on net interest income and non-interest income is greatest in the quarter if these loans are securitized as average balances peak and any gains are recognized. These securitizations have occurred in the first and third quarters of the year with the next securitization planned for September in 2019. That concludes my comments and I will turn the call back to Damian for questions.

Okay, thanks a lot for, Paul. Operator, could you open the line for questions?

[Operator Instructions]. Our first question comes from the line of Frank Schiraldi with Sandler O'Neill. Your line is open.

Just want to ask about the -- couple of things. First, on the rapid funds product. Obviously very strong growth year-over-year. Is that more seasonal in nature? Or it’d have just reached sort of a level where -- kind of a more mature level of -- with the current partners you have in terms of revenues?

Yes, we do have one new partner but the indirect rapid funds product really can only be done by very large institutions that can integrate into networks -- the credit card networks. But the big news for that is direct rapid funds, which I've noted before, which we're building out and should have us -- we don't know what that impact will be but that market is many multiples the size. And that's when we are the -- with a partner, we are the people integrate into the network. And so we right now have beta test going on. We think that's going to be a significant growing product set for us that will far in surpass what we do with on the indirect but we don't have any guidance yet. We're still in the -- we're trying to get five use cases. We have four partners now. We have beta testing going on. And we think that will -- we don't have any guidance for it. But we think that will be increased growth in that area. But the indirect is correct. You're seeing now that we have several big partners, you're having normal growth from them, instead of explosive growth we’ve experienced two years ago. We have one additional partner that we've added. So you'll see growth, but you won't see it, 5000% because it's off of much larger base. But once again, that's just a drop in -- that's one drop in a very large bucket for the rapid funds product once you go to the direct side.

And for that business, you guys have the barrier to entry of Durbin. I mean, is it based on interchange rates to direct transfer?

No, it's not. It's a push. It's literally a product that was developed really by the networks themselves, where the use case was just not accepted until very recently, two years ago. But it was -- it existed for multiple years at places like MasterCard. But it wasn't -- these push to cards weren't accepted by the banking institutions. So now this is more of a standard product. So there isn't a barrier to entry, but obviously as a first mover in the space, and having the largest partners there really is value in there as people add -- people don't want to experiment with somebody, obviously, if someone's going to join push to card, they're going to want people with experience who understand how to how to do that. So it's the direct side, though, that has a real large potential for the future.

And that's more of a -- in terms of revenue is more of a 2020 or is that a 2019 story?

I think we'll start seeing some of that -- I just really don't have guidance. I think we'll see some of that revenue at the end of 2019. But that's more of a '20. People will have more guidance in 2019 about it at the end of the year once we develop all the use cases. And we'll understand better the pricing. The pricing is much higher on the direct side because we really control -- the disbursements can be very, very large. If you're looking at a Venmo product, the push to card might be $5, but with disbursements -- corporate disbursements and stuff you could be paying a $1 million bill, $10,000 bill, so the pricing of these transactions are very different. And so we -- once again that's a great -- we don't have an outlook but we have a lot of encouragement that this will be a good source of revenue for the future.

And then, do you guys have handy the expenses that were tied to the securitization in terms of the variable comp?

Yeah, so we -- it depends on -- we have a formula and we said this before, based on two parts of these transactions. It's a market based spread based on the loans we hold, but then there's a calculation that we do. It's a subjective calculation, it’s quantitative, but it's within our discretion, and it's based on the gain and we accrue fully for that as we go through the year. So we put in approximately -- relating to that, we put about $3 million additionally into our bonus accrual for the first quarter.

Okay, but that $3 million -- okay, so that $3 million was expensed in the first quarter or will go through the year?

No, we have the bonus accrual that runs the entire year, but we put $3 million extra into the bonus accrual related to the securitization activities in the first quarter.

And then just finally, I know there can be some disconnect, there seemed like a pretty a really big disconnect this quarter between GD -- gross dollar volume growth year-over-year and prepaid card growth year-over-year. So is there any sort of color you can give on that front just given the -- how outsized the differences were?

Well, we had -- we also had good growth in the -- we're getting a lot of growth. So even in -- I can give you some insight for the first 20 days of April even we're still having 20 plus percent growth. So fees are very bumpy. So it's very good that the GDV is growing, but it depends on which programs, at what times. And there's not only interchange fees or things like incentive fees that get paid. Some of those might go over a quarter because that have to be trued up, we try to accrue for it, but that's not always the case. So, once again, our guidance is that this market, if you look at the market in aggregate, it’s growing -- the prepaid market is growing around 11%, 12% in total use. And fees, we think long-term is still in the 7% to 9% range. So we're getting an outsized portion of that right now. And to be honest, our pipeline right now is probably from what my team is telling me, we've got the strongest pipeline we've had in the last five years. So what you're seeing is really what's happening. There's only a few large prepaid players, three dominate the market. You've got a lot of program -- new programs coming on, there are people who want to develop these types of either debit or prepaid card products. And they're going to a few providers, so some of those providers, including ourselves, are getting the majority of the volume. And that's what we had said before. But as the markets, we may get -- if we're competitively advantage, obviously, we might get more of that market volume, we think we will, but the market is growing around 11%, 12% a year. And if you look at sources like Nielsen that'll be validated by what their statistics are for the marketplace.

Our next question comes from the line of Matthew Breese with Piper Jaffray. Your line is open.

I just wanted to get a little bit of color around deposit flows this quarter. In the last couple of years we've seen the first quarter actually be a down year for deposits. This year was up quite a bit. And so I just wanted to get some insight as to how the seasonal aspects of your deposit flows are or might be changing?

Well the first quarter is usually the quarter where we get significant gift card and then tax related deposit flows. So I'm not sure -- that's -- usually our balance sheet balloons abate with deposits and they go out of the bank during the latter part of the quarter and then in the second quarter. Okay? This year, because of the GDV growth, we had a lot of deposit growth. It's that simple. And so that was great because we lost $400 million of Safe Harbor deposits. And we were growing our securitization business, $300 million. So we had a $700 million deposit funding gap that we were -- the reason that in some cases we didn't grow some of our lending businesses aggressively if you look at our average assets is because we had that funding gap. And we managed to bank in aggregate and we didn't want to balloon certain businesses. The good thing is things like SBLOC we could fix the throttle off a bit through the integration process of the Talea platform. So you'll see huge growth, I think, double-digit growth over the next year in the SBLOC business, probably 20% or more. But we couldn't really add all those assets at once. So that's kind of the color around that.

Yes. And I was looking at period end deposits, not average balances. Yes. The other question I had was, just on the securitization. I understand the next one is in September. But as we think about the balances held for sale, it's quite a bit higher than usually do post a securitization. And the most recent one you noted was the largest one you had to-date. So, just wanted to get a sense for the trend inside the securitizations. And with that, should we expect more robust fees as it seems like these things are getting larger?

So, what happened in the marketplace, first of all, our securitizations were not at the right size. So when we started this business, our capital base was much lower as you know. We've had a lot of good capital accretion events, earnings plus the sale of the Safe Harbor. So we really -- we want to be in that market is above, 600, but more like 700 or 800 because of institutional investors and rating agencies like a lot of deals. Right? And they like them put in and they like diversity. And so our decision in the latter part of 2018 was to now that we had more capital was to get to the size that, that necessarily let run that business correctly. So our average balances will be double, up to double they were in 2018 and 2019. In fact, giving you some guidance in April, we already sit on $300 million plus of floating rate loans in April already, because we had $90 million of loans that weren't quite ready to go into the securitization in the first quarter. So it was at 5.18 but we were targeting 6, we just didn't close them in time. So those sit on our balance sheet with those other loans, so it'll be much higher. We're targeting for the second securitization, at least 6 and hopefully $700 million, which we think is the sweet spot in the market. As for the gain, that's a lot to do with how market spreads behave. Now, we had a very outsized gain in the first quarter of 2018 based on market movements. We do not expect that in 2019 even with the larger size, but we did get very good levels from the rating agencies because of the deal economics that was somewhat offset by spreads compression.

Okay. So in other words, you're telling me there's other dynamics here and size does not correlate -- the size of the securitization does not correlate to the size of the fee?

Well, everything if you had, obviously, if it's 600 versus 300, it does. But the fees move around based on a whole bunch of dynamics, including market spreads, level set by -- accept by rating agencies. And then what people purchase our bonds for depending on market conditions. So all those things get set into that model, which values the security that we hold on our balance sheet which creates that fee. So the guidance for -- a good guidance for the third quarter, once again is the guidance we gave you for the first quarter, we think it will be around 7 million, 8 million, potentially 9 million for the third quarter, but it could be less and it could be more depending on how the market moves.

Last question just around the margin trajectory or the change in margin trajectory given the change in stance from the Fed. Your bank is quite asset sensitive. Does the pace of margin expansion change with the change in Fed stance here?

Well, we still -- we have the opposite. Banks who have -- we're kind of an opposite bank, so that we have the interest rates for our deposits, we price immediately and then our assets repriced in the future. We usually have the opposite happened, where you can lag the deposit rates. So you'll see a continued spread NIM expansion over this year as that occurs and we do more of the CRE securitization loans. So I believe that you'll see that go through 3.50. We had talked about this last year, we did a little bit better than we thought we were going to do. And I know that the analysts on the phone also predicted a lower NIM for us. And we probably did, too. But we've got some good conditions for and we've seen repricing in our loan portfolio, so you’ll see a drift up if there's no interest rates, in spite of the Fed hikes, and it should go through 3.50 throughout the year, and hopefully, it'll settle above the market average, I think we're above -- at the NIM average for the banking industry, and I think will be above it, which is historic for this bank piece we've traditionally been much lower than it.

And our next question comes from the line of William Wallace with Raymond James. You line is open.

A quick follow up on the securitization. Paul, you said it in your prepared remarks but I didn't write fast enough. What was the -- both the interest income on the loans that were sold in the quarter, the yield …?

In total, the CRE loans, the increase over last year was 3.3 million and …

It’s 10.5 -- it was around 10.5, wasn’t it?

No, he’s asking about the interest, not the gain.

No, no, wasn't it about, we had 2.5 -- do we actually give that number up?

I think you gave the yield.

I gave the yield and if you look at -- also I mentioned the interest -- the increase in interest on each of the loan segments…

8.6 million.

Yes, it was…

8.6 million, Wallace.

Okay.

And then again with it was about 10.

11.

You're talking about now when you securitize the fees are going to vary depending on a bunch of different stuff. Does the variable comp associated with that also vary based on whatever the fees are that you collect?

Yes.

Okay.

So -- but I think a good estimate to put in is kind of what our guidance was the 80-ish, maybe a little bit higher than that. But we keep on saying this. We've been surprised in the positive side for the last four securitizations. So I guess we're going to be surprised negative at some point, but to deal -- or we still have an advantage in the way we issue our securities that have been very well received in the market and we had five -- in the last go around for securitization we have five tightening with our partners who bought the bonds. So the spread came in substantially, and which really increased our gain. So our bonds are being very well received by the investors who buy them.

Yes, certainly, that's great. So, in the prepared remarks you talked about a goal for keeping expenses flat from where they were in the first quarter, but shouldn't they come down by the 3 and whatever you said, the $3 million that you had for the additional bonus accrual associated with the loan held and then they'll jump back up in the third quarter when you do the next one, and then come back down for maybe $3 million less not flat to $39 million?

On a run rate basis, yes. However, we've got a bunch of initiatives supporting new products that we're building and reengineering that redoing. So it may not be a one to one but you're correct when you said that. On a run rate basis, our expenses were more like 37 than they were 40 or 36 if you look at the run rate expenses on the continuing size.

Right, but you continue to invest in the franchise.

Yes. We got a lot going on here, because we're trying to build out -- we're finishing our remediations. We're totally restructuring our payments business to look at what the market should be in five years. We're building out new products in SBLOC. We have an IBLOC product now based on insurance backed loans. We're creating a card for the SBLOC product much like a debit card that will be based on the collateral held in IBLOCs. There's a lot of investment going into the business and now that we have the capital and the people to do it and running through the remediation, there's a lot of growth opportunities out there for us. And we don't want to -- we couldn’t harvest, but we really want to plan right now. So we might spend a few million dollars really planting new seeds.

Understood. Damian you said something about being able to take your foot off the gas on the SBLOC and that you think that with the implementation of Talea that, that you can -- 20% growth in SBLOC loans, is that -- -- it was a two different things?

Yes, we're targeting double-digit growth in the SBLOC products Talea has this year. So you'll see balances go up I think pretty aggressively during the year. And we have a great pipeline. If you think about the bank as a whole though, we did when we sold -- we had a softer quarter in the fourth quarter and that's partly year-over-year because we lost those season deposits. We've already -- we were worried about not having -- we didn't want to borrow a lot of money to grow our businesses at the wrong time. We look at the bank as in aggregate. And so if you take that SBLOC, deposits we lost, and you take the fact that we needed to get our average assets up in the securitization business, we timed the investment in new sales force and everything to go with Talea to really start being realized in the second quarter of 2019, not the first quarter because of the liquidity issues. And it's worked out very, very well. So I think we've got the right pipeline right now to grow the business in high teens 20% plus for the next year. We have very aggressive plans, new product sets going into the SBLOC platform. So we think it's going to be -- this is -- once again, this is our opinion, but we think we're going to show good growth in that business over the next year. Well over the next three years, but we'll see. Make that claim next year and it won't be as believable, but I think we really will see balances start to go up nicely.

Okay. And then on the provision expense looks like you guys built your reserve relatively meaningfully. So you can drive that decision?

Yes. So unfortunately, we're still dealing with a couple of little issues from the past. In 2015 and early 2016, a lot of our SBA business was franchise lending to small franchises. So they are -- franchise will go -- we have a guarantee. The problem is, is that when you take some of these franchisees back, you get basically a meat slicer, a barber chair and we don't do these -- I don’t. But we had to once you -- it's in the seasons part of the portfolio. So we adjust -- there were some loss factors that had to be adjusted. That's why you got that extra bit. We probably won't have that again in the next couple of quarters, but we had to adjust those loss factors to account for higher losses in that franchise lending, which we don't do anymore. But I don't think it'll be a long-term impact to our reserve.

How big is -- what’s the balance of those franchise loans on the books?

It's not high. I think a bit and this is -- I think it's around $70 million. But most of them are good. We're talking about certain types of franchises and stuff. So we made the proper adjustments. I don't make those adjustments myself. I'm one of those people who approve those, the reserve, but I let our modelers have great independence with our auditors and stuff in setting our reserve correctly. And so when they believe that the lost arms have changed, and regardless whether it's a increasing or decreasing part of the portfolio, I'm a very conservative person as you know when it comes to credit risk.

Okay, thank you. Any updates on The Florida Mall property and I believe there was a lawsuit around the Fort Lauderdale hotel?

Yes well there was a -- I -- we really believe there won't be anything coming out of the Florida hotel thing. That was -- that's got to do with the EB-5 money which we're not -- it's not our -- we didn't take the money, it was the money that was taken by the sponsors. We believe there's no basis whatsoever, legal basis to claim that we would owe anybody any money in that area. So we don't think that's an impact at all. The mall is in negotiations. We believe we have a path now. It includes the -- remember the mall has a ground lease. And so it's all -- there is four parties involved trying to get this thing done. But it includes the ground lease. That was the sticking point, before was, people own the ground lease, didn't want to sell it or didn't have a price in mind of how they would sell it. We believe that's been solved. So we think we have a path over the next six months to sell the mall without any investment from ours at par.

Okay. And when you say par, are you talking about the par -- the new par that you're carrying into that at today, right?

Correct. It's an OREO, so whatever the value of OREO is, we think we'll get that back right now. And the mall is still income producing even though -- might be the only mall in America income producing, but it's still income producing, so it's not a drag on us. So we should -- we'll continue to run it and hopefully we'll be able to -- I think the property is a massive property that really should be developed by somebody who really understands the market. I think there's real value there. Somebody can get the ground lease plus our property, I think they've got a great deal and they could have quite a -- quite of a -- quite a good project. But getting all these disparate parties together with the ground lease and terminating that ground lease is always a tough thing to do in a real estate transaction.

Yes. Alright. Damian. I think I might be last, so I'll just ask a question, if you could update on the order, where you stand, where you feel like you stand, any kind of updates that you can provide us around the orders?

Okay. So we have made, I would say and I don't think I'm disclosing anything the regulators would disagree with, great progress in building a best in class BSA capability and an appropriate and best in -- future best in class consumer class compliance capability. The BSA center of excellence that we developed here in Wilmington, I believe it's been extremely well received. There is a few things we need to finish up on. We had some conversions and stuff, we still need to finish and certain areas, where we have to -- we're talking about, I would say and this is a pure estimate, we're talking about, of the total sum of the universe that needed to get done, converted, changed, we're down to the last 3% or 5% of things we need to get done. I think that's been recognized by our partners and that we have a clear path over the next year to be removed from the order on the BSA side.

Thank you. And I'm not showing any further questions, so I'll now turn the call back over to Mr. Damian Kozlowski for closing remarks.

Okay. Thank you everyone for joining us today. Have a good weekend. Thank you, operator.

You are welcome. Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.