Bancorp Inc (TBBK) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Bancorp Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Andres Viroslav.

You may begin.

Thank you, Latoya.

Good morning and thank you for joining us today for The Bancorp's Third Quarter 2017 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'll be a replay of the call beginning at approximately 12 p.m.

Eastern Time today.

The dial-in for the replay is (855) 859-2056 with a confirmation code of 95371306.

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 Security 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 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 would 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.

My name is Damian Kozlowski.

I'm CEO of Bancorp and the President of The Bancorp Bank.

I've been in these positions since June 1, 2016, and I welcome you to our Third Quarter Earnings Call.

The third quarter of 2017 was another positive set for our company.

In this quarter, The Bancorp earned $7.3 million in net income or $0.13 a share on approximately $57 million of continuing operations net revenue.

All of our businesses are improving, and Bancorp realized an approximate $11 million gain in the third quarter of 2017 from our floating rate commercial loan securitization business.

Our run rate earnings are improving as revenue continues to build across our businesses while tight expense management improves operating efficiency.

Here are some of the highlights from the third quarter that drove our performance.

As we have discussed previously, our integrated business plan is being implemented.

A recently updated version of this plan is on our website.

In the third quarter, we exceeded our own internal budget and are tracking well with all our key initiatives.

There were several onetime expenses in the third quarter that should be nonrecurring, which had a $3.2 million after tax impact.

Approximately $2.5 million was due to a civil monetary penalty issued by the FDIC in connection with business conducted from 2010 to 2014.

Although we are still evaluating our position with regard to the civil monetary penalty, we have accrued the exposure accordingly.

Moreover, a $1.1 million expense or $725,000 after tax resulted from a buyout of a long-term contract that will reduce future operating expense by approximately $2 million.

In this quarter, we also had approximately $4 million of additional employee expense linked to revenue generation from the securitization and other sources.

By our estimates, current structural expense is running at approximately $38 million quarterly run rate or $152 million annualized.

Our expenses continue to show improvement.

Cost savings are on target with about 85% completion of our Phase 2 cost restructuring implemented.

Expense issue continue to improve as we close out 2017.

Preparation for our Phase 3 platform reengineering has begun.

This process focuses on creating a more rational, efficient and productive operating platform to support innovative growth.

Cost savings are hard to determine, but an additional savings of approximately 10% to 20% of operating cost is possible after its full implementation in 2018.

However, the main focus of this process is to create a higher revenue growth while improving the productivity of our platform.

Core revenue continued to grow, both quarter-over-quarter and year-over-year.

Third quarter 2017 net revenue compared to third quarter 2016 grew 31%.

Year-over-year business growth was led by SBLOC loans, which grew 16%, and quarter-over-quarter business growth was led by SBA loans, which grew 11% annualized.

We continue to make real progress concerning our regulatory situation.

We're now implementing our integrated compliance program that will significantly enhance our compliance management processes in BSA/AML, third-party risk and consumer compliance.

Along with our financial progress and the enhancements made in risk management, we believe this integrated compliance program is improving our overall safety and soundness and reducing regulatory risk.

Our new operating team we announced last quarter that is comprised of seasoned executives from JPMorgan, Citibank, Bank of America, AIG and the Federal Reserve is making significant progress in reorganizing and enhancing their teams to improve our ability to meet all of our current and future regulatory requirements.

In summary, the third quarter was another step in the right direction for The Bancorp.

We remain very focused on continuing to enhance performance and resolving any remaining issues that face the company.

Now I'm turning the call over to Paul Frenkiel, our CFO, to review the financial results in more detail.

Thank you, Damian.

Consistent with our business plan and budget, Bancorp increased its profitability in the third quarter of 2017.

Net income was $7.3 million for the quarter, which reflected $2.5 million nondeductible civil money penalty and a $725,000 tax-affected data processing contract exit fee.

That exit fee will reduce future data processing cost by significantly more than that charge.

The third quarter also included various compensation charges, approximating $4 million associated with the $11 million in securitization income for the quarter and other production, performance and income-based compensation.

Third quarter results also reflected continuing revenue growth in Bancorp's major lending lines.

A $4.4 million increase in net interest income compared to the third quarter of 2016 reflect the continuing double-digit year-over-year growth in leasing, SBA and SBLOC loans.

Interest income, which is earned on commercial loans held for sale or securitization, increased by only approximately $200,000.

However, primarily as a result of a third quarter 2017 securitization, related quarterly income approximated $11 million.

The $4.4 million increase in net interest income also reflected the impact of the Federal Reserve 25 basis point increases in both December 2016 and March 2017.

Our largest percentage increase in loan balances was in security-backed lines of credit, or SBLOCs, which grew organically 16% year-over-year.

That portfolio yields in excess of 3%.

The leasing portfolio, which grew 11% year-over-year, continues to yield in excess of 6%.

SBA loans also grew 11% year-over-year and yield over 5%.

Total loan balances, excluding loans held for sale, grew 15% year-over-year.

The lines of business comprising those totals have historically had low charge-offs.

Our cost of funds grew minimally, reflecting only a partial adjustment of rates on our largest -- on prepaid card deposits to -- sorry, our cost of funds grew minimally reflected -- reflecting only a partial adjustment of rates on our prepaid card deposits to changes in market interest rates.

Prepaid card deposits are our largest funding source and should continue to adjust to only a portion of future increases in market rates.

The interest margin should benefit accordingly as rates on variable rate SBLOC and SBA loans and investments adjust more fully to higher market rates.

Prepaid cards, in addition to being our largest funding source, are also the primary driver of noninterest income.

Compared to the prior year third quarter, related fees increased 2% while the total amount spent on prepaid cards or gross dollar volume increased 5%.

The 2% third quarter increase in these fees, while modest, demonstrated a return to previous increasing trends.

The increase reflected growth in organic and new programs, which began to offset the impact of a client and customers who terminated their card programs in recent quarters.

Reductions in certain noninterest expenses also contributed to third quarter results.

After considering the aforementioned civil money penalty, data processing exit fee and revenue-related compensation expense, Bancorp continues to work toward a structural $38 million quarterly noninterest expense goal.

As Damian noted, additional expense reduction opportunities continue to be pursued.

Net interest margin for the quarter was 3.26% compared to 2.69% in the third quarter of 2016 and 3.10% for the linked quarter.

The improvement in net interest margin over third quarter 2016 reflected the impact of the rate increases in December 2016 and March 2017, which resulted in higher asset yields versus a lesser increase in deposit costs, as noted earlier.

It also reflected a greater proportion of average assets and higher-yielding loans instead of securities.

As a result of a decrease in average assets, which reflected balance sheet management efforts and the $7.3 million of third quarter earnings, the leverage ratio at the bank and holding company were, respectively, 8.04% and 8.25% at the end of third quarter 2017.

That concludes my comments, and I will turn the call back to Damian for questions.

Thank you, Paul.

Operator, we're going to open the lines to take questions.

(Operator Instructions) And the first question will come from Frank Schiraldi of Sandler O'Neill.

Just on the expenses.

Paul, I think you got -- both you and Damian mentioned that $38 million number.

If you look at the -- pull out the data processing stuff and the money penalty and then you're at $40 million, and then if you have $4 million tied to that securitization, you got $36 million.

So just wondering why $38 million versus the $36 million?

What's the other sort of $2 million?

It's really timing, and a large part of it is compensation expense.

It's difficult to determine in any single quarter what incentive-based compensation for production, so forth, will be.

Yes.

And if you look historically, the $150 million, you know me, getting -- where we had talked about in previous calls, getting down to that low $150 million number was kind of the -- beyond our target, original targets of where we wanted to go.

So when we look at the overall expense base and we track it very carefully, it looks like, on a run rate basis, it should be -- any one quarter will be up and down, it looks like a $38 million.

That's our best estimate that we can give you.

It's not conservative either.

It's what we really think we're doing.

Okay.

But -- so if I look at just this quarter, I should probably think about if I was to pull out the securitization in terms of the revenue side and look at the expense side, I should think about probably a $36 million number, at least in this quarter, was sort of core expenses outside of the securitization and the other stuff we talked about.

Yes, that's just math.

But I just want to caution that timing does play a role.

We do have a lot of different processing contracts and things that are linked to revenue generation.

So it bounces around a bit.

But that's just -- that's purely math, and that's accurate.

Okay.

I mean, I would think you'd try to get the revenues in the same quarter where the expense is, but you're saying it can be kind of -- it doesn't always line up that way, I guess.

It's choppy.

It's choppy because it's -- of course, we have to align it per GAAP.

So obviously, you have to expense -- align expenses.

But as you know, they -- it's not a one-for-one always.

And we still have about 15% of the Phase 2 ready.

So there are some more expenses.

There are -- there is some possibility that we'll continue to manage down, though, from the $152 million annual run rate and get towards the $150 million or a little bit lower.

But once again, revenue, and I've said this on the call before, it's a good thing like -- such as the securitization, revenue, depending on where it is and how it's actualized, can affect your overall expense base.

And so in this particular case in this quarter, it did.

Okay.

And then -- and just sticking with that for one second on the securitization.

Those revenues were, I think, sort of double the gains we saw.

Last time, you had one of these securitizations.

So is there any way to frame for us how to think about expected revenue from these securitizations, say, over a given time frame, over a 12-month period?

Or is that just too difficult?

No, this is a -- I'll frame it for you.

This is the high side of what you'd expect.

A couple of things happened in order to increase the gain.

One was when there was a spread difference between when we originated the loans and put the loans into a structure.

So it's advantageous.

That was one source of the increased gain.

Another source of the increased gain is that we have been very -- spent a lot of time improving our credit risk management process and underwriting process.

So that when we went to the rate -- rating agencies to look at the levels of each of the securitization levels, which would be distributed to institutions, we got better levels, better ratings.

That made the structure enhanced.

And so -- and we also ended up holding less of the structure on our balance sheet, 4% versus 6%.

So those are the 3 sources of increased gain from this.

This securitization was also a bit bigger.

So that's why it resulted in this substantial increase in the gain over last time.

So that's kind of -- that probably could bound the gain.

That doesn't mean that $4 million is the least amount of number, depending on the market conditions.

This tends to be a little less volatile than CMBS business because there is no hedging in this particular case.

So we cannot predict.

I'd like to underline, we cannot predict the gain.

The gain is done by a third party, assesses the structure and assesses what the gain should be, and then we simply book it on our balance sheet after reviewing it.

But that's as best as we can bound it for you.

Okay.

And then just finally, on credit.

Things look fairly positive here, obviously, in the discontinued book.

I know you have plans, expectations for whittling that down over time.

I just wondered if there's anything maybe specific in the works you could share with us that would move another -- slug of this off in the short term.

And maybe as part of that, you could talk a little about the Florida mall that's in OREO.

Yes.

We can't predict -- we believe that we'll continue to whittle down both Walnut Street and discontinued very aggressively.

We're working very hard on the final -- in the interest of our investors and all the community around The Bancorp community, we don't want to sell something at a loss when we don't need to and when it's cash flow generating, it's safe.

So we're going to aggressively work down discontinued and Walnut Street.

As for the mall, it's in the marketing process.

I can't share anything with you now because it's in a confidential marketing process.

Hopefully, we'll have a disposition of that asset within the next few months.

But I can't guarantee that.

But I can't disclose anything right know.

It's currently in a confidential marketing process.

I mean, I think in the past, you've said you expect this thing, in terms of the size of the disc op and Walnut Street, that shrink by about half over -- so I think an 18-month period.

I mean, I don't want to put words in your mouth.

But is that sort of accurate?

And is that -- is there any change to that thinking?

I have said that, and that's our goal.

So I think we have a path to it.

That doesn't mean we'll be able to realize it.

But if you look at what's happened over the last year, you'll see that there's a substantial change in the size of the portfolio.

And then we've also added a lot of disclosures as to the type of assets, et cetera, and the marks so that people can get a better idea how we're working it down in methodical way.

The next question is from William Wallace of Raymond James.

On the loan sales, you've got -- your loans held for sale balance, I'm surprised that, that didn't decline more significantly, given what I've assumed was a high volume at sales.

Maybe can you just give some details around the volume of loans sold?

And then what is -- is that $300 million, $380 million in the loans held for sale bucket, is that all loans related to this CMBS business?

No.

We also have SBA loans held for sale.

We report those also in the press release.

So -- where we have the detail of the individual loan types at the bottom of the page.

So you can break those out yourself.

But the reason it's higher than you might expect is because we have continual production.

Yes.

We put a lot on just prior to the loan sales.

So quarter-over-quarter, it won't seem to have big of a difference.

How big was the loan sale?

Approximately $300 million.

Yes.

It was a little bit more than $300 million.

And so -- I know you can't predict the gains.

But plus or minus, if you're selling $300 million, that's the kind of gain you might be able to book.

Or was there other factors affecting this...

No.

It's spreads, it's credit underwriting, it's how much we end up holding on our balance sheet are the 3 determinants of the gain that the third-party uses to model what the gain is.

And like I was saying to Frank, we really bound -- I -- the most likely case, that'll be somewhere between 4 and -- 11, I think, is extraordinary because of the market conditions.

But 4 or --4 is kind of the range, the usual range.

We plan to do 2 to 3 a year, 2 at the minimum and 3 at the maximum.

So you can think of it probably as the minimum is probably around 8-ish for a year, and the maximum is obviously -- it could be $20 million but -- or more, but it's unlikely that would be achieved, so to be -- to keep it safe.

We also get a lot of interest income, obviously, from these loans as we're -- we want it to be a very smooth business so we want to keep the level up to a -- so that when we securitize and we plan for the securitizations, we don't lose too much net interest income in that process.

So we want to run it smoothly.

And so we've -- remember, we made this transition in November of 2016.

We decided to, and I think you're a supporter of this, get out of the CMBS business, which also had hedging risk.

We got out of that business and built the -- this securitization capability.

Basically, we're using the floating rate business.

We were doing institutional sales, and we wanted another way out.

And that obviously -- that strategy has obviously been validated by 2 -- a lot of net interest income but also 2 substantial gains that totaled $15 million for (inaudible).

Okay.

And then as we think about maybe bottom line impact as we think about these sales in our own models, you mentioned $4 million of expense associated with the sales, which is about 35%, 36% of the $11 million.

So is that -- should we be thinking about kind of variable expense around 35% of the revenue?

The $4 million reflects expense connected to securitization, but also other items.

So it's really difficult to assign a percentage to it.

It can vary.

There are a lot of determinants to it.

So I can't really give you a percentage.

The only thing you can really do is to look at the changes in our salary expense, which is the primary expense impact on a quarterly basis and see how that varies.

As Damian said, we do our best to line it up and associate it with the revenue, but GAAP doesn't always follow that pattern if you don't have certainty with respect to those expenses.

So I can't really give you a percentage for that.

Have you started disclosing the salary line in the press release or no?

No, no, but you'll see it.

We're working on the 10-Q.

You'll see that in 1.5 weeks or whatever, couple of weeks.

Might be helpful to start disclosing that in the press release since we model off of the release but...

We'll take that under consideration.

The leverage ratio, you're over 8%, which is -- was a pretty meaningful move in the quarter.

Do you feel like the -- I know there's some seasonality around the prepaid business, which can impact the leverage ratio.

Do you think that we will -- we have the potential to drop back below 8%?

Or do you think that we're here to stay?

Our goal, clearly, is to keep it over 8% in this quarter.

Our biggest seasonality in terms of deposits is in the first quarter because of the tax refunds.

But even if we go under that percentage for a one quarter, when you normalize it in the following quarters, you should see a return to that.

And of course, our goal is actually to grow over the 8%.

And obviously, if you look at what played out this year, where we were in the beginning of the year, where we are now, there is clearly earnings power here that's going to be accreting capital and growing per-share book growth.

So we want to continue down that path, and we expect to.

We think what we're doing is sustainable and will add to the Tier 1 capital.

But we want to manage the bank above 8.5%, and we think that goal was -- is within reach in the next couple of quarters.

Okay.

And then Damian, in your prepared remarks, you mentioned Phase 2 giving the potential for 10% to 20% additional cost saves that could be captured in 2018.

And it sounded like you were suggesting that, that percentage will, to some degree, depend on the success of -- on the revenue generation side.

So I interpret that to mean that if you're able to successfully drive revenue growth through whatever these initiatives are, that maybe the percentage and the cost basis won't be 10% to 20%.

But if you're unable to execute on the revenue growth strategy, should we see -- by the end of, say, 4Q '18, should we see a 10% to 20% reduction in that $38-ish million run rate that you're talking about?

Is that how we should think about it?

Let me think about that for a second.

It's hard to determine that.

All I would say is that the -- there's a lot of efficiencies you can get through a reengineering process.

What we did on the first 2 phases, one is people, a leveling of the organization.

We went from 8 to 4 levels, basically, in the organization, and we realigned our staffing and did it based on capacity and everything.

And that had a big impact, obviously.

And then we looked at the entire expense envelope.

And we said to ourselves are these rational contracts, do they need to be renegotiated, what are we spending on T&E and everything else.

And that obviously had a big impact on the near-term cost, and you can see it as it trails down.

So -- but the reengineering is a little bit more of a white sheet approach.

And so what it strives to do is align efficiency on the back end of the business.

So you combine things of like tasks.

That's where you get the cost saves.

But it -- really, what it does is it forces you to rethink how you're aligned to the sales force and how you work with your clients, and that almost always results in revenue productivity.

At least, it has every time I've done it at similar banking institutions.

So it's hard to say that -- it's kind of the 2 sides of a coin.

But obviously, if we're not growing our revenue, I'm going to look very closely at our expenses and make sure that those expenses don't grow at the minimum, if not decline.

But we expect to run the bank -- and everything from the past, even when the organization had problems, there was revenue growth.

So we expect that revenue growth to continue, and our #1 goal is to hold the expenses to where they are, pretty much where they are today through 2018.

We think we could be kind of around where we are in 2017.

That would be a big win, obviously, if we had minimal expense growth and we continue to grow revenue at this rate.

So that would be a big -- obviously, a big win for the company.

And we want to really have the jaws at a reasonable level.

We think, over the next 3 years, and I've said this before, we're going to have a healthy jaws no matter what they are.

So if -- obviously, we have 0 revenue growth.

To have the jaws, we have to have negative expense growth.

So that's what -- that's how we're managing the business, right?

I think it's rational, and I think we have enough to work with here to achieve that.

Okay.

So I'm interpreting that to mean that as we stand here today, you're not anticipating actually getting 10% to 20% of costs saves by the end of '18.

That's kind of a potential backstop if other initiatives don't deliver strong revenue growth.

Well, let me restate it one more time.

When looking at a run rate basis and understand the productivity of what expenses create, maybe the better way to look at it is that you get 10% to 20% more productivity out of the revenue line rather than saving on the cost line.

But once again, we're going to be managing the business in its aggregate as an enterprise.

If we don't see revenue growth, we want to have a healthy jaws.

And the only way to get that, if you don't have revenue growth, is to make sure expenses don't grow or contract.

However, we don't expect that.

We've got a lot of business opportunities.

We have strong growth in pipelines across our businesses.

So we're expecting to have to manage the expenses in a growing institution rather cutting expenses at a bank that isn't growing.

The next question is from Matthew Breese of Piper Jaffray.

Maybe just going back to the securitization.

As part one of the question I guess, what are the loans that actually go into held for sale?

Like what kind of loans, commercial real estate, the C&I?

Geographically, where are they?

And can you just give me an idea of the team in place originating those loans, given the Philly commercial operation was shuttered?

Yes.

It's a very different operation.

The person who runs the organization in New York, it's about 18, 17 people in New York, they're all experienced underwriters, all have worked at major institutions.

They're very different than the underwriters that we had in the community bank.

The franchise is national.

So we put on assets throughout the United States, and they're mostly transitional loans.

So they're usually 3 years with extension, 1 or 2 extensions in there.

There's a big market for these loans.

They're all commercial real estate.

So there -- a lot of multifamily office and less retail, but they're fast amortizing.

So many of this type of structures amortize fairly quickly over the life, being halved in about 2 years or so.

So they're an investment that a lot of people -- there's a lot of appetite for, and there's appetite across the stack.

So there are institutional investors that want the AA-plus tranches and then there's people who want to do the B2B [buy] or the equity investor.

So there's -- it's a very healthy market.

One of the reasons we exited the CMBS market because of the characteristics of the CMBS market and how it's changed over the last few years.

This is a niche that you can play in, that there's great demand for these type of assets and this type of securitization structures.

And if that changes, well, we won't be in the market.

So we're -- it's producing -- it's not we're not going to grow this business substantially, but -- we like this business right now in the marketplace.

It doesn't -- we don't build up a lot of real estate risk on our balance sheet, and we can take opportunities to take gains like we did in the last quarter.

Is that helpful?

Very helpful.

Follow-up is can you talk a little bit about the risk retention rules?

And with securitization like the one we just saw, what is the strip that you need to keep on the balance sheet?

Is it horizontal or?

They don't apply.

They don't apply.

We kept it on about -- we kept it because it's -- we want to hold a few percent of each structure.

So right now, the first deal we hold, 6%.

This deal we held about 4%.

As a public policy, when we first got in this business, when we talk to the regulators, we said we would hold the piece up to a limit.

We might hold one or more of these assets that are quickly amortizing.

But there is no requirement for us to hold it on the balance sheet.

We did that as a business decision.

Understood, okay.

And then maybe going back to the expense versus revenue commentary.

Just walk me through some of the growth opportunities for the bank.

So if we look year-over-year, what do you expect the size of the balance sheet to be?

Part 2 would be what do you -- what does that imply for loan growth?

And maybe we could talk about net interest income as a follow-up.

Yes.

So I'll let Paul.

Yes, it's tough here.

So we're planning to keep the size of the balance sheet relatively constant with modest growth.

We have certain investment securities that are -- that can be sold.

And really, as we've done over the past year, you saw some decline, a modest decline in securities portfolio.

So we're managing to fairly limited growth and keeping in mind that we want to increase our capital ratios.

That said, if you -- our securities are yielding less than the 3%, which is the yield on the SBLOCs and which has been the largest portfolio and largest growing portfolio.

So there is room to increase net interest income on a continuing basis, even without a lot of balance sheet growth.

And our loan deposit ratio now, if you look at that, is still incredibly low if you take out the discontinued portions.

So as we work that down, there's so much potential to grow those businesses and replace it with bonds.

So ultimately, we'd like to run at a 70% loan-to-deposit ratio.

So doubling that contribution to net interest income, and -- but that's an equation.

What's happening, we're at 2.45% I think on the tenure.

We can't get so lucky to get the tenure to 4% here because then we would have a very different conference call.

You'd think we were geniuses.

But we're very asset-sensitive.

So as interest rates rise, this bank is in a fantastic position.

We don't even discuss deposit betas.

The #1 conversation in all the industry conferences right now is deposit betas, and that's not even an issue.

For Bancorp, interest rate sensitivity is incredibly low, and we're very asset-sensitive.

So we're encouraged, the continued growth of the marketplace, tax cuts and then large GDP growth throughout the world.

But barring that, I think we can -- even under the stable conditions or a lower interest rate environment, I think we can continue to -- through the transfer of loans from bonds, can continue to grow our net interest income nicely, increase our spreads, which we saw.

I mean, one thing on this call has been a lot about when you're going to get over 3% on your NIM, right?

And we blew through that one quite aggressively in the second quarter of this year, and that's very encouraging.

Okay.

And maybe kind of tying the NIM commentary into the mix shift.

So how quickly can your mix shift?

Meaning, what is the outlook for loan growth year-over-year?

And with that, what is the decline in securities?

And then what is the outlook for the NIM?

Yes.

We want loan growth like you're seeing year-over-year.

So you have one quarter you might have -- depending on the seasonality, but also because the payoffs, big -- all that stuff.

It's hard to really look at quarter-over-quarter, though it did grow quarter-over-quarter.

You got a lot of stability in the loan books this quarter.

We had a better performance in the SBA, where we had close to double-digit growth in the loan book.

But that -- it's hard to judge quarter-over-quarter.

You have to look at year-over-year.

So you want the same type of year-over-year growth.

So we want to like a 10% loan book growth year-over-year.

We [can't] be too fast.

There's some businesses where we do have opportunities that we step away from because they might be too much, too fast.

We think about that.

And so we want around 10% a year, whether it's 9% or 11%.

But we want historical growth trends to continue.

We think we have plenty of runway for that.

When you look at this quarter, we do have very strong pipelines.

But if you look -- for example, the auto leasing business, this is the time of year where we start -- it starts to have a very good trend because this is when the new cars come out.

SBLOC has had a little -- we've walked away from a couple of bad price deals, and that's why there hasn't been growth this quarter on the SBLOC.

There's the SBA, we just hired several new origination and expanding the platform.

So there's always underlying reasons why things grow or don't grow in any quarter.

But year-over-year growth, we think we'll be very healthy.

Okay.

And then going back to the NIM.

What is your outlook for the NIM?

Or if it's too lumpy, maybe you can just comment on what your outlook for net interest income growth is expected to be, given some of the balance sheet changes.

Well, the NIM should -- it depends, right?

So you're going to have it -- the general trend, once again, year-over-year, will be positive.

There's no doubt in my mind because you're trading out 2%, in some cases, for 5% or 6%.

So that's easy equation to make.

As long as our balance sheet continues to grow, the NIM will grow.

That's almost an assured situation.

I don't know what the mix of loans will look like next year or what the ultimate loan growth will be.

But you may -- once again, because of the balance sheet size and our quarterly adjustment in the first quarter, you may see, in one quarter, NIM drop.

But year -- when we're here talking next year, the NIM should be -- yes.

Clearly, our goal is higher, to increase the NIM.

But we can't really predict...

If we got 3 interest rate increases, you're going to see a much higher NIM, right?

So we really can't predict interest rates, and we really can't predict what the exact portfolio will be.

All we know is that what -- if you look historically and where the NIM was in the beginning of the year and where it is now, you can see a lot of real, good positive changes though -- they didn't come by accident.

Some of it came because of market conditions and the raise of interest rates at the Federal Reserve.

Other came from market -- from management actions supporting the growth of NIM, like a lower balance sheet and more effective use of our assets.

And so we're going to continue to do those things, and we expect the NIM to improve.

Okay.

Last question for me, and I'll hop out.

As you implement the rest of Phase 2 into Phase 3, what is the long-term profitability targets, as measured by ROA or ROE?

What are the metrics you're looking at?

How quickly can you get there?

Yes.

Well, that's all in our -- we were very transparent about that.

If you look at it, we just updated our strategic presentation.

This bank clearly can run double-digit ROEs and over -- fairly over 1% ROA.

That's our goal.

We're still in the -- we're in the early days.

If you think about the performance of the firm over the last few years, there's been some headwinds, and now we have some tailwinds, and we've just got our whole management team in place, which we announced last quarter, and we're very encouraged.

So I think -- we'll keep on updating the market, our goal.

We did not expect to be this high in ROE -- in ROA when we were talking to you last year.

There's no doubt about it.

When we do run our models, they can get quite optimistic.

We're trying not to be -- we're trying to be very transparent, but not overly optimistic.

It goes back to the business model.

The business model is extremely advantaged in this environment.

Once again, we don't have the infrastructure.

We don't pay at the end of the day.

But the funding rate is very low.

And -- plus, we make all these fees off the funding rate.

So if you added it back, we'd actually have a negative funding rate at the bank.

And we need to put that money to work, and that's extremely advantageous where the market is going.

I mean, retail banking is changing dramatically, and we're at the cutting edge of that.

So it's an incredibly exciting story.

I was just at Money 2020, which is the big industry event in Vegas over the last few days.

And there's just so much opportunity that's happening within this space, and it's all off the back of a conversion of the brick-and-mortar model into something else, which is more enabled for people to do banking more in their personal time rather than in the personal time of the banks.

So it is -- it's quite a dramatic.

I think we're right -- well positioned for that change.

It's very exciting.

I'm trying not to get overly optimistic because I hear a new idea every day, and you can go running off after new -- every new idea.

But we're not done with our reengineering process.

We're not done setting the bank right.

We still have a lot of issues with our regulators that we want to address and make sure they're addressed in the right way and they're addressed for the long term, not just the short term.

And so all that is going on.

But the -- I think the future prospects of this company should be quite impressive and consistent, at the minimum, with what we've presented to the marketplace on our website.

The next question is from Frank Schiraldi of Sandler O'Neill.

Just one follow-up, if I could.

Just on the BSA order.

I want to -- is there any color you can give just in terms of time line?

Is -- where are we right now?

Have you given everything to regulators and the ball is sort of in their court at this point?

And if you could just talk about how impactful the order is now -- currently to growth in the prepaid business for you guys.

Yes.

I -- it's always in their court.

That's my perspective.

So it's like the CMP that we got from 2010 to 2014.

It's -- they regulate the industry.

They're part of the system like we are, and we're trying to work and build the community with them, period.

So it's really -- I can't really speak to what their perspectives are.

All I can tell you is that we've put everything in place possible that they've requested, and we're continuing to work down the issues.

So we've totally created a new compliance program.

That is in our website.

You can even see a video on our website and look at how we approached it.

We've got a very comprehensive process to remediate every single finding of all of our regulators, right?

We're working very hard on the BSA side of it, but also on the consumer compliance side, to make sure that we self-identify, and we have a program in place to give great transparency and understanding of how the business is working.

And I think we have the people to do it.

I think the people that we put in place are -- it's -- and I -- this is qualitative so -- and subjective, but this team, I could run any bank with.

I'm really impressed with the people we've been able to recruit here mostly because the banking industry once again is changing.

And it's not so much fun to be at a big bank anymore struggling with all the issues and not being able to affect your environment.

I think we can here.

I think over time, the regulators will see us.

They saw us a little bit off -- I guess, off the guidelines in the past.

I think we're going to be great friends.

I think we're going to set standards for the industry at the end of the day.

It's not going to happen today.

But next few years, we're absolutely and totally dedicated to creating a platform that's leading the industry rather than following it, and that's it.

And because why?

Because this business model is leading the industry.

It's leading the future of banking, and we want to make sure we're doing our best to support that.

And then -- I guess how impactful -- like what are your expectations, if you could remind, us for prepaid fee revenue growth year-over-year?

And then once the order gets lifted, does that expectation gap up?

Yes.

It's -- well, yes.

And the reason it gaps up, less to do with what we can't do today because that's not really what's -- obviously, we've been growing, and we had some program stuff this year.

But we should have -- we should return to this high single-digit fee growth in that space next year.

But it's really the new businesses, the innovation that's going on.

We want to make sure that the regulators feel that when we're going into new segments and new businesses and augmenting our platform in order to serve new clients, that we have a very rigorous process in place, risk management process and control process and also understanding the residual risk so that the regulators feel comfortable as we build the company.

I think there's much more upside potential on new revenue than there is on old revenue.

I really do.

Well, will it enhance our revenue on the -- if we get out of the order?

Yes, a few percent maybe, on the legacy businesses.

It's really about what we're going to do in the future.

That's where we want to work lockstep with the regulators.

There are restrictions on our ACH business, and there's some restrictions on our traditional card business.

But it's not meaningful to our current performance.

What's really important is that we get everything right for the future, the future growth of the company.

So that's how I see it.

I think they've been fairly reasonable, the regulators, to date.

This is -- obviously, time's changed a lot.

The banks that operate in this field, because of the interchange fees and other reasons, are smaller than the very large banks.

However, we have national, very big bank data footprint.

So Bancorp itself has 100 million cards out there, and so there's a responsibility for us to make sure that we're doing business in the right ways.

But once again, the potential is enormous for us if we get this right.

I think we got the team in place to do it.

The team, our payments team, our acquiring team, it's an amazing group of individuals, and we want to make sure that they can do business as easily as possible with our current and future client sets.

And so that's what we're doing to set ourselves up for it.

So you know what I'm surprised about?

That during this time of transition, where we've -- expanding so many resources on solving issues, that we've had -- I've been able to come on this phone with this type of performance.

I'm blown away by it, to be honest with you, but I think there's so much more potential on the table.

That's up to investors to decide whether that's going to happen and management to do it, and I think we've got everything in place to give us a good chance of being able to accomplish these things.

Okay.

I just -- I guess I look at prepaid growth in the quarter of -- year-over-year of 2% and -- but even with the BSA order in place, you still expect that to ramp up to the high single digits next year.

Is that accurate?

Yes.

Yes, we had -- there was an acquisition, a program shut down.

These weren't things related to Bancorp at all.

That gave us some headwinds this year, and we're going to work our way out of it.

So the first -- and we have some new services that we've offered that are consistent with the consent orders that we have.

So we -- I'm betting on that business.

It looks really good right now.

I think you're going -- but that doesn't mean it's going to happen.

It only means that I -- the trends are very positive for us.

I'm very -- the 2% fee growth is actually a very good comparative on the run rate business when you look at what's going on.

So I'm very encouraged for next year.

I think we're set up well on the expense side, and I think we're set up well on both the fee side and the balance sheet side.

So we haven't done our planning yet for next year.

We're waiting for the end of this quarter.

And as we work into the fourth quarter, we'll be putting a budget in place, obviously, a new strategic agenda, cascading goals once again like we did this year, and then we'll be posting a new presentation on our website.

And then if we think that we're going to be able to produce different targets, we'll post those right up with it.

Okay.

Yes, that's a good point for -- on the business loss, and I guess that runs through the -- if you think about year-over-year growth, that kind of runs through the snake by first quarter of 2018.

Is that fair?

That's absolutely fair.

There was one big -- there was a couple of big client programs and one big acquisition from another bank.

That's why the revenue went away.

But that will -- on a year-over-year basis, won't exist anymore.

So obviously, we'll get that big bump in the first quarter, and we have potential to look very good then.

But we'll see what happens.

Nothing's ever in the bag.

We'll have to see what spending behavior is and all those other things that go into whether or not we have a good quarter or not.

There are no more -- there are no further questions at this time.

I'd like to turn the call back over to Damian for closing remarks.

Thank you, everyone, for joining us.

We think we're making a lot of progress here, and I think we have a different future than we had a couple of years ago.

So we're going to keep on working hard for everyone, and we'll talk to you soon.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.

Good day, everyone.