Andres Viroslav - Director, IR Damian Kozlowski - CEO Paul Frenkiel - CFO

Frank Schiraldi - Sandler O'Neill William Wallace - Raymond James Matthew Breese - Piper Jaffray

Good day, ladies and gentlemen, and welcome to The Bancorp Third Quarter 2017 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 Andres Viroslav. You may begin.

Thank you, Litoria. 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 will be a replay of the call beginning at approximately 12:00 PM Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 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 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 risk 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 step 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 our key initiatives. There were several one-time expenses in the third quarter that should be non-recurring which added $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 $1.1 million expense or $725,000 after-tax resulted from a voidable 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 expenses running at approximately $38 million, quarterly run rate were $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. Expenses should continue to improve as we closeout 2017. Preparation for our Phase 3 platform reengineering has begun. This process focuses on creating a more rationale, efficient, and productive operating platform to support innovative growth. Cost savings are hard to determine, but additional saving are approximately 10% and 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 continue 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 are continuing to make real process concerning our regulatory situation. We are 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 has comprised of seasoned executives from J.P. Morgan, City Bank, Bank of America, AIG, and the Federal Reserve is making significant progress in reorganizing and in 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 continued enhanced performance and resolving any remaining issues that face the company. Now I'm turning the call over to Paul Frenkiel, our CFO. He'll 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 non-deductable civil money penalty and a $725,000 tax effected data processing contract exit fee. That exit fee will reduce future data processing costs by significantly more than net 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 reflected 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 of 2017 securitization related to quarterly income approximated $11 million. The $4.4 million increase in net interest income also reflects 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 back lines of credit for 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. Lines of business comprising those totals have historically had low charge-offs. Our cost to funds grew minimally 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 non-interest 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 demonstrate a return to previous increasing trends. The increase reflected growth in our 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 non-interest expenses also contributed to third quarter results. After considering that the aforementioned civil money penalty, data processing exit fee, and revenue related compensation expense, Bancorp continues to work toward a structural $38 million quarterly non-interest 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 in 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.

Good morning. Just on the -- on expenses, Paul I think you got both you and Damian mentioned that $38 million number, if you look at the pullout data processing stuff and money penalty and then you had $40 million and then if you have $4 million tied to that securitization you have $36 million. So just wondering why $38 million versus $36 million was 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 and so forth will be.

If you look historically the $150 million beginning where we had talked about on previous calls getting down to that low $150 million number was kind of a -- beyond our target, original targets, 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 $38 million, that's our best estimate that we can give you. It's not conservative either is what we really think we're doing.

Okay. But still if I look at just this quarter I should probably think about if I was to pullout 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 older 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 was thinking try to get the revenues in the same quarter where the expenses but you're saying can be kind of it doesn't always line up that way I guess.

It's choppy.

It's choppy.

Okay.

Because of course we have to align it for GAAP. So obviously we have to expense, align expenses but as you know that’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 will continue to manage down those from the $152 million annual run rate and get towards the $150 million or little bit lower. But once again revenue and I have said this on the call before it's a good thing like such as the securitization revenues depending on where it is and how it's actualized can affect the overall expense base and so in this particular case in this quarter it did.

Okay. And then just sticking with that for one second on the securitization those revenues were I think sort of doubled the gains we saw last time you had one of these securitization. So is there any way to frame for us how to think about expected revenue from the securitization say over given timeframe 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 would expect, a couple of things happened in order to increase the gain. One, was when there was a spread difference which when we originated the loans and put the loans into a structure, so is that contagious, that was one source of the increased gain. Another source of increased gain is that we have been very -- spent a lot of time improving our credit risk management process and underwriting process. So we went to the 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 enhance. And so -- and we also ended up holding less of the structure on our balance sheet 4% versus 6%. So those are the three sources of increased gain from that. This securitization was also a bit bigger, so that's what resulted in this substantial increase in the gain over last time. So that's kind of -- that probably could bounce in the gain that doesn't mean that $4 million is the least amount of number depending on the market conditions. This business tends to be a little less volatile CMBS business because there is no edging in this particular case. So we cannot predict. I 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 is 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 you know 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 will continue to whittle down both Walnut Street and discontinued very aggressively. We're working very hard on the final foot. 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 and safe. So we're going to aggressively work down discontinued to Walnut Street. As for the mall it's in a 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 now 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 discount in Walnut Street shrink by about half over so I think in 18-month period and I don't want to put words in your mouth but is that sort of accurate and is there any change to that thinking?

I have said that and that's our goal.

Okay.

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 in the marks, so that people can get a better idea how we're working it down in methodical way.

Okay, all right. I will let someone else ask question. Thank you.

Okay, Frank. Good to talk with you.

Thank you. The next question is from William Wallace of Raymond James. Your line is open.

On the loan sales, you've got your loans held-for-sale balance, I'm surprised that didn't declined more significantly given what I assume was a high volume of sales maybe can you just give some details around the volume of loans sold and then what 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 then 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 you won't see that big of a difference.

How big was the loan sale?

Approximately $300 million.

Yes, but it's 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 -- you might be able to book or was there other stats you're expecting to fill in?

No, it's spreads, it's credit underwriting, it's how much we end up holding on our balance sheet are the three 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. The most likely case that will be somewhere between four and 11 I think is extraordinary because of the market conditions but the four -- the four is kind of the range, the usual range. We plan to do two to three a year, two at the minimum and three at the maximum. So you can think of it probably as the minimum was probably around eight-ish for a year and the maximum was obviously could be $20 million or more but it's unlikely that would be achieved. So to be just to keep it safe. We also get a lot of interest income obviously from these loans as we wanted to be very smooth business, so we want to keep the level up to 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 ride it smoothly. And so 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 because we were using the floating rate business we were doing institutional sales and we wanted another way out. And that obviously, that strategy is obviously been validated by two -- a lot of net interest income but also two substantial gains that totaled $15 million for 2017.

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 -- 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 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, okay.

But you will see, we're working on the 10-Q you will see that in a week and a half or whatever, couple of weeks.

Sure. Might be helpful to start disclosing that in the press release since we model up the release but --

We will take that into consideration.

Thank you. The leverage ratio you're over 8% which was pretty meaningful move in the quarter. Do you feel like I know there is 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 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's 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 we think what we're doing is sustainable, it will add to the Tier 1 capital. But we want to manage the bank above 8.5% and we think that goal is within reach in the next couple of quarters.

Okay, thank you. 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 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 bases 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 2018 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?

Thank you. Let me think about that for a second. It's hard to -- it's hard to determine that all I would say is that the whole -- there's a lot of efficiency you can get through a re-engineering process. What we did on the first two phases one is people the leveling of the organization, we went from eight to four levels basically in the organization and we realigned our staffing and did it based on capacity and everything 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 tries to do is align efficiency on the back end of the business, so you combine things of light tax 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. And 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 two sides of a coin, but obviously if we're not growing our revenue 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 number one 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 then 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 three years and I've said this before we're going to have a healthy jaws no matter what they are. So if we obviously we have zero revenue growth to have a 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 rationale 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 cost saves by the end of 2018, that's kind of a potential backstopping if other initiatives don't deliver strong revenue?

Well let me restate it one more time. When looking on a run rate basis and understand the productivity of what expenses create may be a 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.

Okay, thank you Damian. I will step out and let somebody else ask the question.

Thank you, Wallace.

Thank you. The next question is from Matthew Breese of Piper Jaffray. Your line is open.

Maybe just going back to securitization as part one of the question I guess what are the loans that actually go into held-for-sale, what kinds of loans commercial real estate or 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 fully commercial operation was shuttered?

Yes, very different operation. The person runs the organization in New York is about 18, 17 people in New York they are all experienced underwriters all worked at major institutions. They are very different than the underwriters that we had in the Community Banks. The franchise is national. So we put out assets throughout the United States and they're mostly transitional loans. So they’re usually three years with extension, one or two extensions in there. There is a big market for these loans, they are all commercial real estate, so they are lot of multi-family, office, and less retail but they're fast amortizing. So many of these type of structures amortize fairly quickly over the life being halved in about two years or so. So they're an investment that a lot of people, there is a lot of appetite for and there is appetite across the stack. So there are institutional investors that wanted AA+ tranches and then there is people who want to do the B2B guide or the equity investor. So 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 has changed over the last few years. This is niche that you can play in that there is great demand for these type of assets and these type of securitization structures and if that changes well we won't be in the market. So we are its producing, it’s not we are 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 vertical?

They don't imply.

They don't imply, okay.

We kept it because of the advantage we want to hold a few percent of each structure, so right now the first deal we held 6% this deal we held about 4%. As a public policy when we first gotten this business, when we talked 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 in 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 banks. So if look year-over-year what do you expect the size of the balance sheet to be? Part two would be what do you -- what does that imply for loan growth and then we can talk about net interest income as a follow-up?

Yes. So I'll let Paul step 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 have done over the past year you saw some decline, modest decline in securities portfolio. So we're managing to fairly limited growth and keeping in mind that we want 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 is in 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.

Yes. And our loan deposit ratio now if you look at that is still incredibly low. If you take out the discontinued portion so as we work that down there is so much potential to grow those businesses and replace it with bond. So ultimately we would 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 10-year. We can't get so lucky to get the 10-year to 4% here because then we would have a very different conference call, you think we were genius. But we're very asset sensitive, so as interest rates rises, this bank is in a fantastic position. We don't even discuss positive betas, the number one conversation at all the industry conferences right now is positive 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 very 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 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 and increase our spreads which we saw. I mean one thing on these calls 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 may be kind of tying the NIM commentary into the mix shift, so how quickly can you 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 that's depending on the seasonality but also because of payoffs, big client, 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 loan book but that's it's hard to judge quarter-over-quarter; you have to look at year-over-year. So you want to think about the year-over-year growth. So we want like a 10% loan book growth year-over-year, we don't want to see too fast, there is 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 per se the example the auto leasing business this is the time of the year we start it’s start 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 business. SBA we just hired several new origination in expanding the platform. So there is always underlying reasons of why things grow or don’t grow in any quarter but year-over-year growth we think will 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 -- the NIM should it depends right, so you’re going to have the general trends once again year-over-year will be positive. There is no doubt in my mind because you’re trading out 2% in some cases 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 that ultimate loan growth will be. But you may once again because the balance sheet size and our quarterly adjustment in the first quarter, you may see in one quarter NIM drop but year-over-year when we’re here talking next year the NIM should be higher.

Clearly our goal is to increase the NIM but we can't really predict.

So we get three inches rate increase we’re going to see a much higher in 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, where it is now, you can see a lot of real good positive changes. So they didn't income by accident, some of it came because the market conditions and the rise 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 a 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 will hop out. As you implement the rest of Phase 2 and the 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?

Well that’s all -- we are 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 has been some headwinds and now we have some tailwinds and we just got our whole management team in place which we announced last quarter and we're very encouraged. So I think we will keep on updating the market, our goal we did not expect to be this high in ROE and ROA when we were talking to you last year. There is no doubt about it. When we do run our model they can get quite optimistic, we're trying not to be we are trying to be very transparent but not overly optimistic. It goes back to the business model, the business model is extremely advantage in this environment once again we don’t have the infrastructure, we don’t pay at the end of the day, the funding rate is very low and plus we make all these fees off the funding rate. So and if you add it back, we would like to 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 and I guess over the last few days and there is just so much opportunity that's happening within the space and all of the back of it our conversion of the Brick & Mortar model to 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's quite 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 everyday and you can go running after new every new idea but we're not done with our reengineering process, we’re not done setting the banks right, we still have 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 to the long-term not just the short-term. And so all that going on but the -- I think the future prospects of this company is should be quite impressive and consistent at the minimum with what we presented to the marketplace on our website.

Understood. That's all I had. Thank you very much.

Thank you. Nice talking with you Matt.

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

Hi guys, just one follow-up if I could just on the BSA order I want is there any color you can give just in terms of timeline is -- where are we right now, have you given everything to regulators and then 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 it’s always in their court that's my perspective. So it’s like the CMP that we got from 2010 to 2014, its they regulate the industry, they are part of the system like we are and we're trying to work and build the community with that period. So it's really I can’t really speak to what their perspectives are, all I can tell you is that we put everything in place possible that they have requested and we’re continuing to work down the issues. So we totally created a new compliance program, if that is in our website you can even see a video on our website and look at how we approached it. We have got a very comprehensive process to made 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 -- this is qualitative and subjective but this team I could run any bank with. I’m really impressed with the people we're able to recruit here, mostly because of 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 at -- in 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 I guess off the guidelines in the past, I think we're going to be great friends. I think we’re going to set standard for the industry at the end of the day, it’s not going to happen today. But next two years we’re absolutely and totally dedicating to creating a platform that 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 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 obviously we've been growing and we had some programs up this year but we should have -- we should return to this the 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 very rigorous process in place, risk management process, and control process and also understanding the residual risk so that the regulators are still 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 enhance our revenue on the if we get out of the audit yes 2% maybe on the legacy business 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 how I see it I think they've been fairly reasonable regulators to-date. This is obviously times 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 a 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 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 clients sets and so that's what we're doing to start ourselves up towards up. What I'm surprised about that during this time of transition where we are expanding so many resources on solving issues that we've had -- we've -- I have 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 to being able to accomplish these things.

Okay. Just I guess a 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, we had there was an acquisition, a program shutdown 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. So -- I'm betting on that business that 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 and 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 fees 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 on new strategic agenda cascading goals once again like we did this year. And then we'll be posting a new presentation 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. That's a good plan for on the business loss and I guess that runs through the if you think about year-over-year growth a kind of runs through the snake by first quarter of 2018 is that fair.

That’s absolutely fair. There was a couple big client program the one big acquisition from another bank that's why the revenue went away. But that will on a year-over-year basis won't just anymore. So obviously we'll get that big bump in the first quarter we have a potential to look very good there. But we will see what happens; nothing is ever is in the bag. We will have to see what spending behavior is in all those other things that go into whether we have a good quarter or not.

Thank you. There are no further questions at this time. I 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.