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 Bancorp Incorporated 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 be given at that time. [Operator Instructions] And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Andres Viroslav. Please go ahead.

Thank you, Candace. Good morning, and thank you for joining us today for The Bancorp's fourth quarter and fiscal 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 12:00 p.m. Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 548-5438. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words, believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see The Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to 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 am 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 fourth quarter earnings call. 2017 was a year of accomplishments and transition for The Bancorp. I will highlight three areas that have contributed significantly improving our performance and strengthening our institution for the future. Number one, we measurably reduced the risk of the bank. Our discontinued and Walnut Street portfolios started the year at $361 million and $127 million, respectively. We have enhanced our credit risk management processes with a focus on reducing volatility from these assets. During 2017, we reduced discontinued exposure by 16% from $361 million to $304 million and Walnut Street by 41% from $127 million to $74 million. While we may continue to have some gains or costs to resolve some of these credits, we believe that these portfolios are correctly marked, and that these adjustments will not significantly adversely impact our operating performance. We also made significant progress in exiting non-core assets. The two most notable were the sales of our European franchise and our HSA business. These dispositions provide us more focus and management time for other business opportunities as well as lower our overall risks and costs. Moreover, we significantly enhanced our compliance activities in BSA third-party risk and consumer compliance. During 2017, we developed the integrated compliance program that deals with the root causes of our regulatory issues. A video detailing this initiative is on our website. While we cannot predict when we will exit any outstanding regulatory actions, we believe that we will continue to make substantial progress resolving these issues in 2018. Number two, we greatly enhanced our productivity and efficiency. Both our revenue productivity and cost efficiency greatly improved in 2017 due to annual revenue growth of 17% and the restructuring and delayering of personnel. Revenue per employee increased from $219,000 to $377,000, a 72% increase. In addition, non-interest expense in 2017 was reduced from $199 million to $155 million, a 22% reduction. The current run rate allows us to selectively invest in new initiatives and opportunities. We are now in the third phase of our organizational design process. The first two phases focused on employees and operating costs. The third phase is about creating a more flexible platform to better service our clients, while enhancing our ability to innovate with both improved productivity and efficiency. Number three, we have created the necessary conditions for future success. A lot of our focus in 2017 was set - was to set the organization on the right course for 2018 and beyond. We believe that we have taken the right steps to do that by investing significant time and energy, not only across our platform and resolving issues and enhancing processes, but also in thinking through what drives the performance of each of our businesses. We have looked at everything from sales comp to technology platforms and made many changes that not only supported 2017 growth, but go a long way in unlocking the future potential of our organization to innovate and create new solutions for our clients. The most important factor in creating these necessary conditions for future success is The Bancorp team. Our team today is professional, engaged, informed, knowledgeable and excited to succeed. Over the last year, we've made a lot of change, but we begin 2018 with an exceptional group of individuals that act as a team with the same goals and aspirations. Our objective is to achieve extraordinary client and financial success through both business and organizational innovation, while always maintaining a safe-and-sound institution. Thank you to everyone in The Bancorp community for making 2017 a turning point for our company. I'd now turn the call over to Paul Frenkiel, our CFO, who will detail more about the fourth quarter and full year results.

Thank you, Damian. Consistent with our business plan and budget, Bancorp achieved significant improvement in profitability over the prior year. Fourth quarter pretax income from continuing operations was $10.2 million before approximately $18 million in additional tax provision, primarily resulting from the adjustment of deferred tax assets to the new 21% corporate tax rate. Future quarters will reflect the lower 21% rate compared to the prior statutory 34% rate. Fourth quarter results reflect the continuing revenue growth in Bancorp's major lending lines. A $1.7 million or 7% increase in net interest income compared to the fourth quarter of 2016 reflect a continuing double-digit year-over-year growth in Securities-Backed Lines of Credits, or SBLOC, and high single-digit growth in leasing and SBA loans. Resulting increases in interest income were significantly offset by a $1.6 million reduction in CMBS loan interest, reflecting the timing of securitizations and originations. This reduction should be viewed in the context of the significant gain on sale and securitization of related loans in third quarter 2017, which serve to reduce interest income in the fourth quarter. The increase in net interest income also reflected the impact of the Fed Reserve 25 basis point rate increases in both December 2016 and March 2017. Our largest percentage increase in loan balances was in SBLOCs, which grew organically 16% year-over-year. That portfolio yields in excess of 3.25%. The leasing portfolio, which grew 9% year-over-year, continues to yield in excess of 6%. SBA loans also grew 9% year-over-year and yield over 5%. Total loan balances, excluding loans held for sale, and securitization grew 14% year-over-year. The lines of business comprising these totals have historically had low charge-offs. Our overall cost of funds grew 15 basis points to 45 basis points in the fourth quarter 2017 compared to 30 basis points in the prior-year quarter, reflecting only a partial adjustment of rates on our prepaid card and other 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. Interest margin should benefit accordingly, as rates on variable-rate SBLOC SBA and other loans and investments adjust more fully to higher market rates. Net interest margin for the quarter was 3.11% compared to 2.84% in the fourth quarter of 2016 and 3.26% for the linked quarter. The decrease compared to the linked quarter reflected the impact of timing of the sale and securitization of higher-yielding commercial loans. Originations continue to replace the loans, which were sold in third quarter 2017. The improvement in net interest margin over the fourth quarter 2016 reflected the impact of the rate increases in December '16 and March '17, which resulted in higher asset yields versus a lesser increase in deposit costs, as noted earlier. Prepaid cards, in addition to being our largest funding source, are also the primary driver of non-interest income. Quarterly income is uneven and increased 13% in fourth quarter 2017 compared to the linked quarter and 18% over fourth quarter 2016, while the total amount spent on prepaid cards or gross dollar volume increased 3% over the prior-year quarter. As noted, related income is uneven on a quarterly basis. For full year 2017 to 2016, prepaid fee income increased approximately 4%. Reductions in certain non-interest expenses also contributed to fourth quarter results. Non-interest expense decreased 14% or approximately $6 million compared to the fourth quarter of 2016. Additional expense reduction opportunities continued to be pursued. The impact of the adjustment to deferred tax assets, resulting from a change in tax rates, was partially offset by fourth quarter earnings. Accordingly, at year-end, the consolidated leverage ratio stood at 7.9%. Continuing loan growth, expected Federal Reserve increases and non-interest income increases, all taxed at a significantly lower rate, should continue to support earnings and capital. That concludes my comments, and I will turn the call back to Damian for questions.

Thank you, Paul. We're going to open it up. Operator, would you open the lines for questions?

[Operator Instructions] And our first question comes from Frank Schiraldi of Sandler O'Neill. Your line is now open.

Good morning. Just a couple of questions. Just, first, on the - on regulatory capital levels, I guess. You guys have a goal or a target, I think, of a Tier 1 leverage at 8.5%, obviously, a little set back in the fourth quarter for obvious reasons. But can you just share with us your thoughts on your capital plan, I guess, to move that Tier 1 leverage back up to 8.5% over time at the bank and sort of timing - your thoughts on timing to get there?

Yes. So it hasn't really changed that much. We think we're going to have - the deferred tax asset change will be offset a lot this year through earnings. So we should be able to get to that 8.5% this year probably a little after midyear. Ultimately, we're hoping to get close to 9% at the end of next year. We don't think that there'll be capital raises to close any kind of gap to our minimum, you never know. We might have capital raises for other reasons. We have not decided on any of those things, but we're not going to raise capital in order to close that measure because we think we'll be accreting earnings, and we get to keep a significant bigger portion of those earnings. So we really - we were - we talked about last time about us trying to get to 9% at the end of next year, and I think we'll be able to do that.

You're right. And that's just through earnings internally. And then just for modeling purposes, more than anything else, I mean, when you say 9% by next year, you're talking about a 9% sort of level for the full year Tier 1 leverage?

No, I said end of year, end of year. I think, like I said, I'm not sure it's hard to predict these things because of the size of the balance sheet, obviously, because of our prepaid business, but we're hoping to get to our capital minimum by the third quarter. So I don't know if that'll be in the beginning or the end of the third quarter, but of course, we have to see how it goes. But we're hoping to get there towards the minimum sometime in the midpoint of the year.

So what is the minimum, 8%, you're saying? Or...

8.5%.

8.5%? Okay.

Yes.

And then secondly, I guess, if you could just speak a little bit to - the prepaid, obviously, was up 18%, Paul, you mentioned year-over-year. And there's some seasonality, I guess. I guess, there's just some - a little bit of timing there - timing issue. But can you just maybe give us a little more color on if there was anything - one specific thing that might have moved that up in terms of the rundown of - a runoff of a single partnership, something along those lines, and your, you guys, thoughts on that prepaid fee income line in terms of growth going forward?

Yes, we're very happy with the performance on the prepaid for the year. We had some - we discussed before, we had some program terminations and also an acquisition that affected our business. So we did like the performance on that business. So, it's encouraging to see the fourth quarter. It's volatile, but the general trend is in the right direction. We've said before that - and the mix changes, too. So you can't use a strict guide of GDV growth to say what your fee income is. But it's encouraging. There's no - it moves around a lot. So there's not one driver any quarter. Some of it is timing. If you look on the financials, it wasn't driven by things like affinity fees, it's actually business-driven. So last year, I think there was more affinity fees than this year driving the prepaid. So we also replaced those as part of the general business. So I'll let Paul comment.

Yes. So there really were a number of factors and a number of programs, Frank, that - it wouldn't be helpful in terms of projecting. As Damian noted, it's a sign that we're now on an increasing trend. So we're predicting single-digit growth, and it's uneven from quarter-to-quarter. So we really can't predict growth off of that.

Okay. But single digit growth, I mean, I guess, the best thing to do for modeling would be to look year-over-year and use single digit growth?

There will - I think it - we've said before that it's very hard to predict. But we had some headwinds. We were - I think this time last year, we're looking more of a - to get through those headwinds in the first half of the year, which we did. It's really encouraging to us to be able to have the 4% total growth in the fees. And then to see the fourth quarter perform like it did, we're very happy with that. Some of that, it's complicated. Some of its onetime, but still to get 18% over the prior year is a big deal in this. So I think you're going to see an increasing trend from this year. We don't know how big. We can't predict that, but I think it's a very positive sign, obviously. It would have been a very negative sign if it was exactly - if we loss 4%, and we were then negative 18% growth in the fourth quarter. That would have been an equally negative sign. So we're very - we're cautiously optimistic on the prepaid side. With the economy growing and everything else, there's the necessary conditions with the consolidation in the market and everything to continue to support our business as well as the company being in much better financial shape and everything. Some of those client concerns have gone away. So we can continue to strengthen our relationships, do new business and continue to grow the fee-based.

And then finally, you've talked in the past about credit sponsorship as being an attractive business line. Are you able, at the moment, to go out? Or are you actively seeking partnerships? Or do you put that on the back burner until you have something like the BSA order gets off - gets removed, for example? I mean, just what is the timing in terms, do you think, of maybe seeing some of that go to fruition?

Well, we have a bunch of new business initiatives that we've targeted for 2018 in the payment space, but also in our other businesses. And so we've taken - this year, because of all the restructuring, repositioning of the business, but also the work that was done on the regulatory side, we really wanted to continue to support the organic growth that we had in the past, which I think we, by and large, were able to do. This year, we're much more focused on new initiatives around each of our product areas and producing new incremental client revenue and new incremental product revenue. Much of that has nothing to do with any consent order that's on the business from the past. Now as credit sponsorship, we have - I don't think we'll see significant revenue from that until - you're right, until we probably move a little bit further down the road with our regulators. We've been very - we recognize that they - we want to show that we run the business in a very tight controlled manner. And so we haven't gone on the path of building that out aggressively. I think you'll start seeing some of that maybe by the end of this year. But we have other credit-related initiatives across the businesses, including payments that might actually realize new incremental revenue in 2018 that I can't explain here. They haven't been announced to the market.

Okay, understood. Thank you.

Thank you. And our next question comes from William Wallace of Raymond James. Your line is now open.

Thank you. Good morning.

Good morning, sir.

Maybe just to circle back. While the commentary is fresh, on the prepaid business, you guys seem hesitant to talk about what might happen moving forward in the business. I look at the margins on the year, so just looking at the fees as a percentage of GDV, and that was improving throughout the course of the year. I'm curious if that is a trend, or that is a function of a change in the mix with some of the customer changes. Is it a function of a change in the industry? And if you would maybe be willing to just give us a view on what you think we might be able to expect from kind of a margin or a profitability point of view moving forward?

So if you look at - we chart that actually quarter-by-quarter going back several years. It does operate within a range over that period. But again, the answer is the same to the question earlier in terms of predicting fee income that there are a lot of different programs. And the different programs have different margins. They have different expense profiles. They have different regulatory compliance profiles. So there are a lot of factors. So we can't really be any more predictive of that.

You also remember, their clients are also drivers. So it's not only our performance of what they do, but what their clients do. So we're providing a platform. So it's hard to always predict everyone's business plan. But generally, we're much more - the one thing I can say, for sure, is we're very focused as an organization, as you can see, what we've done with expenses, but also what we did with net interest margin. We're extremely focused on making economic decisions. So we're much more focused on the bigger programs. We're not providing the same suite of services to everybody who walks in the door. We're very cognizant of the fees that we charge and the total operating cost against those fees. So when a business does that, and they get a much sharper focus on price and how it reacts to the organizational cost structure that supports it, generally, you have improving trends. And I think that, that focus will help us make the right decisions in the future. Whether because of the market, which is a consolidating market, whether that will lead to higher pricing and/or higher realization of revenue per GDV unit, we're not sure, but I think that we're going to try to get the most out of whatever the market can give us over the next year. So I think there's still opportunity there. I think we can grow. And I've said this before, I think we can grow the revenue, total revenue fee income of that business in the high-single digits. I think that's realizable over the next several years, including next year, and I think it's very encouraging to see a 4% growth this year with the headwinds that we had. So I think we're going to do the right things. I think we - I would be very happy with high single-digit growth from our base business. I'd be very happy with that if we're talking about it next year, I think some of the initiatives that we have to make that better. But that will - we'll see if those play out. So we're optimistic for that business, very optimistic. We're one of the major players in that space. We're healthier than we've ever been. We're more focused on doing it in a safe and sound manner, and we're more focused on cost and price. So I think that all bodes well for a tightly managed increasing business.

Speaking of opportunity to on-load new customers, I'm curious maybe if you could just give us an update on where you stand with the - with putting together the plan and answering all of the consent order points to get the restrictions lifted at the very least or get the entire order lifted.

Yes. So we - well, part of - you have to be organized. So at the end of the day, as you know, the regulators want you to be able to self-identify and run your business. They want to come and check. So we've made - I think we have. Whether the regulators - I believe the regulators are recognizing that, but that's - I could - they speak for themselves. But we've put enormous effort into what we call the integrated compliance program. So it's not only financial crimes BSA, but it's third-party risk, and it's consumer compliance. And we have a plan. We even have a video on our website detailing how we approach that. But I think we're just in a very different place than we were last year at this time, right? I think all the issues have been clearly delineated. There's plans in place for each of the issues. Not only that, but we've identified a whole set of root causes that were - what created the problems in the first place. I think we've never worked closer with our partners, the regulators, in trying to resolve and move forward. So I'm very optimistic that we will be ultimately be able to self-identify and satisfy all the elements of the consent orders over the next year or 2. I can't predict, though, when exactly. That's not my decision. They not only want to see us operate the full envelope of activities in a safe and sound manner, but they want us to show sustainability. So is sustainability two months or is it more than that? I don't know, but I think we're getting - we're definitely moving in the right direction. That's - once again, that's not - I think that's a collective view of all the parties.

Do you - is - you have business restrictions and you have the consent order, and this goes back a couple of years to when the consent order was originally announced. But one of the unique points that was highlighted was the ability to have the restrictions lifted before the consent order was lifted. Is that something that is still worth keeping in the back of our minds? Or is that something that we probably shouldn't get our hopes up for?

No, it's definitely possible. I mean, it's not our decision. I mean, I'm solely focused on resolving every issue as quickly as possible, so that we have a best-in-class compliance environment period. That's my goal, right? Whether it's 6 months earlier that they let us out of certain - I don't think it's going to impact the business that much anyway. I mean, I think there's so much opportunity in the spaces in which we operate that I think we've got plenty of momentum for growth. Our business model is just very - in the environment we are in today, with rising interest rates, with the business environment, the different tax situation, it's - I'm glad that we started last year in doing all the things we needed to do to set ourselves up in a different - very different trajectory. So I think that would be nice to have, but it's not in any way going to - if we don't have that, it's not going to distract from what I think is going to be a good 2018.

Okay. Thank you. The $36.1 million in operating expense, is that - you mentioned in prepared commentary, to continue to focus on additional opportunities. I'm curious how clean that number is, first off, and then if you'd be willing to potentially quantify what the opportunities might be.

That's a very clean number. I mean, that's our base operating expense. It totally depends on the revenue because of - you have the securitization or we build new businesses there could be more comp expense or operating expense, but it would all be accretive to margin and also to profitability. So that's a good operating - we talked about this last quarter, too. It's math. It's basically 12-ish a month. That's 144. I mean, that's simple math. You have to add on it depending on the revenue growth though. So - but it would be accretive because the Jaws of the business are - will continue to widen in 2018, at least, we believe. So expenses should be able to continue to trail down a bit because there are still opportunities and year-over-year impacts. So things - some base operating systems, where we didn't get the full impact this year on savings that we're going to experience in 2018. So on the base business, if you have a reasonable revenue forecast, and we don't have a revenue over-performance, you'll see that revenue will grow, and that you'll have a continued trail-down of expenses to the run rate. Now that depends, once again, on the actions we take in order to take advantage of market opportunities. But once again, that's - we don't like spending. I think you simply have to have - and especially as this business as it's growing into its profitability, we're going to have a Jaws Ratio that's accretive to the company. I don't - I'm not going to accept anything other than that. So we'll need to make adjustments, but it's very encouraging.

Okay. So there is opportunity from that $12 million a month run rate, but you're reserving the right to invest in the business as long as it will be accretive to the operating leverage of the business?

Yes, because we want - yes, absolutely. We've got ourselves down to a level, I think you would agree, compared to where we were that we're in a good place, right? To go from where we were down to $12 million a month on the base level is very - is a good place to be. We've gone down from 743 all the way down to 550 people. Our revenue productivity went through the roof this year. And it wasn't only because that we had less people and less layers and working more as a team, but obviously, we had revenue growth on top of the year previously. So if you look at a peer, like we do, we do a lot of benchmarking to peers. We went from a laggard, like the worst, all the way to right at the peer group and to our main competitors on revenue productivity. That has a dramatic impact on all the key financial metrics like ROA and ROE, and I think you'll see that play out in 2018. So you'll see where we were on a - depending on how you adjust it, 6% to 9% or whatever, in ROE. I think you'll see us come up much closer, or if not, in the near term maybe even surpass members of our peer group. So it's very - we've got all the - this was only the first year. You know where we were last year at this time, talking to you. We were still dealing with some of this oversized risk in the discontinued portfolio. And while we have some of those things still coming through or even some gains, we've really done a tremendous amount to improve the operating performance of the company. And you only saw kind of a blended operating performance run last year. So as the Jaws continue to expand, I think you're going to see good things in 2018.

Thanks, Damian, I'm going to govern myself. I've got a couple more questions, but I'll hop out and let some other people ask questions. What's the tax rate in '18 before I go?

21% for the Federal and around 26%, 27%, including the state income taxes.

Okay. Thanks, Paul. I'll hope out.

Thank you. And our next question comes from Matthew Breese with Piper Jaffray. Your line is now open.

Good morning, guys.

Good morning, Matt.

One item that's been fairly difficult to model has been the margin. And there's a lot of moving pieces there, but maybe in just broad strokes, if you can give us some idea of, at least on an annual basis, where you think that could land in 2018 with a couple of Fed hikes.

Yes. I'll let Paul be the technical. It's going to be hard because that's exactly right, right? So you have Fed hikes, right? So is it 2% or 3%? The target for 2019, I think, is 2.80% on the short end. So that definitely impacts it a lot because we're very asset-sensitive, not liability-sensitive and only take a small amount of that gain - excuse me, that cost into our deposit base for the prepaid. So that's a big impact. Also, it impacts, obviously, as we trade our loans and where our loan deposit ratio improves. But then you also have the third thing, which is the whole CMBS business, when we do the securitizations and how much loans. So the quarter that we - you have this interesting situation. You have this - we have the securitization in August, right? So you've got some of that margin inside of August. Then you've got the big gain, but then you start off in September with a lower level of loans. And since they're high-yielding loans, you do have this seasonality based on CMBS, also this floating rate securitization we did. And you see that interest margin buildup. You get the big gains. But the next quarter, you not only don't get the gain, but you get the less margin. So - and it's always hard to time that. So if you do a securitization in March 31 versus April 31, that kind of throws off your modeling. Not your yearly modeling, because we've already told you that our securitizations are about $300 million when we do that. And we do it - we're targeting to a year. So you can - from a yearly perspective, it's not hard. It's a little bit harder through the quarterly. And I know you don't want to miss quarterly. You don't want to say 15 when it's 25 and vice versa. So - and I'll give it to Paul because...

Matt, and the other thing, so for your model, you can - depending on how you want to model the securitizations, you can use a rate of 5.5%. Although, obviously, those rates fluctuate with the market, 5% is a reasonable rate in the current market to use.

And the gain is - we've had historically - we've had 2 of these securitizations on the floating rate side. We're moving into the sequence, where we will have another one in the next couple of months. And - but the gain is undetermined by a lot of factors. It's done by outside who put a value on the securities that we buy and hold. And so depending on market rates and stuff, we can have an outsized gain that we did in the last quarter or you can have a smaller gain. And that's hard to - also hard to evaluate. We generally are targeting $4 million to $5 million. This is something - when we do one of these securitizations, we're hoping for a $4 million to $5 million gain on the revenue side when we go-to-market, if that's helpful. But that's not necessarily in the bag. It could be less or it could be more. But that's usually - I think we said that last time. That's generally what we're looking for when we securitize a $300 million pool of loans. Is that helpful?

Yes. It also brings a couple of follow-ups. I mean, as we think about the cash balance on the balance sheet at the end of the year, assuming that is a - that's bringing the margin down for the first quarter a little bit, plus the securitization in the next couple of months, I would imagine that, over the next 5 to 6 months, we're going to see some margin compression before we start to see expansion again. Is that a fair way to think about it, given the moving parts here?

Okay. So Matt, you're looking at the quarter end cash total - oh, I'm sorry, the year-end cash total. A better gauge, and within the press release, is to look at the average balance sheet. And you'll see that in Fed funds, we were selling $380 million is - the average for the quarter was $386 million. So we've actually been able to maintain at the $400 million level. And so that actually isn't a precursor. The $900 million you saw at the very last date is not a precursor for that reason. But in the first quarter, if you go back to the first quarter of every year for the last umpteen years, we do get some elevated deposit balances resulting from tax refund - the tax refund program. They should be less this year. So you'll see less of a distortion. That decreases as those balances are spent on the prepaid cards. Those balances decrease further in the second quarter, and that normalizes the interest margin. So between the second and third quarter, you see the normal interest margin. We're watching very carefully the mix of our assets on CMBS. We have less control, but we have more control on the other categories. So that's one of the things that we're looking at to maintain and grow that. But there are a lot of factors. The biggest one - the big - single biggest one that should drive it up is the Fed increases.

Okay. And then maybe you could share with us your thoughts on annual loan growth and the drivers of that for next year. Should it be similar to what we saw in 2017 with kind of low mid-single-digit total loan growth?

Well, I think our year-over-year are double-digit, yes. So I want to grow the balance sheet businesses. Unless you're in an extraordinary situation, you don't want to grow the balance sheet businesses too quickly. Generally, you get 9% or 10% growth is a good year. And 15%, I want to have an explanation of why we're growing so quickly There are some businesses, like SBLOC, where we've invested a lot in automation, but are extremely - it's almost not a lending business because they're so backed, we have almost $6 billion of collateral and $700 million of outstandings with $2 billion of commitments. It's a very low risk business, and it doesn't really affect our capital either. So those businesses - that's really - I could - we could grow that at 20%, 30% a year and have a 16% year-over-year growth like we did on the SBLOC business, and I'm totally comfortable. I'm not sure I want to grow my SBA business at 20% or maybe even my leasing business totally organically 20%, unless we have an initiative to change the way we do business. And that's a hard business to do because you have a lot of - that doesn't mean we won't do that in any one year. But generally, we want to grow the balance sheet in a safe and sound, very controlled way, understanding which segments. We're not - we don't want to get too overly concentrated in any region or any particular type of business. That doesn't mean we don't have segments and verticals and things like that, but we want to understand the concentrations across the portfolio and grow them safely. I believe we do have lower risk businesses. Obviously, this company has struggled with the community banking business in the past. We do not want - that is not the business model that we intend to build out going forward. So 10% to 15% growth year-over-year is, I think, the range that I want to, as - unless there's a real - and we'll be able to explain why unless there's a real reason. That's the kind of envelope. So in the middle point of that, 12% on the core, remember, we have other things like this CMBS, and we have discontinued and stuff. But the core businesses, lending growth, around 10% to 15%, 12%, 12.5%, is kind of the sweet spot. I think we want to grow that. And for this company with a loan - a low loan deposit ratio that's incredibly accretive. So as we trade out of bonds and we manage the balance sheet and increase the loans it obviously has a nice impact on our net interest margin, but also our total revenue. So that's probably too long of an answer, but that's a philosophy answer from a banker, a banker philosophy answer.

And then just on the pending Florida mall sale, just wanted to get a sense for: one, timing; and then, two, the extent if there is any gains there.

Well, the mall - well, we do have cash basically. We're actually operating the mall at a profit, believe it or not. But the - we had a very extensive sale process. We had literally hundreds of people look at the mall property. It's an older mall. And as you've seen highlighted in the press, people are struggling with the old mall model. So it became clear throughout the year that there are very few people involved, and even if you have a profitable - of running it like it is now. So most of the people who are interested in the mall, wanted to knock the whole thing down and totally start over again. That's a totally different price to us because they're not looking at current cash flow coming out of the mall. So our best - we sought out large - very large developers who would have - would reposition the entire asset, that would work with us in order to do it. Of course, you always toy with it yourself and say, we own it, why don't we do something with it, with one of these individuals. But we thought it would be better just to put it behind us and find the right partner to get the deal done. We're hoping for an April close on the transaction, and we think we're fully marked now. We don't think there'll be a gain or anything. We do have a bit of cash in the business, but we don't - we have certain things we have to take care of before that. So we're not anticipating any large sum. We might get a little, but it won't be anything that will really impact the financial statements, we don't believe.

Okay, okay. So no big moves either way there and an April close?

I don't think so. We're under contract right now. It doesn't mean it - sometimes, things don't get done. I think that there's a lot of reasons. This is a good piece of property in the right place. So I think there's a lot of reasons for this to get done. I think it's from the Orlando area. They wanted to get it done, too. So it's - you've got a lot of people who want to get it done. So usually, things get done then.

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

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to you, Damian Kozlowski, for any closing remarks.

Well, thank you very much, everyone. I appreciate you tuning in today to listen to our full-year results. I really do believe there was a turning point in 2017. If you go back to where we were at this conference call last year, we faced a lot of issues, and many of those issues we've been able to make a lot of progress and even resolve in 2017. I am very optimistic for 2018. Our management team is very focused on, I think, the key metrics that all of you on the call are. And so we're looking forward to talking to you over the year and give you more updates on our progress. So thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.