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Edited Transcript of TBBK earnings conference call or presentation 26-Jul-19 12:00pm GMT

Q2 2019 Bancorp Inc Earnings Call

WILMINGTON Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bancorp Inc earnings conference call or presentation Friday, July 26, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andres Viroslav

The Bancorp, Inc. - Director of IR

* Damian M. Kozlowski

The Bancorp, Inc. - CEO, President & Director

* Paul Frenkiel

The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO

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Conference Call Participants

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* Frank Joseph Schiraldi

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Matthew M. Breese

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to The Bancorp Inc. Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Andres Viroslav. Sir, you may begin.

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Andres Viroslav, The Bancorp, Inc. - Director of IR [2]

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Thank you, Crystal. Good morning and thank you for joining us today for The Bancorp's Second Quarter 2019 Financial Results Conference Call.

On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer.

This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call beginning at approximately 12 p.m. Eastern Time today. The dial-in for the replay is (855) 859-2056 with a confirmation code of 1391725.

Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see The Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to the forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [3]

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Thank you, Andres. Good morning and thank you for joining us.

Excluding the lease termination, which will yield $2.2 million in future savings, The Bancorp earned $0.21 a share on revenue of $54 million and expenses of $39 million. Reported per share earnings of $0.20 grew 82% over 2018 second quarter. Total revenue climbed by over 12% while expenses, excluding lease termination, were up approximately 4% year-over-year. Net interest income after the provision improved to $34 million from $29 million year-over-year, an increase of 19%. Tier 1 leverage ratio improved to 10% from 9.9% quarter-over-quarter. NIM improved to 3.41% from 3.11% year-over-year and remained approximately flat quarter-over-quarter. ROE year-to-date stands just under 14%. We see continued significant strength in our payments business with a 30% GDV growth in our prepaid and debit card transactions and a 13% prepaid fee growth year-over-year. Our ACH and indirect push-to-card revenues also continued to build with 18% fee growth year-over-year and 9% quarter-over-quarter. We now expect GDV growth in our payments business to continue during the balance of this year, which could indicate increased growth beyond 2019. We are assessing these trends as well as the impact of direct push-to-card revenues on 2020 and future fee growth. Currently, it is our belief that GDV growth in 2019 should substantially exceed our previous estimates of low double-digit increases with fee growth also exceeding estimates and most likely in the range between 12% and 14%.

Net interest income grew at 17% with contributions from each business line. Quarter-over-quarter loan balances grew across the board led by annualized rates of 24%, 23% and 19%, respectively, for leasing, SBLOC and SBA. We expect balanced growth to continue at an accelerated rate led by our institutional SBLOC business where we have targeted nearly $1 billion in outstandings by the end of this year supported by our new Talea technology platform. We see increasing momentum in this product area and have introduced an insurance-cash-value-backed credit product to complement our nonpurpose securities loans.

Our securitization business continues to build on the momentum from the first quarter when we securitized $520 million in loans, and we believe that our securitization in the third quarter will be approximately $700 million. As previously announced, we have targeted doubling the size of our securitizations in 2019 from the $300 million range in 2018. This strategy has significantly increased our spread revenue and resulted in average gain on sale for each of the last 3 securitizations of $10 million while eliminating related long-term real estate credit exposure. Based on credit market and other inputs, which could change significantly prior to this securitization, we are currently estimating the third quarter securitization gain at between $7 million and $10 million.

Lastly, we continue to make significant progress in fully remediating all our outstanding regulatory issues and also in building a best-in-class platform that will be critical for future opportunities. We believe that we are developing broad capabilities and expertise to address the future growth of the fintech, digital and gig economy financial market and expect to be well positioned for sustained growth and innovation.

I'll now turn the call over to Paul Frenkiel, our CFO, who will detail more about the second quarter.

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Paul Frenkiel, The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO [4]

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Thank you, Damian.

An 85% increase in year-over-year net income to $11.3 million from $6.1 million reflected increase of $5 million in net interest income. The increase reflected continuing growth in Bancorp's largest lending lines, including CRE loans originated for securitization. Average CRE loans increased approximately $284 million or 147% to $477 million.

Growth in other lending lines reflected respective 5% and 18% increases over prior year balances for SBLOC and SBA. The $5 million or 17% increase in net interest income to $35 million reflected an increase in interest income on CRE loans for securitization of $4.4 million to $7 million. Interest on SBLOCs increased $1.6 million to $9 million, and interest on SBA loans increased $880,000 to $6.5 million. We anticipate that third quarter 2019 will show an increase in CRE interest income as balances peak in the quarter they are securitized. The next securitization is planned for September 2019.

In addition to loan growth, the increase in net interest income reflected the impact of the Federal Reserve rate increases in 2018. Approximate yields on the loan portfolios were 4.4% for SBLOC, 5.7% for SBA and 6.4% for leasing. While the yield on CRE loans originated for securitization has recently approximated 5.9%, that yield varies with market spreads and timing of securitizations. These lines of business have had historically low charge-offs.

Overall cost of funds was comparable to Q1 and increased 37 basis points over Q2 2018 to 96 basis points. The 37 basis point increase reflected the impact of Federal Reserve's rate increases, which also contributed to the 58 basis point increase in asset yields. The 30 basis point improvement in NIM to 3.41% resulted primarily from those higher asset yields compared to the lesser increase in the cost of funds. The lesser increase in cost of funds primarily reflected prepaid card deposits, which contractually adjust to only a portion of increases in market interest rates. The 3.41% NIM for the second quarter was comparable to the first quarter.

In the second quarter, growth in SBA, leases and new commercial loan originations largely offset the NIM reduction resulting from the first quarter securitization. Prepaid accounts, our largest funding source, are also the primary driver of noninterest income. Fees and related income on prepaid cards were $15.2 million in Q2 2019 compared to $14.3 million in Q2 2018, a 13% increase. Card payment and ACH processing fees include Rapid Funds revenue and increased 18% to $2.5 million.

Noninterest expense for second quarter 2019, excluding the 309 -- 8 -- $908,000 lease termination, was $38.6 million, thus, below the $40 million quarterly target discussed in prior calls. Salary expense was $2.9 million higher during the quarter and reflected higher commercial loan securitization, SBLOC, information technology and incentive compensation expense compared to Q2 2018. That increase was partially offset by reductions in FDIC insurance, legal, data processing and other expenses.

Book value per share increased to $8.07 primarily reflecting the $0.20 of earnings per share and the increased value of investment securities resulting from lower long-term market interest rates. The consolidated leverage ratio was maintained at approximately 10%. Our capital ratios provide a solid base from which to conduct our operations and take advantage of opportunities in our lending and payments space.

Our goal for 2019 is to significantly increase loan balances over 2018 through initiatives which are specific to each lending line. Second quarter progress with those initiatives was reflected in annualized linked growth, which ranged between 19% and 24%. The annual -- the single-digit goal for prepaid-related revenue was exceeded and amounted to 13% for the quarter. The overall goal for 2019 noninterest expense is to keep those expenses under $160 million for the year. The combination of managed noninterest expense, higher loan interest from lending lines with historically low losses and growing payments revenue will be key in achieving our return on asset goals. Our multiyear goal for return on assets is 1.75% with a short-term objective of 1.2% as presented on Bancorp's website. Year-to-date 2019 return on assets was 1.32%.

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

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [5]

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Okay. Thank you, Paul. Operator, could you open the line for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from William Wallace from Raymond James.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Maybe if we could start on the SBLOC and the new product that you mentioned that you're offering, the IBLOC. Could you talk a little bit about that? And what's driving -- it seems like the optimism around that business line has increased a little bit this quarter.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [3]

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Yes. Well, we've always had a lot of optimism in this product area. And we were building over the last 18 months a new core operating platform. And we had talked about trying to reduce the -- get rid of paper and reduce the cycle time from 25 days down to less than 3 days, and that's been accomplished. We waited to fully implement that product and kind of let it go because we had -- remember, we got rid of $400 million of deposits, and we wanted to make sure what the growth of the securitization business that we've had is an efficient primary liquidity over the first 2 quarters of the year. But now that this product is implemented, it's doing everything that we expected of it. We already -- in July, we were $838 million. At the end of last month, we're already at $855 million. And we expect to be about -- looking at our pipeline of $900 million or more at the end of the third quarter. So it's doing really well. It's doing what we expected. We've signed up new partners. And we have a new sales force. We hired 7 Regional Directors now who are embedded with the broker-dealers and the broker teams in order to not only bring in new assets, but set up to transition when people leave wirehouses and go to one of their alternative platforms.

The insurance backed line of credit is just exactly what it is. It's a complementary product. People loan against liquid securities or the credit that's embedded -- the AAA credit that's embedded in insurance companies when they have life insurance policies. So it's the cash value of the policy. It's -- you -- we get it as collateral so we can call on that in case there isn't payments made. So we already had in the first quarter about $20 million of that. We'll probably have about $50 million of that product at least at the end of the year. So that's complementary and included in the SBLOC number. So when we say $1 billion, probably we'll have $950 million or more of the SBLOC product and around $50 million of the insurance-backed product.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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For the insurance product, have you guys -- have you all signed up new insurance companies? Or is this something that you're rolling out into the kind of -- that you've already...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [5]

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No. So what happens is, is that a broker -- this insurance policy, someone has an insurance policy, and they make a decision, they want to -- they have a cash value of that policy, say it's $1 million, and they want to borrow $300,000. We underwrite that loan just like we underwrite any loan. So we have to make sure whoever that insurance policy back -- backing is, whatever, that insurance company, we have to underwrite the insurance policy. So we have to check to make sure it's -- that we can pull on it, that it's really cash value, that it's -- that can be collateralized and enforced and that the insurance company is strong. Usually, it's an insurance company you know. So it's very easy to do this. So it's -- this is a product that's existed for a very long period of time. And it's very complementary. These people usually make that choice. They have a life insurance policy or they have their securities portfolio, and they make a choice: which one's easier to lend against and what's most appropriate for their own private decision-making.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Got you. Yes. So can you maybe disclose how many new brokers you've signed up with the people that the sales staff that you hired?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [7]

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Well, we have -- we've signed up the entire networks. So LPL, SEI and TD Ameritrade, we signed up the entire platform. So what happens is, we become one of the providers. Sometimes, there is multiple providers on each of these platforms. So it requires us -- once we're signed up, then we go into the broker teams and have to wholesale the product, basically, okay? Now what's changed from a year ago is that now this is not paper-based. This is a web portal type of product now. So the -- all the paperwork and things from where it's been integrated can be done by the -- once it's -- once they're trained on the ability to do it, once we wholesale it to the broker teams, what happens is now they can actually do it themselves. The majority of it is done at the direct point of the client contact rather than having to send paper back and forth. So it's a portal-based. They get their loan much, much faster and 5% of the time than they would've otherwise. And that allows the broker -- it's not a big profit for the broker, but that allows the broker to get their client happy very quickly by getting them cash to fix the driveway or the roof on the house or pay for school very, very quickly. And that enhances our competitive stance versus our primary competitors in the space.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Okay. Moving to another topic. On the prepaid business, in your prepared remarks, I kind of missed a little bit about what you said about what is driving the increased guidance around GDV growth and fee income growth. Can you repeat -- you said something about Talea, I just -- I didn't catch it.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [9]

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No. That's not Talea. That is -- Talea is only about the SBLOC product. So what we're seeing is in -- at both sides. So remember, in the ACH, the push-to-card area, we talked about indirect and direct, right? The indirect is slowing down. It's people like Venmo and stuff, but where it's actually still growing. We expected it to slow down more, but it's not. So we're getting -- we got 18% growth year-over-year and 9% quarter-over-quarter. We didn't expect that to continue to grow at such a high rate. But it's the direct product where we now have 3, signing up the fourth partner where there is this huge potential to have multiples of what we currently had.

On the GDV side, for the payments product, it's fairly -- it's in multiple product categories. And what's happening -- what we clearly see, we -- there's just a great expansion of the number, but also the volume that's going into the fintech program managers. So people like Chime is a good example who's been very successful. You've seen their marketing. But they're just one example of many. We have over 200 programs. And we have about a pipeline of 70 programs that we're actually evaluating to add to our platform. So there is a lot of -- it's not coming from one area. It's coming -- it's fairly broad-based. But it's about the adoption of these program managers, these fintech-related companies, but also it's the whole -- it's happening across the market. It's happening in the digital market with the big banks where everything is being digitized and they're not going to branches anymore. And it's happening in the gig economy where people want to be paid if you're an Uber driver tomorrow or right after you do the drive, they want to take the $10 out of the cash machine and go to McDonald's. So this is really happening. And we're seeing that as the adoption picks up. So that's why we say when we're assessing the trends, we think this could be -- this could last -- this bump in the market volumes, at least for our programs, could last well into -- it's definitely a 2019 event, but it could well be multiyear event that we're experiencing.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

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So I look at 30% year-over-year growth in GDV volume, and you're saying that is sustainable at least for this year.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [11]

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Yes. Well, it's -- yes, absolutely. So if you look at the numbers -- so let's give you an example. It's actually accelerating. So in the first quarter, it was 29%; and the second quarter, it was 30%. And the first -- 3rd of July, it was 31%. So it's -- we're getting a situation where it's not only -- you would expect that if it was just a bump, you then get some deceleration. We're actually getting continued acceleration and adoption. And we've got a bunch of new programs coming out and we've got a big pipeline. So you can always lose a program or whatever, but we're seeing a trend that's different than the trend we saw 2 years ago. There's no doubt. Now some of it might be the fact that we're really set up. So if we had a 30% volume increase 2.5 years ago when the bank was in a different position, I'm not sure we could have dealt with it in the same way. But now our platform is very scalable. So if we got 100% GDV growth, we could handle it. So we might be part of it that we're obviously in vastly better financial health than we were a few years ago. We're one of the few players in the industry that are kind of a gold standard now, and you know the others. And we've really enhanced the ecosystem for our partners so they can feel more confident about the bank's ability to support them over many, many years of future growth.

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Operator [12]

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And our next question comes from Frank Schiraldi from Sandler O'Neill.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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Just a -- and just a follow-up on the GDV conversation. So the push-to-card payments, that's all -- those payments are included in those gross dollar volumes, right? So that's...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [14]

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No. They're not. No. The GDV is all -- yes. So we do -- on the GDV side, we're doing $60 million, $70 million there if you look at this year. And on the other side, there is hundreds of billions of dollars. So there's another 450 billion, 500 billion transactions that actually go through the bank in various ways, but the -- those GDV growth are only other on the prepaid and debit card side.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [15]

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So there's -- okay. So you don't give the volumes then, the growth on volumes in the indirect or direct channel for the push to card?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [16]

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Yes. They're not really -- they're not as relevant because many of them are very big dollar transfers and everything. It's not as relevant. The fees are more relevant there. So it's -- there's not really a GDV per se. It's just transactions because we're doing payrolls. And it's just not that relevant. Why it's relevant on the GDV side because that's the -- if you think about what happened, it dovetailed very nicely. When we lost $400 million of the Safe Harbor deposits when we sold that business for $65 million last year, which we thought it was a fantastic deal for both sides, but we replaced all those deposits. It just so happened to be at that time. Once we lost those deposits, we've replaced them all. And we had 17% balance growth, and that's supported by the GDV volume on our cards. So that really helped us maintain our borrowing costs through that time. It was very helpful to the overall profitability of the bank. And it's continuing. So we do have to occasionally go in the market to borrow for liquidity, but we have virtually no borrowings. And all that lending and all the securitization business is being supported by the GDV growth of the payments business.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

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All right. I mean, I guess on the push-to-card business, the direct channel, certainly, it's -- you talked about the potential there. When do you think you have more clarity or be able to give some expectations on revenue streams in the coming quarter...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [18]

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At the end of this year.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [19]

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Okay.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [20]

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At the end of this year. So like -- I've said this, we were using use cases right now. So we're signing up a handful of partners in order to understand in each of the industry silos in which we're operating, and we have a processing partner also, how we're going to approach the market and what the potential is. So I think we'll be able to give guidance more towards the third or fourth quarter of this year when we talk about. But right now, we really can't. We don't know how. We know it's going to be something obviously, but we don't know -- you mean. We're talking $2.5 million right now of fees in that area. That's the kind of the fee-based in that ACH push to card is that -- how much bigger is that? Is it double, triple? Is it 10% growth? I mean we really don't want to give any market signal. We know there is definitely a business there. We know there's going to be fees. But we don't -- it's -- since the opportunity is kind of -- could be very large. We don't want to give anybody the indication of what that is until we really understand it. And we don't understand it yet.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [21]

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In terms of that business, I mean as you look to sign up partners in the direct channel business, I mean who are your primary competitors? Who are out there trying to do the same?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [22]

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Well, it's -- you need to have -- there's not really anybody right now because you need a partnership with a processor. So anybody could -- a lot of people could do it, but you've got to -- us being -- so one of the first adapters in the indirect side really helped us become one of the early adopters in the direct side. So it's -- there's nothing -- you need to have the technology platform. You need to have the connections in the industry. You need to have long tenor and understanding how to do this with the networks. There are a handful of banks that obviously can do that. But you also need the compliance infrastructure and that CRM infrastructure. So it's such a potential. You could have 30 banks participating and everybody can make money. So this is a trend that is supported on -- even the Fed has come out and said they want real-time payments. I mean it's -- and people want to be paid in the gig economy and that there's fewer W-2 employees and a lot more people being contractors. This is just a trend that is well supported. Everybody wants to get payments instantly. And people are willing to pay, especially corporate clients who are getting large disbursements of millions of dollars. $10 for a payment to them is nothing. I mean that's just -- it's a 1 basis point fee. So it's -- that's the potential. It's clear that it's supported by the macroeconomy as it's changing. Just like GDV is now exploding, this is an area that's clearly the future of banking in the United States.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [23]

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I mean I would think Mastercard Send is similar, right? I mean...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [24]

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Yes. There are a lot of -- there's a lot of development across the industry around real-time payments, right? So it's not only us. There is Mastercard, the rails, the Mastercard and Visa both have products that people can use. There was a problem 3 or 4 years ago, there wasn't a bank adoption yet. So banks weren't accepting these type of payments, but they are now. So this will explode. So that's all I can tell you. I don't know when it will be broadly adopted, but both Visa and Mastercard have the abilities now to set up these push-to-card payments. And so it depends on who will be an early adopter and who will integrate -- remember, with Venmo, they're integrating into the rails, into Visa, into Mastercard, right? With this product, we are the integrator with a processor. That's the difference. So any company in the world can be just like Venmo. So that's the difference. And that's why it's so powerful. And that's why we haven't given any guidance.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [25]

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No. I mean I know there is a huge pie out there, so I understand.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [26]

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I wouldn't worry about it. It's going to get adopted. And whether -- like I said, whether it's 10% at 2.5x or 10x, I don't know and I don't want to give any -- I know it's a big macro trend. And I know that other people could take advantage of it. But literally, that's such a big pie that -- and what's happening is that when these -- they're kind of hit critical mass. Once you're doing it, it's almost a competitive necessity to do it, too. Once you can do real-time payments and you're sending out your disbursements, it's almost like it's -- you're not going to use ACH anymore. So I don't know. Like I said, I can't give you any guidance other than we're working on it to be one of the earliest adopters of the technology.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [27]

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And then I just want to ask on expenses. You guys talked about continuing to keep the expense base under $40 million a quarter. Obviously, you're making some investments or you just made them already, but like Talea and -- into push to card. And I'm just wondering you if you could talk about where you're getting the offset to sort of hold the expense base where it is.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [28]

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Well, if you look at the year-to-date number, right, we're up 3% year-over-year. So if you look on the year-to-date -- and we've made big investments in sales force, in technology platforms and everything. So -- but we've gone -- what we're generally doing is getting much more efficient on the back end. Like our costs aren't going up because our GDV went up 30%. Our costs are the same. But the front end is where we need to get productivity. So we've really enhanced our front-end platforms. So Talea is a front-end platform, but it's -- itself isn't enough. You need to refigure -- reconfigure your sales force, so we've hired 7 Regional Directors to support that. That's where the costs are coming from. They're embedded. So we got 3% growth year-over-year for the first half. But look at our revenue. It's clear. What we're saying is that our costs are going to maintain -- we're still going to try to maintain that 10%. So if we get -- I think we could have clearly double-digit revenue growth, and we'll have -- and I've said this before, we'll have 5% expense growth then. If we had 10% revenue growth, we'll have 0. So it's -- we know how to -- we've demonstrated clearly over the last 3 years that we know how to control expenses. There are some clear expenses that have continued to trail down like as we move away from our regulatory issues around FDIC and all that stuff. There is embedded costs inside some of the costs that you see because we're still in the process of enhancing the processes. But once they're enhanced, they are incredibly scalable. So 30% GDV growth. We don't go up 30% expenses. We went up 3%. And those 3% expenses had nothing to do with the GDV growth, had to do with sales force enhancement. So we still think we can maintain basically the same cost base over the next 18 months and really still continue to drive revenue substantially. And it seems like we're getting that trend now.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [29]

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Okay. So over the next 18 months, you're thinking it'll stay under 40% or if revenues are 20%, then your expenses will be up 5% or whatever it is. I mean you don't have [to send me that formula].

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [30]

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Exactly, exactly.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [31]

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Yes. Okay.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [32]

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To say if we really get the over 15% revenue growth, we will definitely maintain that 10%. But we'll take it every day, right? If we get a 15%-plus revenue growth, who -- I mean everyone would take that, right, [15.5%]? I'm just telling you, a lot of the investments have been made. We've got a fully built out team. We've hired expert sales force. We've got our entire management team in place. And we still have -- if you look at the operating expense year-over-year or look at the operating expense, almost every category is down substantially. So how we've been vesting in the front-end people, better people, and we're lowering our operating costs and our unit costs must be dropping precipitously. For us, 30% GDV in our operating expense, not the people, is down substantially. Our unit cost is diving. So that -- we must be getting much more efficient.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [33]

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Okay. And just finally, if I could. Just on the pre-securitization business. You talked about the next securitization I think being $700 million. It looked to me like there was more in in-loans held for sale on the books. I think it was $900 million plus. So what's the difference there?

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Paul Frenkiel, The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO [34]

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Yes. It's...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [35]

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Yes. Go ahead, Paul.

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Paul Frenkiel, The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO [36]

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It's SBA loans.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [37]

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Got you. Okay. So you are selling some of the SBA, the guaranteed portion now. Okay.

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Paul Frenkiel, The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO [38]

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Yes. Yes. We have them available for sale.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [39]

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No. No. We haven't sold any. So they're just -- we don't sell the SBA loans.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [40]

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They're just going to sit there behind held for sale.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [41]

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So for that total you're looking at includes the SBA loans held for sale plus the securitized loans held for sale.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [42]

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Okay. But you're not going to sell -- you're not planning on selling those SBA loans then.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [43]

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No. We are not selling. Let me make that clear. We are not telling SBA loans. We hold them. We love the asset, and they're great for liquidity.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [44]

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So how big is like too big when you think about that pre-securitization? I mean are those securitizations just going to continue to grow as the balance sheet does? Or...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [45]

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No.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [46]

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Okay. Why? Is there limit?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [47]

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Hopefully, next year -- good guidance for next year is in the same range. We'll have 2 -- we're -- obviously our capital have grown a lot, but we're not necessarily going to grow them. We'll give you guidance on that. We don't really know right now. We think $750 million to $800 million is kind of a range for it. We'll probably have 2 next year in the same range. And we may have them -- we haven't decided yet when we will have them next year. But our -- once again, it's matured, the business. We started this a couple of years ago. We've got a great cadre of investors. There -- we've got a great appetite for our -- we're tightened 5x on our last bond offering. So we -- I can't tell you where we're going to go now, but we'll at least be where we are. We don't expect to grow the sizes substantially next year, but that could change. We're kind of in the sweet spot now of $750 million, $800 million because there's a -- there's multiple tranches and there's also a noninvestment grade tranche that we sell. So that can't be too, too big either. So we kind of like where we are with that product.

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Operator [48]

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And our next question comes from Matthew Breese from Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [49]

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I was hoping just to go back to the gross dollar volume and better understand the components there. If I think back to legacy of The Bancorp, the prepaid card product was a physical card product, open-loop card adoption off the J hook or tax fund -- refund issuance kind of card. How much of the 66 billion in gross dollar volume is that traditional product? How much is now the e-wallet or electronic prepaid? And if you could take those 2 pieces and give us a sense for the growth of each product, what does that look like?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [50]

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So we don't -- we haven't disclosed the exact numbers before. I'll give you something general. The growth is higher in the debit card adoption than it is in the prepaid card adoption, right? So it's the -- there's a lot more. The general purpose, reloadable market is really being replaced by the debit card market. So people are being issued debit cards. But we're getting growth in health care cards, government welfare cards. So we're getting growth across the portfolio. But we're getting like -- from things like Chime, you're getting debit card adoption. But we haven't disclosed -- and we'll consider disclosing that in the future, but we'll have to look at it. That's -- I'll take that as a request, as an additional disclosure in our next earnings release.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [51]

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Yes. Just thinking back, I mean for a while there, it felt like the physical prepaid card adoption rate was slowing. It was coming to a 4%, 5% 6% per year kind of growth rate. And obviously, your growth rate, overall GDV, is accelerating beyond that. And so clearly, there is a introduction of a new product that is driving that.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [52]

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Well, it's a -- well, the debit card is coming from -- or alternative cards, not necessarily debit, but cards coming from the fintech platforms, that's where -- but we're still getting growth on the other side. The disproportionate growth is coming from these fintech companies where people are leaving traditional banks and signing up with them. So that's where the explosion is. It's that adoption. It's not like everybody's buying more gift cards. There are people buying more gift cards, but that's not exploding, right? It's not like you're getting good growth in government cards or health care cards, but that's not exploding. That's not a new technology. The new technology is these programs that provide mostly debit-like products, that's where you're getting the explosion in volumes. So as people move from Bank of America or the local community bank, the companies that we support that are fintech platforms -- fintech banking platforms, that's where you're getting the big volume increases. Hopefully, that's helpful.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [53]

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And beyond -- no, it is. And beyond Chime and Venmo, what are some of the other big brand names you're associated with in that business?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [54]

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Well, I could give you one more that's been disclosed many, many times. It's Varo. So Varo is one that is -- we're a big partner of. So if you look in our presentation, on the website, we have a page that has all the brands that we do business with. And so you could go to that page and it has like 30, 50 or so of the brands that we work with. But we issue the Uber card. We issue -- there's a whole bunch of cards that we -- but I don't want to trip on myself. So the best way to see that is just to see all the brands that we do business with, and you'll recognize almost every one of them, if not all.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [55]

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Understood. And these fintech partnerships, of these 66 billion that's growing at a 30% clip, these fintech -- would you -- if you had to put a number on what proportion of the 66 billion they are, is it more than 50% or less than 50% a quarter? Just rough numbers.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [56]

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We'll consider -- like I said, we'll put that under advisement and consider that as a potential future disclosure, but I think that's a good idea. We'll look at that and maybe we can give more detail around GDV growth and everything in our next release, but I'm not promising it.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [57]

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Are the margins on that business similar to the prepaid? I mean you're clipping 10 basis points, and it's been pretty steady here on the GDV.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [58]

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Totally -- no, well, generally, the debit, that I can give you. The debit is -- tends be lower than, say, gifts or a prepaid card, right? But the volumes are tremendously high. That's why you're getting -- and -- but this is a complicated -- that's why it hasn't been disclosed. It's complicated. Because when we sign up a program, we usually have levels. There is deposits, funding too. So all these things go in together to the economic benefit that we get from a program. So when you get less fees, you can get more -- it's all connected. So it's all negotiation. So that's why we haven't released it in the past. But generally -- but once again, you get the benefit of the deposit. But generally, the gift card, the prepaid on a volume-only basis is likely to be -- in most programs likely to be less per transaction from -- excuse me, more for true transactions than the debit side of the house. Once again, we'll put that under advisement. Maybe we could put a little bit more clarity around prepaid, maybe we could bucket for you, guys, how it's growing, where it's debit versus general-purpose and other types of segments. So we'll put that under advisement. I know that will be helpful to the marketplace, and we'll think about doing that. But we usually don't -- one problem is just the time lag, so pulling all that through the programs and really identifying all -- exactly all the trends is sometimes difficult to do in a very short period of time. But we'll -- once again, we'll put that under advisement.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [59]

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Understood. That was helpful. Just going back to the securitization, what's -- I mean, I guess once the securitization is done or we think about a base line level of loans held for sale, what is that base line level going to look like? Is it now closer to $400 million or $500 million versus $300 million to $350 million before the ramp-up in balance sheet? And like this quarter's growth in loans held for sale was very high, I mean 64% quarter-over-quarter. Does that mean we're going to settle out close like $500 million loans held for sale? It's just a hard number to predict.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [60]

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Well, this is why the growth was more because we only did a -- we wanted to double the size. We're targeting like $700 million, $750 million, and we couldn't get the loans closed in the first quarter. So we had an inventory of loans from the first quarter that were ready to be closed. So we had $520 million in the first quarter, but we're going to have $700 million plus in the third quarter. So that inventory build is what you're seeing in that distortion. But generally, if we're going to target $700 million to $800 million, so $750 million divided by 2, that's easy. That's what we're usually going to be hold on an average basis. However, depending on what we do next year, if we do it a little bit later in the year, you can hold an inventory of loans later for the spread revenue. So generally, as the market loses depending on the market dynamics, if we were to lose the gain, the $7 million to $10 million average gain we've been getting, we probably would hold the loans 1 or 2 months less to replace the gain and keep them in inventory and then do the securitization. So we think we can maintain that business revenue going into 2020 even if we are to lose the gain. So if that's helpful.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [61]

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Yes. And then just thinking about the yield that you associated with that portfolio, the 5.9%, which, of course, your real state in this environment seems really high. What's in there? What are the structures? Where do you...

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [62]

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Is that all?

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [63]

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Yes.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [64]

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Pretty much all multifamily. They're in major markets. With assets that have been usually 30 to 40 years, occupied 90% or more. They're transitional interests, some interests only with a 3-year periods with additional extensions available. They're loans that have -- generally, if you look across the entire market, the sponsor who acquires the property, the multifamily property, usually put significant amounts of their own money in. We usually have an interest reserve or whatever or a reserve to do the enhancement of the property. And we're usually around one DSCR. We have usually full coverage even at the purchase of the property and then DSCR usually is over 125%, sometimes over 150% or more, once they remediate the property. So these assets are -- we would hold these assets ourselves. So like we said before, if something was ever to happen and the market was to go bad, we could have easily put this on our -- we don't have other real estate exposure. We could put this on our books. We keep it under 200% of capital. So that would be far less than any other banks in the United States. So it's -- we like to do it the way we're doing it. We like doing the securitizations the way we're doing it. But if we ended up holding loans, we would be fine with that, too.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [65]

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And the average LTV on these?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [66]

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These are 70 -- the ranges range from probably 75%, a little bit less than that, depending on the deal. The multifamily is still higher. It can go a little bit higher than that depending on the cash -- DSCR. If you got -- but we do a little bit of other stuff which would be lower LTV. We do a little bit of retail. We used to do more. But retail, we only do certain types of office and retail in these pulls. They're a declining percentage. I think our first pull had something like 40% retail and office. And I think this pull has 90-plus percent multifamily. That's why we're so secure in the fact. All 4 securitizations have really performed exceptionally. A lot of prepays in the first one because interest rates went up so much and we had much higher spread markets, but they've all performed fantastically. And so we're very comfortable with these.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [67]

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Okay. And then as just my last one on this subject. Given how much you mentioned multifamily and one of the largest multifamily markets has been disrupted, New York City, by the new rent laws. Is there any exposure to that asset class where some securitizations could be affected?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [68]

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Yes. We don't really -- we have done very, very little in New York City. We do a lot in the Southwest. We have a national presence. So we're doing it all around the country, in major markets like Houston. So still, New York -- New York is still a very good market for a -- the higher end market, maybe there are some real stresses. But there is multifamily in Brooklyn that people have been living in since the Mayflower hit. So I mean it's still a good market in the right segments. But we're not really in New York. We're -- we don't do a lot New York deals for a lot of reasons. We're doing these big -- if you look at our deals, these are these big condo developments, the multifamily developments that are next to Air Force Base, they're next to oil refineries. They're more middle- to low-income housing. They're not the -- they're not really affected. The people have to live somewhere kind of places that get enhanced over time and they've been living there since 1962. It's those type of properties and that's -- those are properties that perform really, really well from down cycles, and they really don't get a hit as much in value as you do in the wealthy segments. So that's New York's problem. New York problem isn't the middle of the market. It's the upper end that's getting clobbered because of the change in taxes, the changes in the ability for offshore people to invest using a limited liability company, thanks to 60 Minutes about 4 years ago. That's what's killing the New York market, and then they -- added to that, the tax reform where you can't write anything off. So that's what's -- that's the upper-end market, though.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [69]

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Okay. No. That's very helpful. The last question just tied back to the NIM. The Fed is on the precipice of financially cutting later this month. And I wanted to get a sense for how much of your loan portfolio is tied to prime or LIBOR or some short duration index. And the same question for the deposit book. I'm really just trying to get a sense for it. With the cut, what's the initial impact to the NIM?

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [70]

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I'm going to give it to Paul, but we've done a lot to -- we took a position. And part of where you see our 37% increase in book value was we took a position when the 10-year approached 3% to try to limit our downside to declining interest rates, right? And we were able to do that. One of that -- one of the things we did was sell Safe Harbor which was part of the equation. But I'll give it to Paul. We've done scenarios around this and it doesn't affect us as much as it would have before. And even like a 25 basis point might have about $0.01 over a year impact on us. But I'll give that to Paul.

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Paul Frenkiel, The Bancorp, Inc. - Executive VP of Strategy, Secretary & CFO [71]

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Yes. So as Damian said, we had significantly more exposure several years ago, but -- as a result of the securities purchase, as a result of the sale of Safe Harbor, which didn't have any capacity to be reduced when market interest rates are reduced. We're actually absorbing a lot of that hit already. There is some modest -- we do have -- we still are rate sensitive. So there can be a modest impact from rate reductions. But to manage those, we're also looking at several strategies that are in the works, and we expect them to come to fruition this year to add fixed rate loans to further decrease that exposure.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [72]

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Yes. We have a lot of room on -- we have a lot of variable assets obviously still. Some of them are LIBOR-based. They don't move -- they don't necessarily move as -- or have moved already depending on expectations rather than actually on the Fed cut. The thing I can tell you though is the reverse happens on our funding just like we said it goes up about 40% of -- it's going to happen the other way. So the impact of the funding will happen obviously as an offset. Is that helpful?

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [73]

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Okay. Yes. Helpful. Appreciate you taking my questions.

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Operator [74]

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Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Damian Kozlowski for any closing remarks.

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Damian M. Kozlowski, The Bancorp, Inc. - CEO, President & Director [75]

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Well, thank you, everyone, for joining us today. We appreciate all the questions and we look forward to talking to you next time in our third quarter announcement. Thank you, operator.

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Operator [76]

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