The Bancorp, Inc. (TBBK) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to The Bancorp, Inc. Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Andres Viroslav. Sir, you may begin.

Thank you, Crystal. Good morning, and thank you for joining us today for The Bancorp's Fourth Quarter and Full Year 2019 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 7997238. 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, performance or achievements 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 The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andres. Good morning, everyone. In the fourth quarter, we ended a strong 2019 with continued strength in our payments, GDV, gross dollar volume growth and increases in our loan originations. We also continue to resolve issues with our regulators, decreased our discontinued Walnut Street portfolios and positioned ourselves for continued net income growth in 2020. Excluding a $7.5 million charge from an FDIC; CMP, civil monetary penalty; for BSA, Bank Secrecy Act-related activities, The Bancorp earned $0.18 a share from continuing operations on revenue of $56 million, expenses of $40 million. Compensation expenses and allowances for loans were slightly elevated in the fourth quarter mostly due to accelerated lending growth that will provide for future increases in profitability. The adjusted earnings per share of $0.18 grew 64% over 2018 fourth quarter. Total revenue climbed by over 17%, while expenses were up approximately 7% year-over-year, excluding the civil monetary penalty. Tier 1 leverage ratio improved to 9.7% from 9.4% quarter-over-quarter. Continuing operations ROE year-to-date, adjusted for the CMPs which also included a charge in the third quarter related to the SEC, stands at 13.5%. For 2019, EPS adjusted for the nontax deductible CMPs was $1.05 compared to $0.72 for 2018, which excludes the gain on the sale of a safe harbor IRA business in 2018. For 2019, revenue grew 17% over 2018 excluding the gain on sale from the safe harbor business, while expenses increased 6%, excluding the CMPs. Pretax income, excluding the gain on the IRA sale increased by 49% to $81 million. GDV growth for the year was 34%, driven by the innovation in the fintech market, and we expect continued GDV growth in our payments business in 2020. Trends do indicate that there will be an extended period of GDV momentum, and growth should continue to exceed historic levels of fee growth. Our year-end loans and leases expanded in 2019 by 22% over 2018. This growth was led by 30% growth in our SBLOC/IBLOC portfolio for which we exceeded our $1 billion target through our enhanced Talea platform. Our other lending businesses also expanded with 22% growth in SBA and 10% growth in leasing balances. Our pipelines in each of these lending lines continue to be robust, and we expect continued growth in 2020. In 2019, we also simply reduced our discontinued and Walnut Street portfolios. Discontinued commercial was reduced $47 million or 40% from 2018, while Walnut Street was down $20 million or 34%. We continue to aggressively manage the disposition of these assets and hope to make similar progress in 2020. Our securitization business continued to build on positive origination momentum. In 2019, we completed two securitization transactions for substantial gains. Our hold levels or average balances of these loans increased from $273 million to $574 million from 2018 compared to -- excuse me, 2019 compared to 2018. In 2020, we plan to complete three transactions that will either securitize or sell loans to third parties in the second, third and fourth quarters. A sale of loans is expected to produce a gain similar to securitization gains in the past and may exceed $10 million, wholly subject to market conditions. The sale of loans eliminates prepay risk and allows the bank to establish another avenue for the monetization of loans while eliminating our long-term real estate credit risk. We believe that we are developing both best-in-class lending businesses and broad capabilities and expertise to address the future growth of the fintech, digital and gig economy financial markets. We expect to be well positioned for sustained growth. To this end, management has developed a new four year Phase 2 business plan focused on innovation. We believe our current targets of financial performance are reasonable and attainable in 2020. These targets can be accessed in our investor presentation located on our website. Next, I turn the call over to Paul Frenkiel, our CFO, who will detail more about the fourth quarter and 2019 full year.

Thank you, Damian. Quarterly net income increased $2.2 million or 31% over 2018, excluding the $7.5 million nondeductible FDIC civil money penalty in fourth quarter 2019. The increase included $5 million of higher net interest income, reflecting continuing growth in Bancorp's lending lines, including CRE loans originated for sale or securitization. Average related balances for these loans for the quarter increased approximately $320 million or 164% to $515 million. Growth in other lending lines reflected respective 45% and 21% annualized increases over the linked quarter for combined SBLOC and IBLOC and for leasing. The $5 million or 15% increase in net interest income to $35 million reflected an increase in interest income on CRE loans held for securitization or sale of $3.5 million to $7.1 million. Interest on SBLOCs and IBLOCs increased $650,000 to $9 million and interest on SBA loans increased $1.6 million to $8.2 million. The proportionately lower increase in SBLOC and IBLOC interest reflected the impact of three Federal Reserve bank rate reductions in 2019, which resulted in proportionate reductions in income on a lower yield relative to other business lines. For fourth quarter 2019, SBLOCs and IBLOCs yielded 3.7%. Because these loans are secured by marketable securities or the cash value of life insurance, credit losses have not been incurred. Additionally, as a result of the automation of related collateral management, overhead can be managed to relatively lower levels. Those factors should be considered in light of these loans' lower yields. Approximate yields on the other loan portfolios were 5.7% for SBA and 6.5% for leasing. While the yield on CRE loans originated for sale of securitization has recently approximated 5.5%, that yield varies with market spreads and timing of securitizations. These lines at worse sales. These lines of business have had historically low charge-offs. Overall cost of funds was 0.77% compared to 0.96% in Q3 and 0.87% in Q4 2018. The decrease reflected the impact of the Fed's 325 basis point rate reductions. The impact of those reductions was partially offset by higher rate short-term time deposits to fund higher commercial real estate balances prior to sale of securitization and other changes in the deposit mix. The lesser increase in cost of funds compared to loan yields also reflected the impact of prepaid card deposits, which contractually adjust to only a portion of increases or decreases in market interest rates. The 20 basis point year-over-year decrease in NIM to 3.12% resulted primarily from lower asset yields resulting from the Fed's rate reductions compared to the lesser decrease in the cost of funds. Prepaid accounts, our largest funding source, are also the primary driver of noninterest income. Fees and related income on prepaid cards were up 23% to $17 million in Q4 2019 compared to $13.8 million in Q4 '18 after adjusting Q4 '18 for a $739,000 atypical write-off. Card payment and ACH processing fees include rapid funds revenue and decreased $416,000 to $2 million year-over-year, reflecting the exit of certain nonstrategic, higher-risk ACH customers. Noninterest expense for fourth quarter 2019, excluding the nondeductible $7.5 million CMP was $40.2 million, slightly above the $40 million quarterly target discussed in prior calls. Salary expense was $3.5 million higher during the quarter and reflected higher commercial loan securitization incentive SBLOC, information technology and other incentive compensation expense compared to Q4 2018. That increase was partially offset by a $1 million reduction in legal expenses, reflecting lower regulatory-related legal costs. Annual results for 2019 included the gains on two securitizations in the first and third quarters. Thus, continuing operations' return on assets for full year 2019 adjusted for the CMPs, was 1.28% compared to 0.83% in fourth quarter 2019. Book value per share was $8.52 compared to $7.22 at the prior year-end, primarily reflecting $0.90 of earnings per share and the increased value of investment securities resulting from lower long-term market interest rates. The Q4 2019 consolidated leverage ratio, which is based upon average quarterly assets, was approximately 9.7% and risk-based ratios approximated 19%. Our more than well-capitalized position provides a solid base to conduct our operations and take advantage of opportunities in our lending and payments space. That concludes my comments, and I will turn the call back to Damian for questions.

Okay. Thanks, Paul. Operator, could you open up the call to questions?

[Operator Instructions]. And our first question comes from William Wallace from Raymond James.

Damian, the three commercial mortgage transactions that you guided for in your prepared remarks, what's driving the increased volume there? Is it just market dynamics? Or are you building out the segment?

So we've been spending the last couple of years building out our origination capability around the country. So -- and this is -- remember we started this business at the end of 2016 when we shut our CMBS business down. And our product, both the loans and the securitizations, have been extremely well received in the investor community. So we've been able to originate more, but we also have been able to distribute. There's also -- it's come to our attention through real estate firms that there's a broad market in just the loans. So instead of us securitizing, there's many people who want to hold those loans, put those in investment vehicles or securitize themselves. So we were originating more, but we think we'll do three -- instead in the first quarter, we'll do three securitization or loan sales in the second and third and fourth quarter this year. And what -- our understanding of the economics will be similar to what it's been in the past. So it will be around $10 million or more for a gain in those three occurrences.

On the net interest margin, if you look to the deck that you guys put out intra-quarter that provides your guidance, you have very bullish expectations on growth in the SBLOC business. We've seen that in the numbers that the loan growth in that segment is accelerating. I'm wondering what the margin impacts to that business will be to The Bancorp overall. Paul spent some time talking about the lower risk characteristics and i.e., the lower interests on the loans which is fine. But help us kind of think about what that does to the net interest margin and what it means for net interest income as the mix of your loan book shifts more towards these lower-yielding loans.

Well, for one, I think one significant offset to the lower yields, if we just want to talk about the net interest margin exclusively and not consider the lower overhead and basically nonexistence of credit losses, we have, on the other -- we have the other lines of business with higher yields. So we're also projecting higher average balances of the loans held for sale or securitization. So those will be an offsetting factor to the growth in the SBLOC. And you have extremely high rates of growth in the SBA, which we're yielding, which we're still yielding 5%. And in the fourth quarter significantly, you started to see additional growth in the leasing. We're also targeting the leasing for additional growth.

I think you're going to see, I don't know, not to interrupt you, Paul. You're going to see -- if you see stability in the Fed rate, you're going to see stability in our margin also. The growth which we're targeting fairly good growth in our presentation, about 30% or more in the SBLOC market, that growth will be offset by the higher rates in all the other businesses. So you're probably going to get fairly good margin stability if you get stability in the Fed's target rates.

Yes, okay. As you're answering the question, I thought of a better way to maybe think about it. Your net interest income in 2019 grew $20 million roughly. Do you think that, that level of growth accelerates in 2020 as your growth accelerates in these portfolios? And if so, can you talk a little bit about how we might think about the growth in net interest income in our models?

So I think you have to look -- we don't make predictions and we don't give guidance on that specifically. We did give the guidance on $1.25 and $1.34 because we have several ways and alternative ways of achieving that. But if you want to -- for your modeling purposes, I think you have to look at the growth rates in each line of business and especially CRE loans held for sale because they really were the driver, as I said in my comments, of the -- or the main driver of the increase in net interest income. So it's basically a mathematical formula, where you have to assume, you have to determine your own estimates of the growth rates for each category and apply the interest rates. We can't micromanage the growth in SBLOC in any given quarter in terms of how much we're going to generate. But in the short term, even SBLOC in terms of earnings per share and return on equity, it's a distinct positive because it's so low risk and relatively low overhead.

And remember, we're simply maintaining -- forget about the interest income. You have to think about the fees, too, obviously. You know this. But we're just not putting the expenses on at the same rate. So you're -- as you have this similar growth rate over larger portfolios, of course, you're going to have at an absolute level more interest income and more fee income because if you're having the same growth over larger portfolios. And our expenses are simply going to be maintained at a level where you're going to still be in that 10% in 2020 and probably beyond that of having a fairly good continuation of jaws ratio where around that 9% to 10% range. So you're going to see an expansion in -- continued expansion in ROE, continued expansion in return on assets, and therefore, the absolute level of earnings per share.

And Damian, my last question before I let someone else hop in. I've had several questions throughout the quarter relating your relationship with Chime, their signing on of Stride as a partner as well and what that means for The Bancorp. Would you be willing to just give us some commentary around what Chime means for The Bancorp, maybe in GDV terms or prepaid revenue terms? Just anything you could give to us that would help us understand how their addition of a new partner on their processing side will impact you.

Yes. So that's not odd for a program that's maturing to have more than one partner. Our partnership with Chime started from the beginning and I think will last way into the future. We have a very, very close relationship with them, including with the processor, Galileo, who they use, and we've been working together to help them build their business. They are one driver of many in our GDV growth. We have other fintech-like companies, like PayPal and Venmo, are also big drivers of growth. That whole segment is. But also, we have other areas that are growing in very significant rates, too, like in health care. For example, these are very early numbers. I don't want to set an expectation, but here's an example and it's seasonality to these things, too. So debit tends to peak in December and then flatten out in January. And our growth is still in the mid-30s in January at a total level, and it's not coming from those debit fintech areas. It's coming from places like health care. So we have a very diversified portfolio in many categories. Chime has been a great success, but we've had other great successes in our portfolio. And our relationship is exceedingly strong with that company. So we -- while they've decided to have another partner which is an odd, it's not -- that in itself will not affect our relationship or affect our growth prospects around our GDV growth across the portfolio.

And I said that was my last question, but you commented on health care. You're not talking about HSAs, I assume. What do you mean by health care?

So we're actually the market leader. We control between 60% and 70%, 75% of debit cards for FSA and medical spending. So those, for instance, in January, where people are trying to use up their annual allotment and allocation of funds, that gets heavy seasonality at the first part of the year. You have basically 90 days into the next year to use up your prior year. So that's not -- as Damian mentioned, and that's only one of them. We also do, of course, the incentive cards and gift cards and many others. I refer you to our 10-K where we go through the various lines of business that we have in that area.

And we have -- I just -- the pipeline we have today is just dramatically different than it was two years ago. We work on maybe 20 or 30 programs or product additions. Today, we're looking at over 100. We have 19, which are new companies that are significant relationships across our portfolio. Around 40% of those are fintech, that's debit card related. But it's exceeding, it's very strong, and it's across all those categories that could support future growth like rapid funds we've talked about before. We recently announced a new partner for this direct corporate disbursements business. That's continuing to be rolled out with our partners, Visa and MasterCard. There's just a lot going on to support the business. And while I can understand that Chime is a great success story, this is -- our company is dedicated to providing an ecosystem to hopefully make many people successful in this space as the market changes, and we continue to do that. So we're experiencing not only great growth from specific partners, but we have a great pipeline to support the business going into 2020, but substantially beyond that because these are contracts that aren't one year contracts. And generally, they're 3 to 5 year contracts. And so once you sign that contract, especially with somebody who is well-financed and growing, those GDV growth come over years, not just months.

Our next question comes from Frank Schiraldi from Piper Sandler.

Just on the securitizations, Damian, you mentioned -- so three for 2020 and you talked about gains maybe being, I guess, around $10 million per. Just wondering if you could give us some sense of what that means to the bottom line in terms of margins in that business, and so what sort of contribution that is to the bottom line in 2020.

So it's -- first of all, we don't -- that's the best guidance we give on the gains. And the gains are, at least the first securitization, we believe -- excuse me, sale will happen in the second quarter. The reason that we've timed it for second, third and fourth quarters is because we have the kind of peak liquidity in the first quarter. So we're able to hold the loans a little bit and set ourselves up for the year on the securitization. So the -- if our average balances are likely to be higher than they were last year, probably 20% or 30% higher. There's been some compression in spreads over the last few years. So the rate on those loans are around the 5% range. And you can -- we've been guiding $5 million to $7-ish million in the past, and we think that's more like $10 million. So that's pretty clear. So that's going to contribute significantly. Now do -- is that in our model, is your question. So the answer is no. So when we say $1.34 target, we had $7 million in there. Well, we had 3, but we had $7 million, and we had lower average balances than we think we're going to actually hold. So there could be upside on that $1.34 based on how the performance of the securitization business is in 2020.

Okay. So yes, that was my next question. So nothing else in terms of your modeling has changed to offset a greater revenue contribution from the securitizations?

No. So when we have a -- that's our best guidance right now. So if you think about the $1.34 we've put on the table, that's basically what we think is the likely scenario for the bank in 2020. $1.25 is much more of a downside based on not getting the gains in securitization, not getting the growth that we've been having, not getting quite as much GDV growth. But it's clearly -- there's upside on that projection based on overperformance in securitization, but also in the other businesses. So we feel very comfortable -- very, very comfortable with the $1.25. And considering the trends and where we think we're going to be building the business and where we are on expenses, we feel $1.34 is a reasonable target for the bank for 2020 based on those dynamics.

Okay. I'm just curious, I mean, the slide deck you have out there, you have some detail in terms of growth expectations in GDV and expense level expectations for 2020. Have those changed though? I mean I guess, the expense level has to change with the securitizations. The game's changing, there could be some more variable expense tied to that. But other than that, are those still all pretty good expectations?

They are. And once again, it's a normal distribution. That's how we do our budgeting. So we're trying to share a lot with you. So the $1.34 is basically our budget, period. The $1.25 is our downside if things don't work out well, right? So obviously, if things all work out well, it's more than that. So that's what we're telling you when we say our target is $1.34. That's our managerial target for the bank. That's something that we think is very attainable. And it's through like a lot of banks or a lot of companies do. They think about it as an upside and a downside. But we're -- we think that $1.34, some things don't go as well or some things do better. But right now, if you look at just the securitization business, it looks like just that category, and that $1.34 would exceed our expectations. So we want to keep on investing in this business, we want to deliver our target to the investors in the bank and want to do better. But we're not -- if we have to take $0.05 off the table and invest it in more ability to service our clients or build better infrastructure, we'll probably do that. But what we're saying is that we're comfortable with the $1.34 and we're at least going to deliver that $1.25 regardless of what we think are reasonable market conditions.

And how much of this securitization do you intend, in terms of these CRE loans, do you intend to retain on the books?

So we get rid of them all. So the reason we're doing -- we started building the securitization business because we thought that was the best way to lower the long-term real estate risk, right? Most people would hold those. We didn't hold those for various reasons, including the community bank portfolio, which is now pretty much gone now. Walnut Street and discontinued is pretty much gone now. So we have much more room to have real estate risk in our portfolio. But what's happened through the securitization where our bonds actually trade in the marketplace was that everyone became very, very interested not only in the securitizations but they -- the next question both high-end real estate firms, but also the top-tier banks all looked at our loans and said, "Hey, why are you -- what are you doing? So where did you come from? We'd like to purchase your loans maybe and do things with them because we think they're high quality." So that created a whole other channel now to distribute that product. So we think we're going to be doing that this year. Now that we have a securitization brand, we'll probably sell whole loans which are great for us because we don't have any future risk to the loan, obviously. We don't have any prepay risk. We don't have any -- and we -- in a few instances, we kept our LIBOR strip. So it gets rid of all the risk and it has a similar gain. So it builds another channel to distribute those loans. So that's where we are on that.

Okay. And then on the GDV growth, obviously, just continues to accelerate in the year-over-year growth. Would you guys be willing to give any sort of detail on concentration there? Like if I think about your Top 3 contributors in terms of partnerships or your Top 5, like what sort of contribution, what sort of percentage of that growth is being driven by that concentration?

Everybody would love me to do that. So I get a question on that, I don't know, three times a day. And it's not only you, it's investment bankers and analysts, and they all want our information because they want to back out a market participation map in the industry. And we're reluctant to do that because we're not trying to pick winners or losers. The minute that we do this to the right detail, you're going to back out exactly what each company is doing. We want those companies to be able to report their own progress. We don't want to front-run anybody. And we don't want anybody making assessments of success or failure of companies based on our information. That's why we don't do it. We thought about it, we may do it in the future in higher level categories. But we've sat around and said, "Okay, let's do it this way and then brainstorm it. Okay, there's enough information to back something out now." So we're very reluctant to do it. We're reluctant to do it because we don't want to front-run anybody's -- and it's very -- it can be misleading. It can be very bumpy, people are in different stages of growth. So comparing one company to another depending on their life cycle, and we don't want any of that information which we think is strategic. That math that we would produce is very strategic because were the number one provider of prepaid in the United States. We're the number 8th or 9th issuer of debit cards. There's a lot of -- and we broadly participate across the fintech and other product categories. So we're reluctant to do that, but we -- it's under advisement. It's every -- I'm going to say the same thing every quarter. It's under advisement. We're trying to get to a level where it's meaningful enough to you that it doesn't irritate you, but not too meaningful. You start doing exactly what I think you're going to do once we give you the information.

Fine. But the indication then is that the concentration is high in terms of your top partners.

Well, it's not as though. It's extremely diversified and our top 20 programs is about 80%, but there's a lot of diversification in those programs. So this is another thing. The things that you might think are true because you have one -- we don't want to change -- we don't want to be the people changing people's expectation. All I can tell you is that, yes, we have some concentrations, but they're not -- they can't jeopardize the growth of the portfolio, let's put it that way. And they're not -- and it's fairly -- if you look at the top 10, it's very diversified. If you look at the top 20, it's even more diversified. So 60 in the top 10 and about 80 in the top 20. But they're new programs, are all long-term contracts, they're long-term relationships. There's going to be new programs coming on over the next year that we'll announce that are, I think, will be significant to future growth. All those things will continue to drive GDV, as we've said, at least 20%. But we're talking about probably like it was last year, as we're seeing in January, in the 30s. That's something that looks pretty solid for 2020.

Great. Well, I think you're kind of giving some of the concentration there by saying the top 10 is -- I think you said 60% of growth you're talking about?

No. Yes. I'm not giving you category, though.

No, no, I'm not asking. If you could give Top 5, what percentage Top 5 is, I think that would be helpful. And I wouldn't -- I don't think if people know how the percentage of Top 5 are, I don't think that's going to help anyone back in due lot. So I think that would be helpful.

I don't think that would be that helpful to you guys. But we can -- what we [indiscernible] the top 10 programs and show maybe category. Maybe we'll do that for top 20. We'll put that under -- now we're going to put that under extra special advisement for 2020.

Okay. All right. We'll see what it does for 1Q. But -- so the top -- but you did say the top 10 partnerships drove 60% of the growth, right? Is that...

It's a little bit less. Oh no, I'm talking about the concentration. So the -- but it's also true about the growth most likely. So it's in that range.

Okay, and then just finally, on the -- on your comments about the next several years here in terms of innovation, in terms of investment, does -- 2020, you've given guidance for, I'm assuming we're still ways away from getting guidance for 2021. But as you think about growth and you think about investing in the future, I mean, do you expect that to -- is it reasonable to say that there's additional investment that could slow your rate of growth in 2021? Slow it more than your long-term EPS growth expectations? Or is that...

No, no, no. So we put long-term targets for our new -- when we did our new business plan, we built in plenty of expense to take -- we went to a fairly detailed level because we're actually changing our operations and technology platform, not for current but for where it's going to be in the next 5 to 10 years. So there's a lot of investment that's already gone in. But we scoped out very carefully what that's going to take for the company to actually realize the long-term target of a 20% -- or 1.75% ROA. We're fairly confident, like we were confident -- we're more confident in the Phase 2 business plan than the Phase 1. You know where the company was in Phase 1 in 2016. That had a lot of things out of our control, period, out of our control. Like when you're seeing derisking a bank and you've got a bank with $150 million of revenue, $220 million of expense, that is a more risky business plan. For those of you who haven't remediated a bank where you have consent orders and SEC investigations, you're going to have to take my word for it. The Phase 2 is all about growth. We've -- what's amazing is that de-risking the bank, we sustained this amazing growth through the last three years, and it's accelerating exactly at the time like the Talea platform for the SBLOC or we're reengineering the back end of the leasing business or we're changing our ops and tech platform. We've -- just for example, FCRM, we built this center of excellence, where we took all four sanctions tools and turned it into one. We fully implemented our process and now have, we believe, we're at the precipice. We've already -- we believe we've got the best or one of the best FCRM capabilities in this neck of the industry. So we think we're going to move forward on the regulatory issues. So it's -- we're in a much better place than we were three years ago with the first business plan. But remember, the first business plan took a company that make no money, that's now making a 13.5% ROE run rate. And looks like next year, our target is a 15% ROE, right? And I'll tell you, as a CEO, I'm much more comfortable in Phase 2 than I was in Phase 1. That's the only way to explain it. It's more exciting, it's more fun, but I'm more comfortable with the dynamics of the business than I was three years ago.

And we do have a follow-up from William Wallace from Raymond James.

I didn't figure out how to get out of the queue, I'd hop in. I wanted to push the issue that Frank was bringing up about the concentration in the prepaid business. You're right, I think there are some investors that are trying to back in to the growth in some of your clients. But there is -- there are other investors that are trying to figure out how much concentration risk there is at The Bancorp with 1 or 2 customers representing x percent of the revenue in the prepaid line. So any clarity you give there, I think, would help the interest of you as stewards of shareholders.

Yes. And I'm telling you, there is not an over -- I'm going to be very clear. There are people that always make comments. They see things in marketplaces or they want to manipulate the market maybe. And they'll make comments about things that are -- that could appear to be true. But I'm telling you, they're not. We have great diversification across our programs, we have long-term contracts, we have an amazing pipeline as we're telling you that the GDV growth is going to be supported through 2020 and beyond. And it's easy to latch on to 1 or 2 like you can latch on to Venmo too and say that's driving all our growth because it is PayPal after all. You can do that. Or you could say, you can look at our FSA business and say, "Oh, that must be the driver." But what we're saying, it's not -- it's gift cards. It's not just FSA, it's just not the fintech. While fintech is exciting, and that's where we've really been able to have a beachhead, that's not the only product category. We're also in government cards. In this technology, we're also in direct rapid funds, where we're the early adopter and one of the leading providers in that area. There's lots of legs. We're not on a three legged stool. We're on a 15-leg stool. It's not -- there's not one program driving the success of this company, and it's also a bank. So it's not one -- the fees for this quarter were $17 million, but what was the interest income? It's double that, right? So there's a lot of opportunity across the board. There isn't one company driving the success of The Bancorp. There's not one company that's jeopardizing the sense of The Bancorp. We applaud the success of every one of our partners. And we hope to continue to have healthy building and expanding relationships with every one of them. And we'll put that under advisement, special advisement.

Extra special advisement. I like that.

Extra special advisement. But once again, I don't want you to back it out and then everybody asked me about these 2, 3 fintech companies and what their growth rate is. So we will...

That's right. But you're saying pretty clearly that it's not 1 or 2 or 3 relationships that are driving revenue, and that whatever information you can give to help us as analysts and investors see that, then hopefully, that would help provide support to valuation allowance.

So we unfortunately have perfect knowledge, and the market doesn't, let's put it that way. We have perfect knowledge of what these companies are doing, we have perfect knowledge of their financial statements, we have perfect knowledge of their volumes, we have perfect knowledge of their account size, and it's unfair for us, unless we were to tell everybody everything about everyone, which would be also strategically damaging to every one of these companies, it's not fair for us to pick and choose and to validate or not validate people's understanding in the marketplace is extremely broad. Once again, we're doing -- January, we'll probably do over $7 billion in GDV on these cards. It's extremely valuable information, and we either share it or we don't. And we're just reluctant to share it too much. And maybe like we said to Frank, we'll give you very general things without saying anything specific.

Yes. I think that would be helpful. My last question since I'm on. On the expense level, you finished up the year, the last two quarters at kind of adjusted run rate around $40 million. You've got one more securitization coming in -- I'm sorry, not securitization, loan sale coming in 2020. What's a run rate expense level that we might anticipate? And I'll back out after that.

Well, that's giving you the answer. But it will be a couple of million more than it was if you add everything, if we get the -- let's put it away, if you end up with the target of $1.34, it will probably be a couple of million more than it was on a run rate this year. And that's for -- it's mostly on the -- we have -- it might not be because we do have some saves, potential saves in there, but it will be -- it won't be a lot. We're talking, once again, the jaws, I'm going to go back to the jaws. We're talking about if the revenue is 14%, the expenses will grow 4%. If the revenue is 9% growth, you're probably not going to get any expense growth. That's the way to think about it. So if you put those estimates that we've already given on the phone and inside our presentation obviously, and understand that if you model out an upside or downside case, you should be able to figure out with that jaws information, what's the potential of the company is. Once again, we're comfortable with the target of $1.34. And in that case, where we meet our revenue expectations, you'll see that jaws and you'll see growth of a couple of million more on a run rate quarterly basis than we had in 2019. Was that good?

Yes.

[Indiscernible] without paying anything.

We do have a follow-up from Frank Schiraldi.

Just the more technical, I guess, question on just looking at the margin, and obviously, the excess liquidity that helped drive that margin down. You got the CDs on the books. Paul, you might have mentioned something about this, but certainly in the past, you've talked about short-term CDs being used to fund the CRE growth. And they were still on the books at the end of the quarter and we're driving a negative spread, I guess, funding that cash on the book. So just kind of curious why you kept that on through the quarter. And if you can kind of talk about the average deposit growth year-over-year was a lot lower than the end-of-period growth 4Q-over-4Q.

Well, we wanted to make sure that we had the good primary liquidity at the end of the year, like it's good for every bank to do. That number's like a cleanup period. We want to make -- but we also -- it actually foretells that we expect significant growth to cover that primary liquidity in the first quarter. So you have to think of it that way. Why do we have excess liquidity at any time. We're managing the bank as an enterprise, and we expect that excess liquidity to be used in some way.

Yes. So Frank, one of the things that you saw in the increase in the average balance and the increase in the CRE loans originated for securitization or sale is it's not that easy to determine the timing of those closings, but at the same time, we're really closing hundreds of millions of dollars in any given monthly period. So to some degree, we decided, because we were surprised very honestly that we had such robust demand and we were able to generate these numbers which were beyond expectations, we actually added liquidity in advance of that just to make sure that we had more than -- just to make sure that we maintained our consistently high historical levels of liquidity.

Okay. I mean just the last thing on that. It seemed like the short-term borrowings would be a cheaper option. Just wondering, I mean, the CDs don't bring anything along with them other than the funding, right? I mean they're not -- they don't -- they're not customer-related at all?

That's a very good question.

Good question.

That's a very good question.

That's a very good question, and it's one that we consider when we make those decisions. It's somewhat of a balancing act. As Damian said...

And we do borrow at other time of the year but into the end of the year going into the first quarter, too.

Yes. So we like to -- the cost differential is in terms of the interest cost is actually the FHLB charges 25, 35 basis points over daily Fed funds rates and the brokered CD market, which is what we used is very close to that actually. So -- and there's no big difference in the interest differential. What you do have is a difference, as I'm sure you're aware, like the FHLB you can do daily, but we decided for liquidity purposes, we wanted a balanced balance sheet. And so we thought that a modest amount, less than 10% of our total assets and CDs really presents a better liquidity posture. But it did have a modest impact on the net interest margin. The other thing that happened in the fourth quarter, we actually got more toward the end of the year in deposits than we thought we would.

Yes, from the regular business, yes.

From the regular business. So I mean, if we could totally predict the future, we might have done things slightly differently.

We always -- we never play it -- we're not a bank that has 5% or 9% primary. We don't -- we're a low-risk bank, right, so we're low risk on our -- definitely low risk on our lending portfolio and our investment portfolio, period. We have higher than peers in liquidity, we have lower -- we're not -- we're high asset sensitivity, low liability sensitivity. We're kind of the anti-bank, and we want to run the bank long term, low risk. And we don't -- we're not trying to use the bank as a hedge fund. So we take reasonable -- knowing our business mile, we make reasonable decisions throughout the year, whether it's borrowing or at the end of the year deposits in order to match the low-risk profile of the bank. We don't take a lot of duration risk and we don't take a lot of interest rate risk to be -- and obviously as we build our portfolio from the 40s to the 50s to the 60s to the 70% loan-to-deposit ratio, we're going to be taking on more of that risk, but in low-risk businesses. But obviously, that will expand the interest income substantially and the margin substantially, so not net interest margin but the operating margin. So we sit down and talk about those all the time, but we don't have -- when we think we don't know is when we go conservative, and that's why there was more deposits rather than borrowings.

And that does conclude the question-and-answer session for today's call. I would now like to turn the conference back over to Damian Kozlowski for any closing remarks.

Well, I'm hurt that there's not a third follow-up. But I want to thank everybody for joining us today, and we're looking forward to a great 2020. We had a really great year in 2019 that we really put a lot of things in place. We were so happy to see the growth in our lending businesses, but also the GDV growth, and we're really excited about 2020. Throughout the year, we'll be making announcements about new programs and new relationships and extending relationships, so we look forward to presenting those in the marketplace when they become active. So thank you so much for joining us today.

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