Bancorp Inc (TBBK) 2013 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and fiscal 2013 The Bancorp, Inc.

earnings conference call.

At this time, all participants are in a listen-only mode.

At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

(Operator Instructions) As a reminder, this conference call is being recorded today, Friday, January 24, 2013.

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

Over to you, Andres.

Thank you, Gary.

Good morning, and thank you for joining us today to review The Bancorp's fourth-quarter and fiscal 2013 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer; Frank Mastrangelo, President; and Paul Frankiel, 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 12:30 p.m.

Eastern Time today.

The dial-in for the replay is 888-286-8010 with the confirmation code of 20461868.

Before I turn the call over to Betsy, I would like to remind everyone that, when used in this conference call, the words believes, anticipates, expects, and similar expressions, are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements.

For further discussion of these risks and uncertainties, please see The Bancorp's filings with the SEC.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect occurrence of unanticipated events.

Now I'd like to turn the call over to Betsy Cohen.

Betsy?

Thank you very much, Andres, and thank you all for joining us today.

We're delighted to be able to report to you what we consider a very solid quarter in the fourth quarter of 2013.

Some of the highlights reflected both in the press release and in the increase in growth in the Company, I think, are very much in our favor.

We have indicators not only of trends, but also of solid achievements.

Earnings per share was up 32% -- were up 32% even after a 13% increase in the average number of shares outstanding on a fully diluted basis.

Operating earnings of -- on a quarter-to-quarter basis, 2012 fourth-quarter to 2013 fourth-quarter, up 21%; and for the full-year 2012 to 2013 up even more at 41%.

We've been talking to you, over the course of the last several years, about our intention to enhance what we think is the quality of earnings.

And so, one of the measurements that we use is noninterest income as a percentage of net interest income plus noninterest income.

And so, in 2013, that ratio was 47% of that total being noninterest income -- or another way to express it is noninterest income represented 88% of net interest income, even after the growth of 15% in net interest income.

Over 2012, that number -- in 2012, that number was 24%, and the comparable number was 70% as opposed to 88%.

We think both of those are indicators of growth within our core businesses and, as I will talk about in a minute, a sign of diversification of our noninterest income stream.

During 2013, we concentrated on augmenting the streams of noninterest income, diversifying that portfolio of noninterest income.

And thus, we have certain elements to report.

For example, ACH, both volume and fees, were up 80% over 2012.

And for our CMBS group, we really only began our securitizations in the fourth quarter of 2012, and so we can't give you a year-to-year comparison.

But in Q4, for example, they were essentially equal to Q3, and we see very strong pipelines.

And the spreads within the CMBS market, although subject to external factors, appear to continue to be strong.

Last quarter, we further discussed with you the fact that we were adding services as part of our prepaid income reported to you.

And so, this quarter, as promised, we reported Gross Dollar Volume, GDV.

And for the fourth quarter, earnings were 15 basis points on that GDV as opposed to 14 basis points in the third quarter of 2013, and 13 basis points for the fourth quarter of 2012.

So we have made progress.

On the other side of -- on the asset side of the balance sheet, investments continue to grow, and we, therefore, are able to have some further diversification within that portfolio.

Loans were flat as a result of several very significant anticipated paydowns during December of 2013; however -- growth in our commercial loan portfolio.

However, growth in our targeted segments was still very strong.

And additionally, one might note that net interest income, as I had mentioned before, grew 15%.

Return on average assets was up 27%, while average assets themselves were up 17%, and return on average equity was up 17%, while the average equity was up 21%.

So, both of those showing that we are maintaining our growth as a result of our increase in average assets outstanding or equity.

On the asset side, we are looking forward to the launch, as we have been discussing, of our deposit sales program, probably at end of first quarter or beginning of second quarter when we have our most significant need.

On the loans delinquency side, non-accruals were down from $48 million to $40 million.

90-days-plus is down to a bare minimum $110,000.

We had a loan transition into the 30 to 60-day category as a result in a change in manager and a missed income payment, which meant that the totals did not reflect the very significant decrease in non-accruals -- $48 million to $40 million.

On the expense side, roughly 8% to 10% of our personnel expenses are commissions.

And so if you take a look at the growth in personnel expenses, it really has to be evaluated in terms of the significant growth in noninterest income, which is producing.

In Europe, we accelerated expenses in the fourth quarter -- actually, I think in the third and the fourth quarter -- so that we could complete all of our passporting by Q1; at the latest, Q2 -- which involves upfront expenditures.

And during 2014, Europe, which was being built out from an infrastructure point of view, both passporting and personnel and a platform was negative to the extent of about $3 million.

And we would expect that to turn to breakeven in the second or third quarter.

To talk a bit more about noninterest income portfolio, I would ask Frank to chime in.

Well, thank you, Betsy.

Thank you for joining the call, everyone.

Q4 was as normal a relatively strong quarter from a noninterest income standpoint.

The Bank achieved 40% year-over-year increases in total noninterest income.

Betsy's already touched on some of the drivers.

(technical difficulty) Q3 income increased 20% year-over-year.

The CMBS team contributed, as Betsy mentioned -- really, not measurable as a percentage year-over-year, but contributed $4.6 million of noninterest income for the quarter.

And merchant income, which is inclusive of both the card and ACH transactions that Betsy had noted earlier, were up 47% year-over-year.

So, lots of contributors to the continued very strong noninterest income growth.

I think that -- thank you, Frank.

I think that all of our verticals appear to be growing.

We suggested to you earlier in the year that in light of the introduction of Obamacare, we were not able to really make a prediction about healthcare, but it continues to be a very healthy business.

And if anyone can figure out what people are going to do in healthcare, please do give us a call.

I think, with that, I would like to open the floor to questions.

(Operator Instructions) Matthew Kelley.

So, could you just give us some insights into where you are in the credit cycle?

Is this the inflection point we've been waiting for?

We've seen provisions go from $9.5 million to $8 million to $6.5 million.

Is this the turn on provisions?

-- would be the first question.

Well, let me answer them one at a time, Matt.

So if you'll remember your other questions.

You know that we don't make that kind of prediction.

We believe that we have been aggressive in identifying credit issues, and so we think that we are getting ahead of the game.

And so, that's as much as I will say on that.

Okay.

What about just the tone of inflows versus outflows resolutions?

Maybe just give us a sense of how you feel this year about credit compared to when we spoke in October?

Well, I think that the disposition cycle is always a long one.

It takes time to take a project into the -- either into OREO and identify it as nonaccrual, and then to craft and complete a disposition.

You know we look to a 6 to 9-month cycle for that kind of achievement.

So, I think that as we -- we do believe that there are, in process, transactions which should reduce both the existing non-accruals and existing OREO -- or those that are on the books today -- within that period of time.

So, we're optimistic that that's in process, but giving you a timetable is just not something I can do.

Okay.

And then a question for Frank on the prepaid business.

So we booked $31.5 billion of GDV for the year.

What type of growth rate do you think we'll see in 2014 on your domestic US prepaid operation?

And then how much of a lift do you get from the European operation as that comes in?

Maybe you could split those two apart.

Yes.

I think it's tough to call what the lift will be in Europe right now.

You know, 2014, as Betsy said, I think will move European business to a breakeven position.

That will be a combination of the expense load will decrease, because there's been a lot of work going into licensing and passporting the past two quarters here; and then secondly, by the ramp in some business.

But that's not going to move the needle that much from an overall GDV standpoint.

In the US, I mean, we'd anticipate a -- it's going to be an upper-teens to low-20s growth rate, we believe, in calendar year 2014 -- just for the industry overall.

And we'll probably be benchmarked somewhere in that range or slightly above.

And the 15 basis points this quarter, I mean, is that a new run rate we can use?

Or do you think it -- is that going to call the 14 or --?

I wouldn't expect it to be a run rate.

I mean, you've seen it's bounced around quarter to quarter this year.

Last quarter, it was 14 basis points.

While certainly it is 15 this quarter, it was 14 last quarter.

I don't think we can call it -- you can call it a run rate.

I mean, we still have -- there's still competition and challenges maintaining margin and things like that.

Certain things we are doing to offset that in the short-term have been working, but there are still pressures on margin that could make it difficult to maintain 15.

Okay.

You know, Matt, it's also a factor of what kinds of new growth come into that portfolio.

If it's from larger customers, there's pressure -- more pressure on the margin; if it's from smaller customers, less.

And that's a very hard thing to predict.

Okay.

And then the pace of securities purchases was pretty robust, kind of accelerated from 3Q.

Can you talk about the pace going forward?

And then what you bought during the quarter, you know, new yields and then types of securities?

Sure.

Paul?

Sure.

I would really direct you to our last Q where we break down the sectors that we have.

And we pretty much stayed within those sectors.

We are very opportunistic, so we are looking for value.

If you're in the securities markets on a daily and weekly basis, you see that, as a result of supply and demand and other factors, you really have to search to find value.

So, we actually expanded virtually all our sectors last quarter.

Our rates are down a bit now, but we're looking -- now we're looking at more variable rate instruments.

And we'll continue to grow the portfolio, so you'll see -- you should see a net increase in income every quarter.

And what was the average yield for the fourth-quarter purchases?

Oh, they varied, but I would say they were in the 2% range.

Got you.

I'll hop off (multiple speakers) --

(multiple speakers) We're mindful of the fact that we still are in a -- will be facing a new Fed Chairman, that unemployment was down a bit; that the factors which lead to higher interest rates are uncertain at this moment.

And so we are protective, both in the -- as Paul was saying, in terms of investing in floating rate instruments, which don't yield as much on a current basis, and in keeping durations short, so that we're not caught in the spike.

So it's a balancing act of barbell portfolio.

Got it.

I'll hop off and let some others ask questions.

Thank you.

Frank Schiraldi, Sandler O'Neill.

Just a few questions.

First, on just on -- trying to think about modeling for 2014 with the deposit sale program up and running, as you noted Betsy, perhaps by the end of the first quarter.

So how do we think about balance sheet growth year-over-year?

Do you think -- is it the goal to keep the balance sheet sort of flattish with this deposit sale program being implemented?

Yes, you know, I can give you our aspirational answer, and then tell you that it's almost impossible to predict.

Remember that the program will be new, and so, we have not yet measured market demand.

We happen also -- we won't be able to size the sale bucket until we see the inflow of deposits.

So you have unknowns on both sides of that from an actual basis.

Our continuing goal is to keep the Bank someplace between $4 billion and $6 billion on an ongoing basis.

How that will play out quarter-to-quarter with this sale program is really very hard to predict at this time, Frank, because it just -- we have no history with it yet.

Right.

Okay.

And then do you think -- I mean, as you look at implementing it, do you see significant hurdles there to implementation?

Or are you confident that you will be able to get it up and running in some meaningful fashion this year?

I'll pass that to Frank.

I'm confident we'll have it running in a significant fashion this year.

Okay, great.

And then, Paul, I just wanted to ask, I might've missed some of your comments on securities purchases last NII.

Did you note -- it's always tough, with liquidity coming in and off the balance sheet with some of the seasonality, to guesstimate the margin quarter-over-quarter, but did you note that you expected NII to be up sequentially from here?

And did you give -- I don't know if you gave any -- I don't think you gave any numbers, but is that what you said?

Or did I -- am I wrong there?

No, we didn't talk about the margin in it, but we are -- obviously, we're working on strategies; specifically, really, the loans that Betsy had mentioned that we targeted, that support the interest margin.

And obviously, that's our goal, to increase it.

The markets in terms of securities, obviously, the yield curve has got to cooperate, and we've got to continue to manage to low interest rate risk.

But we are doing our best, but we're not really predicting that now.

Okay.

And then, Frank, just back to prepaid growth.

And you mentioned high-teens, low-20s sort of growth rate for the industry.

It doesn't sound like that's changed all that much from your comments on industry growth last quarter.

And I wondered if -- you said -- I think you said you can continue to outstrip that.

And I just wondered if, in thinking about the magnitude of outstripping that number, if the GDV growth year-over-year -- which I think was about 26%, 27% -- if that might be a better indicator for growth going forward than the 20% fee -- prepaid fee growth year-over-year?

Yes.

So, GDV growth was up 26% year-over-year.

So, you know that certainly did outpace the, I think, the industry growth rate.

And then the reality is, it depends on which relationships grew and how much revenue is driven related to how much noninterest income will grow year-over-year.

So, I mean, GDV is certainly one indicator of our ability to continue to outpace the growth of the market.

Okay.

And in the past, you'd also mentioned that prepaid might be growing a certain percentage, but there's other ancillary businesses that are similar you're doing that aren't necessarily captured in that prepaid growth number.

I mean, is that really --?

Yes, we're talking about 18% to 22%.

We're really talking about there is general-purpose reloadable growth in the US.

Because there are already other sectors of prepaid, for example, that grow at far slower rates than that.

Gift cards in the US, for example, grow at 9% to 12% year-over-year annual growth rate, because it's a relatively mature sector of the prepaid business.

There are other sectors in prepaid like that also, that are far more mature and far more established, and grow at far slower rates.

The people we're normally talking about -- we've been talking in the past about this 20% -- 25%, 30% growth rate that's now slowed, call it, 18% to 22%.

We're talking about general-purpose reloadable growth, which has been the fastest growing sector in prepaid over the past handful of years.

Okay.

So -- but when you're talking about prepaid processing fees, that line item, if we're thinking about growth there, you might think of a lower bogie than that?

Because, obviously, general reloadable doesn't pick up the entire pie.

No -- well, it doesn't.

I mean, we -- I believe we'll continue to grow our -- because of, then, the other items that are growing faster that are not in -- that are also not in GPR.

You know, so all the mobile wallet initiatives and things like that.

I believe we can continue to outpace just the general GPR growth rate.

Okay.

Okay, that's helpful.

And then, just following up on mobile banking, the idea of moving from card-based payments to mobile-based.

And as you look at that now, I mean, how far out is that in your opinion until that begins to take hold in a big way?

I think that's the $64 question for the world as opposed to for Frank individually.

I think -- or maybe for the US.

US has lagged in terms of access or accessing, consumers accessing and using their mobile phones as their primary source of data communication.

And, in part, it's because the US is a more mature computer-based or Internet-based market.

T-Mobile has been working on this project for a very long period of time.

And what the adoption curve will be is probably more optimistic today than it would have been if it had launched two years ago.

But what exactly it will be, I think, is really an unknown, Frank Schiraldi.

Okay.

All right.

I guess I was just trying to get at if you're positioned in a way that I think, Frank, you spoke to that growth in some of those businesses is -- could be even greater, right?

So if you're positioned in a way that that could help support your 20%-plus growth rate going forward.

Well, I think that that's not what we're counting on.

We're looking at our traditional business.

So, T-Mobile and other opportunities, because you may or may not remember that we've been talking about investing in our capacity to support mobile banking for long periods of time, and recognizing that it was an area in which we needed to invest -- which, in our case, means expense investment.

Early on, to hold our market position, we have been investing in it.

We have been holding our market position.

This is an indication of that and what we think of as the wisdom of that strategy.

But, as we cautioned all along, it will be -- it's hard to predict what the adoption rate will be and, therefore, the income impact over time that will be very positive, we believe.

But the exact timing of that is really unknown.

Okay.

All right.

I appreciate it.

Thank you.

William Wallace, Raymond James.

A couple of questions that I have.

First, I wanted to talk a little bit on the fee income side.

We've talked a lot about the prepaid business.

I was wondering if we could get a little bit of color on the commercial mortgage bank business?

Can you talk to what the fee income was in that business this quarter?

It was about $4.5 million, which was about equal to what it was in the third quarter.

I think that we have been -- remember this is a business which is only maybe 15 months old.

And so, we have been making enormous progress in terms of both the stability and the growth of our pipeline.

Again, it's a -- in terms of predicting what the spreads will be in that market, neither we nor God, I guess, can do that with any certainty.

We can tell you that the spreads will also be dependent upon the mix within that portfolio, large versus -- larger; we don't do large -- but larger versus smaller loans.

So -- and asset type.

So, any one quarter is hard to predict, but we believe that both volume and revenue from that segment will grow over the course of this year.

And so will that -- (multiple speakers) is that a --?

I know that was not a helpful answer.

I'm sorry, Wally.

Well, it's somewhat helpful, but maybe we could dig a little bit deeper.

Is that -- do you need to -- it looks to me like perhaps you did two big securitizations in the quarter, and that's been what you've done the last two quarters.

Can you do $4.5 million to $5 million a quarter in that, with who you have in staff now?

Or do you have to hire more productions to maintain that level outside this point?

No, no, no.

Our current level is very maintainable.

And indeed, the growth that we're talking about is sustainable with -- I'd say with our current staff, it may mean one lower-level position gets added or -- but we don't need any high-level people to continue.

We have senior people in place.

And then if I look at your loans held for sale on the balance sheet, you had a significant upward move in that this quarter.

Does that mean you're setting up, perhaps, for a pretty strong first quarter?

Well, I think that we believe that the pipeline is strong, as I said to you.

And one reflection of that is what's on the balance sheet and not sold as of the end of the year.

Okay.

Okay, thank you for the color there.

And then on the expense side, Betsy, in your prepared remarks -- and then, Frank, you referenced it as well -- you mentioned that you accelerated some expense in Europe related to licensing and passporting, which -- I'm trying to get a sense maybe if you could help quantify that, so we can get a sense as to maybe what some of the relief might be moving into 2014?

Well, I think we gave it to you on an annual basis, because that's really the way to look at it, is what we've spent to get to where we are.

And I think that if you divide it by four, you'll be high some quarters and low others, because it's not a cookie-cutter expenditure.

What was that annual expense number?

I missed it in the prepared remarks.

I apologize.

I'm sorry.

About $3 million for 2013.

And that's the -- what was accelerated?

Or that's just what you spent to get to (multiple speakers) --?

Oh, no, no, no, no.

That's what we spent.

And so I'm saying to you that it's hard to predict what exact expense will fall within what quarter.

We've been trying to move it forward to get it done quickly.

That increased anticipated expenditures and I can't give you that number off the top of my head for this quarter.

I just don't have it right here but, Wally, I'll get it to you.

That's fine.

I guess what I'm trying to get a sense is -- so that $3 million is expense that goes away now?

You don't have that, so you just have (multiple speakers) --?

No, we will have expenses in the first and probably in the second quarter.

We're looking at breaking even toward the end of the second quarter, but you won't see that until the third quarter.

So, expense relief will be the second half of the year.

It probably will not run at the same rate for the first half of the year, but I don't have my arms around exactly what that number will be.

Okay, fair enough.

And then I guess the last question I had is going to the loan portfolio.

You referenced some large expected payoffs during the quarter.

Maybe if we forget about the payoffs and look at the production during the quarter, how did that trend -- has that been accelerating nicely as the years progressed?

And do you expect that to continue into 2014?

Yes and no -- or yes and yes, I'm not sure which.

During 2014, we will continue what we think is our growth within targeted segments of the business in SBA, in wealth management, in leasing.

And we see our way clear to having those segments grow.

We have said to you in the past that we believe that, barring opportunities, we may not see growth in the commercial sector, which we think is part of our plan that the alternative to that is to find additional verticals like those that we've identified to date -- SBA and leasing and wealth management, and (technical difficulty) add to our portfolio of targeted segments.

We have our arms around a couple of those, but have not yet launched them.

So, we anticipate total loan growth will not be diminished, but it may be diminished in some categories and increased in others.

Okay.

Fair enough.

And then the last question I have relates to that is -- as you target the loan -- the growth in these specific segments, will the yields on those loans drive the increase in the yield of the total portfolio as some of the commercial balances run off?

Well, in SBA, the yields have been in the 5% to 6% range, and leasing in the 6.5%-ish range, so we're targeting our higher-yield, lower-credit expense segments.

We've had significant growth in the Wealth Management portfolio during the course of this year, and anticipate further growth.

Although that's a lower yield, it's been for us, over the last six or seven years that we've been doing it, virtually a zero (technical difficulty) a good -- and you can see Frank is not feeling well -- a good risk-adjusted yield for us.

And we would hope to continue to grow that piece of the portfolio during the course of this year.

Okay, fair enough.

So a lot of it will depend, then, on really if that growth is outstripping the SBA and leasing loan growth?

Right.

Thank you.

Appreciate it.

I'll let somebody else hop on.

Andrew Wessel, Sterling Capital.

So I had a couple questions.

Just, Frank, I guess the fee revenue breakout, can you give those numbers for the fourth quarter?

I know you said CMBS was $4.6 million because merchant income was up 47% year-over-year, but what was merchant income for 4Q?

Yes, merchant income was $1.1 million for Q4; prepaid was a little shy of $11.7 million.

$11.7 million, okay.

And thanks for adding the GDV for the bottom of the press release.

I think that's helpful.

But can I get the full -- what are the actual GDV numbers for year-end, for total of 2012 and 2013?

Because I know you gave the percentage growth, but I don't know what the actual numbers were.

Hold on one second.

(multiple speakers)

In the press release, you have the last three quarters beyond the first quarter.

Oh, I'm sorry.

Okay.

The GDV in Q4 was $7.7 billion.

Q3 was a little shy of $7.2 billion (multiple speakers) --.

Right.

So you have all those numbers in there, but just for the actual year, for all of 2013 and all of 2012.

Oh, I apologize.

You know what?

I don't have that right in front of me.

I can email you that.

Great.

Yes, I'll just follow-up with you, thanks.

And then just the last question on -- looking out, just taking a step back on expenses, right?

So you've got -- Europe spend is going to fall off a little bit.

You're still growing the business, so that's great.

But just as you look out, you've taken on some pretty big -- Europe was a pretty big endeavor, I'm sure, internally.

And then a lot of focus and a lot of -- a decent amount of spend there.

But barring kind of an opportunity of that magnitude that you come across going forward, what would be -- how can we kind of conceptualize what you expect your efficiency ratio to be as a kind of -- I don't even want to use normalized, but something that you kind of year-over-year was about flat.

Now that was on pretty good revenue growth.

But so, at [61.5] we counted there last year, you had a lot of improvements the years before -- over the years before, due to, again, that revenue growth.

But what do you see as kind of a normalized expense base?

And how can we think about that?

Can we get to the mid-50s?

Is that ridiculous?

I mean I don't know how your organization is set up.

Frank, are you -- I'm sorry (multiple speakers) -- if -- maybe if you could just rephrase the question a little bit, please.

(multiple speakers) Okay.

Sure.

If we're looking for normalized efficiency ratio, I mean, (multiple speakers) just as your franchise is set up, barring some opportunity that you see that's a great thing to go after and you want to spend money on it, but just (multiple speakers) --

(multiple speakers) Yes.

No, no, no.

I think that what we have tried to do is move away from your traditional efficiency ratio to share with you the relationship between noninterest income and expense.

And so that ratio has moved up significantly.

We're covering -- I've lost the figure here, but I will get it in one minute -- we are covering a significantly greater percentage of our noninterest expense with noninterest income.

I think in 2012 that number might have been in the 50% range, and in 2013, in the 70%-plus.

So that's how we're -- it's a measure we think is more appropriate to our organization than looking at the traditional efficiency ratio.

Yes.

No, I totally respect that.

And I think revenue growth obviously gives you the opportunity to reinvest in the business.

But we're looking at expense growth 2011 was like 17%; 2012 was 22%; 2013 was 26%.

And again, you've grown revenue aggressively against that.

So you have had operating leverage.

But you know if you look out and you try to value cash flows, right?

Like we can't put on (multiple speakers) revenue growth rates forever.

(multiple speakers) That's way -- no, but that's why we've looked at what are we producing as a result of those increased expenditures?

And so if we take a look at total expenses, and we take a look at total noninterest income, and that ratio of coverage continues to grow, we believe that we are making expenditures which are generating a positive income relationship.

That's another way of expressing what we think is less applicable to us, which is that traditional efficiency ratio.

Sure.

So this year then, taking it from that way, it was 74%, at least by the numbers I'm using.

You covered 74% of your OpEx with noninterest income.

And then last year, it was 56%.

So that was -- from 56% to 74%, that was a huge move.

Is there a point where you think you have the -- and again, positive operating leverage -- but is there a point where you think you're covering all of your operating expenses just with noninterest income?

Well, that's an aspirational goal.

That's been our goal.

We've been moving ourselves up over the course of the last couple of years.

One must remember that a certain component of personnel expense, roughly 8% to 10%, is commission, so we will have expansion of that magnitude -- not of total expenses but personnel expenses -- related to the increased generation of noninterest income.

But our aspirational goal is to move it to 100%.

We moved it from 56% to 74%.

We may be able -- we may not be able to make that kind of leap next year, but we believe that we will be moving that number up.

Okay.

Great.

And can I just get that compensation -- do you have the number for compensation for 2013?

Paul, I'm pulling this out of my memory.

The personnel cost was, I think, $53 million, of which $4 million was commission.

All right, great.

Thanks so much, guys.

I appreciate it.

Jeffrey Bernstein.

I had a couple of $64,000 questions for you.

So I'll try to answer every one.

I wanted to see if we could just get an update on the evolution here of private exchange kind of provider market, and where you guys are playing?

And (multiple speakers) --

In healthcare areas?

Yes, HSA's.

Yes.

And if you could talk about kind of how you see things rolling out next year?

I understand you've already said you think this is more of a 2015/2016 opportunity in terms of financial results for you, but how do you see the kind of getting to market next year?

Frank, do you want to try?

Yes, absolutely.

So, first of all, I would say that open enrollments for the 2014 benefits year was slightly ahead of open enrollments 2013, which is a good sign.

So, it does seem like things are moving along nicely there.

As far as -- it's an important part of our strategy to have product on both public and private exchanges.

We have product on exchanges.

This year, we did see some uptick, I think, in open enrollment -- like I said, from 2013 to this benefit year, as a result of that.

It was -- it was a nominal uptick, a couple points; but not nothing.

We still believe that benefit year 2015 is when this will really hit, when there is a full year's worth of education for employees, and more companies moving on to specifically to private exchanges.

And any update on the relationships that you have there?

Are all the ones that you expect to get in place?

Or how do you see that rolling out?

No.

We'll continue -- no, because even all the exchanges aren't up yet.

So you know there's still large brokerage and consulting firms, for example, contemplating or in the process of building and launching private exchanges.

So I think we're on the majority of meaningful exchanges that are already launched.

But we'll continue to work to make sure that we're on all the relevant exchanges, period.

And then regarding FSAs, I guess, have you seen any impact from the improvement in the use-it-or-lose-it clauses?

And will that be germane for you guys at all?

You know it might actually.

This is something we've been talking about internally.

The interesting thing is that the ability to carry over $500 year-over-year in an FSA rather than have it be completely use-it-or-lose-it, it may actually reduce card spend on a per-FSA basis.

At the same time, that may be more than augmented by more people signing up for FSAs.

So it would be interesting to see how all that plays out.

So, maybe good in the aggregate, but in a decreased revenue slightly per card.

And I guess some people have talked about use-it-or-lose-it being the big barrier to adoption, and that they could see a pretty significant jump in that.

(multiple speakers) Do we have any evidence of that yet?

Or when will we get some evidence of that?

Well, there's obviously no evidence of it yet, because it just went into effect.

(laughter) So (multiple speakers) --

So it'll be the first quarter (multiple speakers) before we see it?

No, because I think that there is -- there's actually other -- it's not every FSA just automatically gets the $500 carryover.

Also, there are actually some structural changes that are necessary to the -- for the product.

Not every company may make those structural changes to the benefit plan to actually get that carryover.

Yes, I think, Jeff, that it's really hard to predict employer behavior at this time.

There's been a lot of talk about large employers going to a stipend and let the guys go out -- let the employees go out and buy that.

But it hasn't really happened across the board.

None of this has happened across the board yet, because we're still in no man's land.

And so I think we can talk about what we think or hope might happen, but we don't have any evidence for it.

Okay.

No, that's great.

I guess we're going to know when we know.

So, last thing, just on -- we've talked about sort of the mobile wallet space, and the players kind of feeling around for what's going to be the right solution here that's going to get traction, and if they would finally really spend some marketing dollars behind, et cetera.

And I'm wondering, in the aftermath of the Target problems and the discussion that, hey, in Europe and everywhere else, they've adopted EMV.

We have it here; we should turn it on.

We should make things safer.

Do we think that that near-field communications is the winner?

Are we hearing from the PayPal's or Google's that they're excited about this?

Or really nothing yet in terms of solidifying around how this works?

Yes.

Well, I think it's way too early to call NFC the winner.

And you know, as a matter of fact, I personally believe BlueTooth Low Energy, BTLE, may have every bit of a chance of being the primary protocol as NFC at this moment in time.

That's slightly separate than the question around maybe Target, Neiman Marcus, and EMV.

There's no question the associations are out beating the EMV drum, using Target and Neiman Marcus breaches as the driver to push that forward.

Interestingly, I don't know whether any of you read this or not, but Target has actually been one of the larger merchants who, a number of years ago, decided that they did not want to implement EMV.

So, you know it's got kind of an interesting turn of events now.

Of course, they're out, I think plan-boarding, as others are.

And I think we will see EMV finally get implemented in the US in a relatively meaningful way by both issuers and acquirers.

Okay.

(multiple speakers) But you don't see that necessarily precipitating a standard for mobile wallet yet?

Not yet, no.

Got you.

Okay, all right, that's great.

Appreciate the time.

Matthew Kelley.

Just to follow-up on expenses, when we think about 2012, expenses were up about 22%, and you're making big investments in new programs, and market share, and mobile wallet, and PayPal and Google.

In 2013, it was a big push into Europe and expenses were up 26%.

The question is, as we head through into 2014 here, are there any big initiatives that we're going to hear about in the second half of the year that you're investing in now, similar to what you were doing in 2012 and 2013, that will elevate expense growth?

I will say that I don't think that we have within our current strategy the magnitude of expense -- of investments or the magnitude of program into which investments required, as those that you've been describing.

Okay.

Got you.

So you should -- we should see expense growth slow at least into the midteens in 2014, we'll see a decline in growth rate (multiple speakers) --

(multiple speakers) We're not saying that.

We're saying -- I was answering a more specific question.

Okay.

(multiple speakers) You've got those big investments.

I guess one would expect to see a slowdown.

That's all.

Without those big investments, one could see a slowdown.

But again, part of the growth in noninterest income is commission-based.

So if we have that, you might not see quite as much of a slowdown as you're anticipating.

But it will be accompanied then by an immediate response in the noninterest in the revenue increase, because otherwise it wouldn't be paid.

Okay.

And then a follow-up question on the deposit suite program, now that that's -- the conference levels are higher, the tests have gone well.

Walk us through -- if you guys sell $1 billion worth of deposit into -- through this market, the smaller financial institutions who need funds, what are you selling at?

And what are the net economics for your balance sheet and your income statement?

I assume you have a fee that is generated.

There's FDIC insurance.

Walk us through what happens to the P&L in the balance sheet if you sell $1 billion of deposits on your suite program?

Frank, do you want to --?

Well, sure.

There's a couple components of that.

So, first of all, it alleviates the Bank's FDIC insurance costs.

And the -- so, hypothetically, if the deposits were only sold for 25 basis points, the same 25 basis points we were earning selling fed funds today -- which we're doing with our excess deposits -- we'd alleviate 9 basis points in FDIC insurance costs, and we'd also alleviate the capital allocation, right, essentially to holding those deposits.

And we'd have the revenue generated selling those deposits to the other bank, 25 basis points.

Right.

But you don't have the 250 basis points of spread income.

So, (multiple speakers) as this starts to be implemented (multiple speakers) -- what?

But we don't have 250 basis points of spread income anyway.

(multiple speakers)

(multiple speakers) Yes, it's a marginal analysis that you have to do, if we have $900 million in fed funds.

So that's roundly offsetting.

That's the whole purpose.

It will increase the margin on the remaining book, because the non-earning or minimal earning component will be reduced.

Okay.

And then what deposit do you envision actually selling?

Is it more the HSA?

I mean, will you be able to sell the prepaid types of deposits, given the volatility?

Or what actually gets sold, do you think?

Yes, we will.

There is a series of different types of deposits that -- where it's easy for us to bake in the proper disclosures and utilize those deposits.

Those do include our prepaid and other types of commercial deposits.

Okay, all right.

Got you.

And then one other just clarifying question.

On the CMBS business, it looks like [17.3] of total gains.

I know there's some fair value marks, I think, of about $1 million.

And you sold some SBA loans as well.

What are the gains you're generating?

What was the total dollar amount of loans sold to generate the roughly $14 million of gains on just the traditional CRE loans sold into conduits?

I'm going to have to send that to you off-line.

I just don't have it in front of me and I don't want to quote it incorrectly.

Understood.

All right, thank you.

Frank Schiraldi.

I just had a couple of follow-ups.

First, on the gain on loan sales, just to keep it there for a second.

I just wondered if you could share with us the expenses associated with -- or the specific -- not necessarily quarter-over-quarter but just the commissions that would be based on $4.5 million of gain on (multiple speakers) --?

I'm sorry, but we don't break out that information for you.

Okay.

Do you break it out in terms of not just commissions but some sort of efficiency, in terms of the expenses associated overall?

Or no?

We do not.

Okay.

And then just following up on credit.

I'm not sure if you talked about 30 to 89-days past due.

And then I just wondered how that had trended quarter-over-quarter?

30 to 89-days, I thought that I said to you that it went -- I'm sorry if I didn't say it; I meant to -- that it -- 30 to 89-days increased by $6 million.

That was represented by a single loan that was in a transition period between managers, where the interest got delayed because of the cash collections.

But it should be back on track.

Okay.

You may have mentioned it.

So that was the only uptick -- if that was really the uptick then.

Yes.

And then I don't know if you had classified totals, if that had sort of trended with total MPAs?

I didn't give you those numbers, but can get them for you.

Okay, great.

Okay, thank you.

Thank you.

I would now like to turn the call back over to Betsy Cohen for closing remarks.

Thank you.

As always, we thank you for a series of very good and probing questions in which not only our current achievements but our predictions of times future are tested.

And we're delighted to have the opportunity to share our thinking with you.

So, thank you again.

And we look forward to talking with you next quarter.

Thank you very much, ladies and gentlemen.

That now conclude your conference call for today.

You may now disconnect.

Thank you very much.