Bancorp Inc (TBBK) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 The Bancorp Incorporated earnings conference call.

My name is Gwen and I will be your operator for today.

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

Later we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Andre Viroslav.

Please proceed.

Thank you, Gwen.

Good morning and thank you for joining us today to review The Bancorp's first quarter 2014 financial results.

On the call with me today are Betsy Cohen, Chief Executive Officer; Frank Mastrangelo, President; and Paul Frankel, 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 a confirmation code of 944-98254.

Before I turn the call over to Betsy, I would like to remind everyone that when using 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 a 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 the date hereof.

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

Now I would like to turn the call over to Betsy Cohen.

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

I would first like to say that we believe that the primary business at The Bancorp is really very healthy, vibrant, and growing.

That, if we had not experienced credit losses in the magnitude would which we did, and if we did not have in this quarter expenses which were -- are either in the nature of investment such as software -- and I will go into them in more detail -- or nonrecurring expenses, that earnings per share would have been $0.24.

The vibrancy of the primary business, I think, has shown by the topline growth in revenues of 20%; the increase in noninterest income of 26%; 13% increase in prepaid card these on a very high base; and a 17% increase in quarterly net interest income over the first quarter of 2013.

All of those are indicators of recurring income sources.

On the expense side, I can think there are a couple of things to look at.

One on -- well, first, on our last call we spoke about the fact that we were in the process of completing our passporting of Europe and thought that it would be completed essentially in the first quarter.

Significant expense was incurred in order to accomplish that and you see that in the first quarter.

Of the business at the bank -- and you can see that in the growth of the GDP and other indicators, certainly the number of active cards -- is, in fact, growing and it involves software -- the need for software expansion.

And, as you know, software is primarily expensed.

We had a one-time wire fraud legal settlement in the $350,000 range, which was reported in this year.

Additionally, some of our noninterest income businesses -- in fact, many of them -- not only had base salaries but have commissions as well.

And so you will see an increase in that -- what is traditionally a salary line, which is really a reflection of the increase in noninterest income related to various businesses and paid as commission.

So it is a flexible number.

Those expenses aggregated $0.04 a share, as I said before, on an earnings per share basis tax affected.

Also recently we filed an 8-K in which we explained that -- or identified a single customer whom we consider to be a major customer and gave you the metrics around that customer, about 1.5% (sic) of deposits and 1.7% -- sorry -- of deposits.

And identified that as a customer for whom there would not be renewal of a contract to whom notice was, in fact, sent that we would not renew that customer's contract when it matured in November of 2014.

So, although there is no immediate impact, we wanted to have that out into the marketplace.

As you know, often have discussed with you the pruning of our deposit accounts.

Generally, we give you the filters which are primarily volatility and price.

And we have the same kind of pruning that goes on, on the program side.

Generally, the overarching measurement that we look to is what we think of as margin.

And that relates to the income that is paid by the customer, together with the expenses attributable to management of that customer.

In 2013, we, in fact, terminated three smaller clients.

This is the first larger client that we felt the need to file an 8-K with respect to.

It is an ongoing practice, as you know from 2011.

Our ability to replace deposits and noninterest income is significant and, therefore, we have no concern that this is a disruption in the business, but rather a prudent look at what we consider to be appropriate from a margin point of view -- appropriate places to spend our time and energy.

On the credit side, we identified a significant credit -- we identified need for additional provisioning and additional -- and included in our credit numbers were, in fact, the losses that we took.

We have continued to be enormously aggressive -- and I will give you -- in terms of trying to, shall we say, clean out the stable, I will give you one example, which was a loan that went 90 days for the first time at the end of 2013.

By the end of this quarter, we had sold the underlying property.

Maybe if we had held it a little bit longer, we would have gotten more for it.

There was just a loss associated with it, but we felt that was the right thing to do.

And that, I think, is emblematic of the way in which we are approaching the portfolio.

Let me suggest here that Frank provide you with the numbers with respect to growth of our core businesses.

And then I will come back and talk about the growth of our targeted loan segments, all of which moved in a very healthy way.

Thank you, Betsy.

As Betsy mentioned, many of the core businesses continue to grow very, very nicely.

You saw a significant pickup in gross dollar volume and the 12.5% year-over-year increase in noninterest income generated from the prepaid group.

The dynamic of the relationship of noninterest income to GDV, it could be looked historically because of the businesses that line up as seasonally strong in the first quarter.

We typically do see a dip in that ratio.

We certainly saw that dip occur in this particular quarter where that ratio was a little over 11 basis points.

If you recall, two years ago that was 10.5 basis points.

Last year we had strengthened that to 13, but recall last year also the tax business got elongated and pushed into Q2 because of delays that occurred from the IRS processing a refund.

So we expect that that relationship noninterest income to GDV will return to normalized levels for the remainder of the year.

The CMBS business also performed extremely well in the quarter, adding more than $5 million in noninterest income.

And the -- another portion of our payments business, merchant acquiring and ACH units, grew noninterest income 50% year-over-year.

So, a lot of good things occurring, as Betsy noted, in the core businesses.

I'll just take a moment in time right now also just to touch on one of the things that I think is probably on your minds, and that is that deposit suite platform.

That deposit suite platform -- the beta has gone extremely well.

Like in any beta, we find little nits and gnats that you have to clean up.

Those things have been cleaned up.

The platform has performed extremely well and we will be taking that program out of beta in the coming weeks here in Q2 as we had been anticipating.

I would just like to add that we have seen enormous demand for the product.

Frank and I were just with the group yesterday and we have had inbound calls of significant number from people who have heard about the launch of the program.

And so we think it would be a very successful tool for managing at total asset size and maximizing return on currently unused funds.

As always, the overage of funds over usable funds suppresses the -- particularly in the first quarter suppresses the margin that -- in the first quarter of 2013, that suppressed margin was 2.25% and this quarter it was to 2.30%.

I might also just augment a comment that Frank made on the elongation of the refund program as administered by the US government.

If you take a look at -- it distorts the purity of the end number of -- with respect to deposits, which generally spikes significantly.

If you look at the average deposits over the period, you will see that the business was quite robust and up from about -- the deposits were up from about -- not all attributable to this.

But this is a significant contributor, this business line, from about $3.2 billion to $4 billion in terms of the deposit base.

So I think you have to look, because of the timing that we don't control, you sort of have to look at both of those elements.

The expenses are somewhat hard to read, but I am going to ask Paul just to talk about the increase in what we think about -- think of as base salary expense and any other items that he would like to put forward.

Thank you, Betsy.

I think that the numbers are kind of -- obscure some of the progress the bank has been making in flattening out salary expense.

We do have some accounting fluctuations that we experienced in this period.

And as Betsy noted earlier, we have some commission structures that are more evident in higher expenses in the first quarter.

I would note that in the same way that we are pruning various relationships, we are also looking at reallocating individuals and not adding staff.

And so I think we are all focused on very closely monitoring a number of people in each department and total expense.

That is going to be a big focus this year.

Thank you, Paul.

Frank, do you want to talk about estimated profitability of Europe, because I think that is an ongoing concern?

Sure.

So first of all, I think you know that there has been a significant expense related to the license build out in Europe so, that we could have as broad of a footprint as possible.

The majority of that is now behind us.

So first of all, I believe that you will actually see the business begin to move towards breakeven -- towards a breakeven scenario.

And I still think that is something we can achieve this calendar year -- get it to that type of footprint by the fourth quarter.

With that, I'm going to ask for questions.

(Operator Instructions) Matthew Kelley, Sterne, Agee.

Betsy, I was wondering, is this provision kind of the long awaited kitchen sink clean up?

Or is this more related to coming from the text of newly identified?

Help us understand.

Is this the legacy problem credits or are we seeing the real inflow of new problem credits that need to be addressed?

Thank you for your question, Matt.

This is totally related to legacy issues -- or legacy (inaudible) excuse me, not issues [yet].

Got you.

And would you classify this as kind of the final cleanup we have been waiting for?

I mean, they have been struggling with higher provisions (multiple speakers).

You know I would never answer that question, but thank you for asking it.

We are working as hard as we can and as quickly as we can, and I gave you just that illustration.

It may involve -- because we are trying to put it behind us -- a little bit more loss than we otherwise, if we had held loans for a longer period of time, or properties for a longer period of time.

If this is for a longer period of time, might have, but we are determined to get this all done (multiple speakers).

Why has the loss content been so substantial?

I mean, if you look at the actual charge-offs relative to the nonperforming loans that you had 12, 18 months ago, it was a very high ratio.

Help us understand why loss content has been so high.

A lot of these are C&I loans, even if they had real estate against them.

And I think we have discussed the fact previously that the Philadelphia market, which is where these loans are, has been unrelenting in its willingness to improve.

It has not improved throughout the -- it took a deeper dive than one might have expected from a relatively stable market, historically.

And the length of the recession and the fact that there really was no -- has been no bounce back until in Philadelphia has added to the pressure on the borrowers.

And borrowers who have paid with religious fervor over a 7- to 10-year period, so we have had broad experience with them -- are just tired and give up the ghost.

Their businesses -- these are C&I loans, so businesses, and they often have a greater loss content.

And did the 30 to 89 days past due bucket decline?

What did that do?

It was $12 million as of year-end.

Yes.

It is -- I'll say it's $4.3 million.

Got you.

Got you.

And the charge-offs --

And 90 days, as you know, under $200,000.

Got you.

And the construction charge-offs you took this quarter, about half of it, what was that related to?

And walk us through the credits that you actually charged down this quarter.

Last quarter you talked about the chain of coffee shops and the medical device or type of distributor business that (multiple speakers).

(multiple speakers) I'm sorry.

I didn't mean to interrupt you, Matt.

My apologies.

I don't know that examples are helpful.

I can just tell you that we are managing through what is a very small construction portfolio and the C&I portfolio for -- as quickly as we can.

And has there been any additional changes to underwriting policy, changes in management?

What have you changed internally over this time while you have been kind of struggling on the credit front?

I think that we began to change forward underwriting criteria, so for new loans, and we were talking about legacy loans, which is what this is, in 2009, 2010.

So, on a forward-looking basis, we haven't -- we have identified the external factors, which have changed the way in which one might underwrite and have applied them.

And I thought that's what you were asking about (multiple speakers).

Okay.

Switching gears to the expenses, what would you classify as nonrecurring?

What was should we think about taking out in the second quarter that you will not have going forward?

Well, we will not have another wire fraud issue.

Software should not be as expensive and Europe should be much less of a burden.

We will have, if we have success are generating noninterest income -- we will have commissions and we will have potentially an uptick in expenses related to those businesses.

So those could be continuing and the others non-continuing.

And there are one or two other smaller, non-continuing ones I just don't have it in front of me, Matt (multiple speakers).

Okay.

Do you think directionally expenses will be up or down in the second quarter relative to the $33 million?

Paul, I am going to pass that to you.

Our goal is to keep them as flat as possible, but I wouldn't expect a reduction.

All right.

And then, last question, on your margin, I know year-over-year comparisons are helpful.

How do you feel about your second quarter margin compared to the 2.46% in year ago periods?

Paul, I am going to pass that on to you.

Second-quarter margins as opposed to first quarter margin.

Remember, Matt, that -- I'll just -- I am sorry, Paul, to interrupt you even before you start.

But, I just wanted to remind the callers that it is an accordion factor.

It is a factor which is a result of how much excess funds we have.

Yes.

And so, it is hard to be exactly predictive of that element, Matt.

I'd certainly welcome a response from Paul, but I just wanted to remind you that it is somewhat unseeable.

Yes.

And the second quarter, our deposits are still hanging at relatively high levels, which in the highest quarter we have, due to the tax refund deposits, is in the first quarter.

So you will still see some of that in the second quarter where our net interest margin will be impacted.

And -- but it shouldn't -- so it really shouldn't change that significantly, though.

If anything, it should be a slight improvement.

Frank Schiraldi, Sandler O'Neill.

Just on credit, to start with, I guess, I am trying to get my arms around the potential loss from this legacy portfolio.

I know it is the C&I and the construction.

I think over the last few years you charged off something like 5% of the total loan portfolio.

So, as you look at it today, do you think there could be significant loss, still, lurking in those portfolios?

Or do you think you have worked your way basically through them at this point?

Frank, I really won't answer that question.

You know that is a predictive question that I just have not answered in the past and won't answer now.

I do think that we have our arms around much of the portfolio and you know I am always hopeful.

In terms of provisioning, you talked about the -- I think the $12 million in provisioning for the newly adverse loans.

First, is discovery of those loans, is that part of an internal review or are those loans that started to go delinquent in the quarter?

I mean, how were those sort of --

No.

It is part of an internal review.

Okay.

And so I am assuming you are still in the process of this internal review.

Could you maybe say how far through the process you have gotten in your estimation?

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

I mean, I really don't have it.

Okay.

I mean, do you think it is a large majority or--?

I don't have the number in front of me.

I mean, I don't have the number.

Okay.

And then, just back to provisioning and the $17 million provision, you talked about the $12 million for newly adverse classifieds.

Do you have the number for what classified loans did quarter over quarter?

I think they were flat quarter over quarter 3Q into 4Q.

I am sorry.

I am just trying to find if I can answer you in any way.

One way to answer is that, on a linked quarter basis, if you aggregate 30 days, 90-plus, and nonaccrual, there was a reduction of almost $4 million -- no, excuse me; yes, almost $4 million, three-point something -- $3.7 million or something like that from Q4 to Q1.

Okay.

I guess I am just --

(multiple speakers)

No.

I am looking for more of like a watch list, substandard loans.

There is very little on any of those loans.

We have taken them right through.

I mean, on any of those lists.

I'm sorry.

Taking them right through to nonaccrual at this point?

Yes.

Yes.

Yes.

Okay.

And then, I know it is difficult to talk about provisioning, but given the $17 million and $12 million was from the newly adverse, I mean, the difference is $5 million.

Is that a decent starting point, do you think, for provisioning -- (multiple speakers)

Yes.

That is what we have budgeted for the quarters.

Yes.

Okay.

And then, just moving on to prepaid fees.

Obviously, as you talked about, Frank, GDV was stronger than the growth in prepaid because margins were down.

I'm just wondering your thoughts on getting to, call it, 20% growth of prepaid fee income year-over-year.

Is that something that is still attainable or has the industry slowed to the point where you should expect that this 12%, maybe 15% growth could be sort of what to expect going forward?

Yes.

Yes.

I mean, my expectation is that the growth rate for the year will be higher than was achieved in Q1.

I think the one dynamic that occurs in Q1 is that you are lining up tax business to tax business.

That is a business line that is not going to have a 20%-plus growth rate.

So, given that that business impacts Q1 so significantly, Q1 is not going to line up with, I would say, what the annualized growth rate of the portfolio will be.

So I am still comfortable --

(multiple speakers) question.

Yes.

I mean, I am still comfortable with something upper teens, 20% for the portfolio for the year.

Okay.

Yes.

I think it is sometimes hard to -- you know, we are comparing first quarter to first quarter.

And with the tax refund business being a significant contributor, if the government does all of its tax refunds in the first quarter one year and only half of them the second year, you're going to have lower growth.

But you will make it up in the second quarter.

Is that clear or am I not being clear?

Just remind me, the growth last year -- the-tax related business last year was more in the second quarter than the first?

Yes.

More of it just got pushed into Q2 than normal because of IRS delays in processing those refunds.

So it had a couple of effects.

Even though the -- as Paul noted, the deposit balances are still bloated at the moment, those deposits do roll off with pretty significant velocity in Q2.

If we compare last year to this year, the average deposits are actually far lower from these business this year at this moment in time than they were last year.

That should help improve margin.

That should be a contributor to an improved margin in Q2 also.

Okay.

But you are expecting, it sounds like, more of the tax business to fall into 1Q this year.

So should the 2Q over 2Q, just the fee income on prepaid, should we expect that to maybe be weak year-over-year, perhaps even weaker than the 12% we saw 1Q over 1Q?

No.

I don't think so, I think because the growth rate, as I said, of the tax business itself is not that significant, number one.

And number two, it is actually thinner than our average.

Right?

That is what contributed to -- typically does contribute to what looks like a margin squeeze in Q1.

So I think you will see a rebound of many of those metrics in Q2.

Okay.

And then, on the CRE -- the securitization business, I know it is tough to -- it has been volatile and it is tough to say, but are you ramping up there?

Do you see perhaps greater growth there quarter over quarter, year-over-year?

It is really hard to predict because it is a mix, as you know, of what is in the pipeline in terms of asset class, which impacts the fee income and the market as a whole.

Are we going to, on a volume basis, do we have the capacity?

And are we interested in increasing that business?

We have had very good experience with it and I think we would increase it.

Will that result in higher noninterest income?

It is really hard to be predictive because the market itself could experience a compression of -- we don't see it, but I am just giving you by way of example the variables.

And you could do more of X, which is a lower fee product in any one quarter and do more of X and less of Y that is a higher fee.

So it is really -- you really have to look at it over the course of the 12-month period, Frank.

Okay.

And then, finally, just on expenses, Paul, it sounded like -- well, I think you said that off the $33 million level in 1Q, the goal is to keep that flat going forward rather than necessarily seeing a decrease.

Is that the way to think about it?

That or I think -- and I said that there wouldn't be decreases.

So we are trying to keep it as flat as possible, but I think you will still see some increases.

Over that $33 million number, quarter over quarter.

Yes.

There are some caveats there because, for accounting purposes, we have to expense certain commissions.

And a big number, for instance, is the expenses associated with those kind of direct commission type expenses associated with the CMBS.

So that can fluctuate significantly.

But, generally, we are trying to keep it flatter.

And do you still think -- I know we have talked in the past, Betsy, about a fee income in noninterest expense being a ratio that you can increase over time.

Do you think quarter over quarter -- (multiple speakers) quarter over quarter, as we move through the year, do you believe that that ratio will continue to increase sequentially?

I would say that, if you look at it as 2014 versus 2013, you will absolutely see an increase.

Whether it will be linear or not, which is really what you are asking, I won't say.

Okay.

That's all I had.

Thanks.

Thanks.

I think it was a lot.

William Wallace, Raymond James.

First of all, I would say thank you for breaking out the line item detail and the noninterest income.

It is really helpful to kind of see how all the parts are moving there.

And I would make a plug if you guys are be willing to do that on the noninterest expense section as well moving forward, I think that would be very helpful for all of us.

We will take a look at it; we promise you.

Thank you, Betsy.

So, not to beat a dead horse, but I wanted to ask a couple of questions about credit, too.

Betsy, you mentioned that there is an internal review and that uncovered issues with these previously classified loans.

What were the issues?

Was it a collateral issue?

Sometimes it is an issue related to a decrease in collateral value.

Sometimes it is an issue in terms of business liquidity.

I mean, it has the whole range of traditional -- very traditional C&I and real estate valuation issues.

Okay.

So, for the internal review, then, does that suggest that you are ordering appraisals on all of your -- your entire pass graded portfolio where you have commercial collateral, and that you are doing cash flow reviews of the straight C&I loans that are all pass graded.

I mean, you are reviewing the entire portfolio?

We are working our way through the portfolio.

And do you have internally an estimate of when you expect the review would be completed?

I don't have that in front of me.

I'm really sorry.

How long has the review been ongoing?

I would have to get the -- I don't have a date -- a start date in my mind.

So I will get back to you on that.

And who is in charge of it?

The Chief Risk Officer.

Okay.

And are you ordering appraisals on the --

We always order appraisals within a cycle, depending upon the kind of property it is.

So for the pass grade loans, what is the timeframe and what are the characteristics that drive dependence of when you would order an appraisal?

For real estate?

Yes.

I don't know that there is one characteristic that answers that question, but we try to look at it holistically in terms of the kind of property it is, where it is located, the health of the guarantor, et cetera.

And that will spark us to reappraise.

And do you have any standards internally as to, no matter what, you will order an appraisal at least once a year or once every 18 months or (multiple speakers)?

Yes.

Usually, generally, it is once every 2 to 3 years because they are not complicated properties.

But, most often, it comes from a review of the loan.

And that is done on a cycled basis, so it would come in a cycled way.

Okay.

But, with the internal review, you are accelerating that process to some degree.

Absolutely.

Okay.

I mean, I think, clearly, the credit has been a frustration for the past year.

I agree with you 100%.

Right.

For you guys, it is a frustration.

For the investor community, it is a frustration.

So any details that you guys would be willing to provide as to how far along you are in the process of reviewing the pass grade portfolio to help us understand how much pain could be left as you identify problems that maybe you didn't realize existed, I think, would probably go a long way to helping support the stock price, because clearly, the prepaid business trends are very strong.

And it is great to see what you are doing in the commercial mortgage business.

I think it is just credit is a big headwind and it will be exciting to talk about the story without credit as part of it.

It would be fabulous.

So, in a follow-up call, could I get from you when the review started and maybe even get a sense as to how far along you are in the process as a percentage of the pass grade portfolio?

I will take a look at that information.

Okay.

On the expense side, so there was $0.04 of pressure related to what you guys would classify as nonrecurring.

However, there -- it sounds like there's some timing issues related to commissions that, perhaps, in the first quarter you did not have some commissions that will hit in the second quarter.

Is that why the (multiple speakers)?

No.

I think it is the opposite.

I think we had commissions in the first quarter that should not recur in the second quarter.

But shouldn't the expense line item go down, then, or are you reinvesting into different parts of (multiple speakers)?

Well, we don't know whether the line item will go down because, in fact, noninterest income could go up.

I mean, noninterest income attributable to commissionable items could go up and (multiple speakers)

Sure.

Well, that is a good problem to have, right?

Yes.

No, but I was trying to answer your question which said specifically will that line item go down.

And since it is related to whether the income line goes up, I couldn't answer it yes.

And most of the commissions come out of the commercial mortgage business, correct?

Well, there are other commissionable items.

Frank, do you want to (multiple speakers)?

Yes.

The prepaid business and the leasing business also drive significant commission.

And then it is all related to this business deal flow, noninterest income generated or the leasing side combination of noninterest income and interest income.

Okay.

So the expectation, then, would be that, assuming fee income continues to grow in the second quarter, the expense line, if you can hold it flat, that would be a win.

Is that --?

Yes.

Okay.

And then the last question I have -- and I know this has been touched on by the previous caller, but Frank, in your commentary it sounded like you were suggesting that the margin on GDV this year versus last year was lower, in part due to some of the tax refund business that was pushed into the second quarter last year.

Yes.

That is correct.

So it is a thinner business; more of it occurred in Q1 this year than last year.

Every year, if you look, like I said last year, I think Q1 averaged about 13 basis points.

The remainder of the year was that about 15 basis points, including Q2, which also included a fair amount of tax refund business.

This year, there really were no significant delays from the IRS.

The majority of that business occurred in Q1, even though deposits actually still peak in Q2.

So the deposit peak is in Q2.

Average deposits are higher in Q1, though, because of the velocity of the runoff in Q2, but it is a dynamic we see year-over-year 2012, 2013, as we have added to the tax business.

This dynamic does occur seasonally.

Right.

So the inference that I am reading through, though, is that where margin in the first quarter of this year was lower than margin in the first quarter of last year, margin in the second quarter this year could and possibly should be higher than it was in the second quarter of last year because you are going to have less of the lower margin tax refund business.

Yes.

But it is, in part, related to something that we can't predict at this moment that I was talking to Matt (multiple speakers) I think about -- I think it was Matt.

I am sorry if it was Frank Schiraldi, but to someone previously before that the outflow of those funds, so therefore the overhang of non-investable funds, is a little bit unpredictable.

And so we really don't know the answer to that until the end of the quarter.

Sure.

That's understandable.

And we would see that play through on the margin side -- the net interest margin side.

Right.

I thought that was what you were asking.

No.

I was talking about the prepaid margin.

Oh, I'm sorry.

Then I am answering the wrong question, William.

I think, also, there is a portfolio mix issue in the prepaid portfolio.

And this is a lower value of -- the tax business is a lower value business, not valuable, but lower --

Margin.

Margin business.

Well, not so much margin as it is rate business.

And so if there is less of it in the second quarter, and there is not another spurt of low margin business, then the answer is yes.

But, it is a matter of portfolio mix in any one quarter.

Understood.

Paul Rue, Endicott Group.

The Company has certainly gone through a bit of a transformation since I started following you guys almost a decade ago.

It has been exciting, a growth story (multiple speakers) --

I didn't think you were that old, Paul.

It is -- a lot of changes, a lot of growth and certainly differentiate from all the other typical banks that we follow.

It has been interesting just to learn more on the calls and the meetings that we have had.

But I was wondering if you would be open for us to meet more of your key people that have been instrumental in the growth and would you consider hosting an investor day later this year?

We have had that under discussion and we are trying to think about the most effective way to do that.

Probably not until the beginning of the fourth quarter, because we really think that -- well, it may be earlier.

But, yes, we are open to it.

Let me just shorten the answer and say, yes, we are open to it.

Okay great.

Thank you.

Jeff Bernstein, AH Lisanti.

Just a couple more questions related to credit.

Can you just tell us what the size of the legacy construction loan book is and if there is any raw land in there?

I will get you that number, which I don't have in front of me, Jeff.

Thanks for asking.

I will bring that number next time.

Okay.

And then, C&I, what are the normal terms on C&I loans?

In terms of -- (multiple speakers) length of maturity.

It is not -- it is generally not -- it is a C&I relationship.

That's why I said sometimes it has a component of real estate, a component of pure business, so to speak, working capital or other.

And so (multiple speakers)

I guess what I am really kind of looking at is -- (multiple speakers)

They have different components.

Sometimes they are business leases, equipment, and so that is amortized over a three- to five-year period.

And they may have a mortgage on the property in which they operate, which might have a five-year balloon on a 25-year amortization, and then they might have some working capital.

So it is -- I am thinking of it as a total relationship.

So -- but fairly safe to assume that these are re-underwritten every five years.

Yes.

Absolutely.

So, if we changed our underwriting standards back in 2010, 2011, a significant portion of that portfolio should have matured and been re-underwritten since.

I think it is always reviewed.

If you are suggesting that all of these borrowers should have been shown the door earlier --

No.

I am really just trying to gauge --

(multiple speakers) I am trying to get to what your question is.

(multiple speakers)

My question is really, if we had a static pool of loans five years ago that all had five-year terms, by now we would have cycled through re-underwriting all of them outside of any extraordinary looks.

So, obviously, it is not a static pool of loans.

But I think we still should be able to assume that a pretty significant part of the C&I portfolio has come up for a look already since you changed underwriting standards.

Is that a correct assumption?

Well, I said to, I think, a previous question that I don't have that information in front of me, but that I will get it.

Absolutely.

Okay.

Yes.

I'm just trying to make an approximation.

But it is correct to conclude that, if it is a five-year cycle, that 3/5 of that has been looked at?

I can't tell you that.

I mean (multiple speakers) by dollar amount, not by year.

I don't have that information in front of me, Jeff.

I would like to (multiple speakers).

That's great.

I would love it if you guys could give me a call this afternoon with those numbers.

Sure.

That would be terrific.

Andrew Wessel, Sterling Capital.

So, I guess one question I was just trying to clean up on credit, I think the thing was the 30 to 89 (inaudible) fee bucket right now is $4.3 million.

Is that right?

I think it is $4.356 million.

I just looked at the number again.

Okay.

So that is down a lot.

I mean, I think at the end of the year is $12.2 million, so in that quarter alone you (multiple speakers)

Yes.

We have moved the stuff right along.

Okay.

And then, you talked about legacy construction is been an issue; legacy C&I obviously been an issue.

I think in the past you have talked about trying to grow in your other channels that are less credit sensitive and have given you fewer problems on the loan side, and kind of keep the commercial loan book -- I guess shrinking it.

But, when I look at what the -- really, you have been trying to grow C&I a little bit.

You have been growing construction loans a little bit.

And, you know --

Well, remember that some of the growth in the real estate loans category is due to the 90-day warehousing of the CMBS loans until they go into securitization.

Okay.

All right.

That's helpful.

But, those aside, I can tell you that with respect to the targeted areas of loan growth, one, we have had growth.

And, two, we have had no losses.

Losses in aggregate over the last five years, three years, is under $100,000 for that whole group.

Okay.

Thanks.

And then on the expense side, again, I am just trying to understand this.

At the beginning you said there was $0.04 a share of nonrecurring expenses.

So, one would expect that expenses would be down quarter over quarter.

So I guess the statement about, if expenses are going to be flat quarter over quarter, despite these of nonrecurring, then really it's salaries and commissions are going up $0.04 if they were to be flat.

Salaries we are hoping to keep relatively flat.

Commissions are variable, which vary with income production.

So, the total line may not go down.

So it is more a statement on growth than on (multiple speakers).

Okay.

(multiple speakers)

All right.

And I am just trying to understand from that 8-K, the client you are not renewing -- the customer you are not renewing, was your statement around that?

It wasn't clear to me.

Was that its deposit variability?

Was that the issue, or deposit volatility?

No.

No.

No.

I was just trying to say that, as much as we tell you -- as much as we have been, I think, transparent about large customers -- and if they are small customers we clearly don't have to.

It is just business as usual.

But, whatever the customer size, we look for certain markers on the deposit program.

One is volatility and one is price.

And I was trying to draw an analogy to the program side and say that we look at what we think of as margin on the program side as the primary filter.

And that is made up of the generation of income minus the expenses associated with the oversight and other elements.

I mean, it could be a number of elements -- data processing, whatever have you, of a particular client.

And when that margin gets compressed, because expenses go up without income going up, we move to nonrenewal or some other mechanism.

Okay.

Great.

Patrick O'Brien, Fox Asset.

Thank you.

My question has already been asked.

Thank you very much, Patrick, for saying that.

Matthew Kelley, Sterne, Agee.

Just one quick follow-up on the credit issue.

To be very clear, the $12 million loan loss provision related to previously classified and now newly adverse, that is all on collateral that was underwritten originally before 2007, 2008.

Is that an accurate statement?

I would have to get you a good date on that, whether the cutoff date is 2008 or 2009.

I can't at this minute, tell you, Matt.

What would you consider the cutoff date for legacy versus new?

I think it is really 2009.

Okay.

Got it.

A question for Paul.

What was the yield on the securities purchased in the quarter?

On the securities purchases, we would have the yielded in the 3.5% range.

Got it.

And then, on the gain on sale of loan item -- the $5.5 million, how does that break out between SBA loan gains versus commercial real estate multifamily gains?

None of it is SBA, Matt.

None of it.

Okay.

Got you.

The SBA sale we did last year was -- I think as we (multiple speakers).

To try it out.

Yes.

We just wanted to try it and make sure we could do it, and make sure we had a system established to sell if we ever chose to, but that is not really the goal with the 7(a) loans.

Okay.

Got it.

And then on the relationship that you are not renewing, what subset -- is that TPR or payroll or healthcare?

TPR.

TPR.

Got it.

And then, what was that GDV for that relationship?

I think we put that in the -- I thought we put it in the release.

We didn't put GDV in the release.

It was -- what we did put in, it was 1.7% of revenue.

It was 2.1% of total deposits.

As Betsy noted, though, it is not 1.7% of net income because of the outsized expense associated with the business.

GDV --

We will get back to you.

I will get back to you, Matt.

I have it (multiple speakers).

Did you terminate [development] because of any regulatory concerns or just profitability of the relationship?

You know, we are looking at margin and we don't discuss individual clients in that way, Matt.

Frank Schiraldi, Sandler O'Neill.

Just two more questions, if I could.

On the -- with the deposit sale program going live, are you comfortable with capital?

Or could there potentially given (multiple speakers)?

We are absolutely comfortable with capital.

Okay.

Good.

And then, just wondering as you go through some of these renegotiations or maybe as you start some of these negotiations to renew these contracts, has there been pricing pressure on margins, just as there might be some pressure on card fees?

We have had occasion where we have increased pricing, actually.

So, I mean, it is all a dynamic of the client and size, and complexity and expense associated with any program.

We certainly have negotiations where we have lowered pricing.

We have certainly had negotiations where we have increased pricing in the current book of business.

Okay.

So it sounds like there is no trend towards decreasing.

Yes.

Yes.

There is no trend.

And even if we are decreasing pricing, it is typically based on forward volume.

We typically work to protect (multiple speakers) current revenue, current margin.

So it is new business.

It is growth, essentially, that might be priced thinner.

But, like I said, for any one of those situations, we have a situation where we have actually increased pricing on a specific client because of, like I said, expense or complexity or whatever it might be.

Right.

Okay.

Thanks.

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

Please proceed.

Thank you all very much for your time and attention to this, and we look forward to speaking with you again in next quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.