The Bancorp, Inc. (TBBK) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 The Bancorp Inc. Earnings Conference Call. My name is Gwen, and I'll be your operator for today. [Operator Instructions] I would -- as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Andres 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 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 12:30 p.m. Eastern Time today. The dial-in for the replay is (888) 286-8010 with a confirmation code of 94498254. 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 the occurrence of unanticipated events. Now I'd like to turn the call over to Betsy Cohen. Betsy?

Thank you, Andres, thank you all for joining us today. I would first like to say that we believe that the primary business of The Bancorp is really very healthy, vibrant and growing that if we had not experienced credit losses in the magnitude which we did and if we did not have in this quarter expenses which were -- are either in the nature of investments 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, is shown by the top line growth in revenues of 20%, the increase in noninterest income of 26%, 13% increase in prepaid card fees 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 think there are a couple of things to look at. One, on our -- or 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. The business of the bank, and you can see that in the growth of the GDV 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 onetime 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 have 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's a flexible number. Those expenses aggregated $0.04 a share, as I've said before, on an earnings per share basis, tax effected. 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% 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's no immediate impact, we wanted to have that out into the marketplace. We, 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 that customer together with the expanses attributable to management of that customer. In 2013, we, in fact, terminated 3 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 process, as you know, from 2011. Our ability to replace deposits and noninterest income is significant, and therefore, we have no concern. This isn't a disruption in the business but rather a prudent look at what we consider to be appropriate from the margin point of view, appropriate places to spend our time and energy. On the credit side, we identified a significant credit -- we identified significant 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'll give you -- in terms of trying to, shall we say, clean out the stable. We -- I'll 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 have 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, that was the right thing to do. And that, I think, is emblematic of the way in which we're approaching the portfolio. In -- let me suggest here that Frank provide you with the numbers with respect to growth of our core businesses. And then I'll come back and talk about the growth of our targeted loan segments, all of which grew 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, if you look 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, 2 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 noninterest income. So the another portion of our payments business, merchant acquiring in 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 the Deposit Sweep platform. Deposit Sweep 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 platforms 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 see enormous demand for the product. Frank and I were just with a 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 will be a very successful tool for managing 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 in the first quarter of 2013, that suppressed margin was 2.25%, and this quarter, it was 2.30%. I might also just augment a comment that Frank had made on the elongation of the refund program as administered by the U.S. government. If you take a look at -- it distorts the period end number of -- with respect to deposits, which generally spikes significantly. If you look at the average deposits over the period, you'll see that the business was quite robust, up from about -- the deposits were up from about 3 -- 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 now I'm going to ask Paul just to talk about the increase in what we think about -- we think of as base salary expense and any other items that he would like to put forward.

Thank you. Thank you, Betsy. I think that the numbers 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're pruning various relationships, we're also looking at reallocating individuals and not adding staff. And so I think we're all focused on very closely monitoring a number of people in each department and total expense. And that's 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's an ongoing concern.

Sure. So first of all, I think you know that there's 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'll actually see the business begin to move towards a breakeven scenario, and I still think that, that's something that we can achieve this calendar year, like get it to that type of footprint by the fourth quarter.

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

[Operator Instructions] Our first question comes from the line of Matthew Kelley with Sterne Agee.

Betsy, I was wondering, is this provision kind of the long-awaited kitchen sink cleanup or is this more related to kind of the -- 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 solely related to legacy issues -- or legacy problems, excuse me, not issues, yes.

Got you. And would you classify this as kind of the final cleanup we've been waiting for? I mean, they've been struggling on the prior provision.

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're 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 or business for a longer period of time might have, but we're determined to get this all done.

And why has the loss content been so substantial? I mean, if you look at the actual charge-offs and you look at the nonperforming loans that you had 12, 18 months ago, it's a very high ratio. Help us understand why loss content has been so high.

A lot of it are C&I loans even if they have real estate against them. And I think we've 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 in Philadelphia has added to the pressure on the borrowers. And borrowers who have paid with religious fervor in over a 7- to 10-year period, so we've had broad experience with them, are just tired and gave up the ghost. Their businesses, they -- these are C&I loans, their businesses, and they often have a greater loss content.

And did the 30-day to 89-day past due bucket decline? What did that do? It's $12 million at year end.

Yes, yes, it's -- I'll tell you it's $4.3 million.

Got you. Got you. And the charge-off...

And 90-day, 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 kind of the chain of coffee shops and the medical device or type of distributor business that drove some of the charge off. What was the extent?

Yes, I'm not sure -- 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're managing through what is a very small construction portfolio and 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've been kind of struggling on the credit front?

I think that we began to change our 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 have been -- 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.

Sorry, okay. Switching gears to the expenses. What would you classify as nonrecurring? What should we think about taking out in the second quarter that you will not have going forward?

So 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 on 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 noncontinuing. And there are 1 or 2 other smaller noncontinuing ones that I just don't have in front of me, Matt.

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

Paul, I'm 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 the year-ago period?

Paul, I'm going to pass that one to you, too. Second quarter margin as opposed to first quarter margin. Remember, Matt, that -- I'll just -- I'm sorry, Paul, to interrupt you before you start. But I just wanted to remind the callers that it's an accordion factor. It is a factor which is a result of how much excess funds we have. And so it's hard to be exactly predictive of that element, Matt. I certainly welcome a response from Paul, but I just wanted to remind you that it's somewhat unseeable.

Yes. In the second quarter, our deposits are still hanging at relatively high levels which -- and the highest quarter we have, due to the tax refund deposits is in the first quarter. So you'll still see some of that in the second quarter where our net interest margin will be impacted. But it shouldn't -- so it really shouldn't change that significantly though. If anything, it should be a slight improvement.

Our next question comes from the line of Frank Schiraldi with Sandler O'Neill.

Just on credit to start with, I guess. I'm trying to get my arms around the potential loss from this legacy portfolio. I know it's 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've worked your way basically through them at this point?

Frank, I really won't answer that question. You know that's 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 I'm always hopeful.

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

No, it's part of an internal review.

Okay. And so I'm assuming you're still in the process of this internal review. Could you maybe say how far through the process you've gone in your estimation?

I don't have that number in front of me. I mean, I really don't. I don't have it.

Okay. I mean, do you think it's 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. In 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'm sorry, I'm just trying to find if I can answer you in any way there. 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, 3-point something, $3.7 million or something like that from Q4 to Q1.

Okay. I guess I'm just -- no, I'm looking for more of like the watch list substandard loans.

It's very little on any of those loans. We've taken them right through. I mean, no, on any of those lists, I'm sorry.

Taking them the right to nonaccruals at this point?

Yes, yes, yes.

Okay. And then, I mean, I know it's 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 going forward?

Yes, that's what we budgeted for the quarters, yes.

Okay, 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, just wondering your thoughts on getting to, call it, 20% growth of prepaid fee income year-over-year. Is that something that's still attainable or has the industry slowed to the point where we should expect that there's 12%, maybe 15% growth to be sort of what to expect going forward?

Yes, 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're lining up tax business to tax business. That's a business line that is not going to have a 20-plus percent 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'm so...

There is timing question.

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

Yes, I think it's sometimes hard to -- we're comparing first quarter to first quarter, and with the tax refund business being a significant contributor, if a government does all of its tax refund in the first quarter 1 year and only half of them the second year, you're going to have lower growth. But you'll have it -- you'll make it up in the second quarter. Is that clear or am I not being clear?

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

Yes, more of it got pushed into Q2 than normal because of IRS delays in processing those refunds. So we had a couple of effects. The -- even though the deposits -- 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 this 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're expecting, it sounds like, more of a 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, and that's the -- that's what contributed to -- typically, does contribute to what looks like a margin squeeze in Q1. So I think you'll see a rebound of many of those metrics in Q2.

Okay. And then on the CRE -- the securitization business, I know it's tough to -- it's been volatile and it's tough to say, but do you -- are you ramping up there? Do you see perhaps greater growth there quarter-over-quarter, year-over-year?

It's really hard to predict because it's a mix, as you know, of what's 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've had very good experience with it, and I think we would increase it. Will that result in higher noninterest income? It's really hard to be predictive because the market itself could experience a compression. We don't see it, but I'm just giving you by way of example the variables. And you could do more of x which is a lower-fee product in any 1 quarter and do more of x and less of y that's a higher fee. So it's really we 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 of 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?

I think the latter -- I think and I said that there wouldn't be decreases, so we're trying to keep it as flat as possible. But I think you'll 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, those kind of direct recommission-type expenses associated with the CMBS. So that can fluctuate significantly. But generally, we're trying to keep it flatter.

And do you still think -- I know -- and we've talked in the past, Betsy, about fee income to noninterest expense being a ratio that you can increase over time. Do you think quarter-over-quarter -- as we -- 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'll absolutely see an increase. Whether it will be linear or not, which is really what you're asking, I won't say. I think it was a lot.

Your next question comes from the line of William Wallace with Raymond James.

So first of all, I would say thank you for breaking out the line item detail in the noninterest income. It's really helpful to kind of see how the parts are moving there, and I would make a plug if you guys would be willing to do that on the noninterest expense section as well moving forward. I think that will be very helpful for all of us.

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

So I mean, not to beat a dead horse, but I wanted to ask a couple of questions about credit, too. Betsy, you mentioned that there's an internal review and that uncovered issues with these classified -- previously classified loans. What were the issues? Is it a collateral issue?

Sometimes, it's an issue related to a decrease in collateral value. Sometimes, it's 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're ordering appraisals on all -- your entire pass rated portfolio where you have commercial collateral and that you're doing cash flow reviews of the straight C&I loans that are all pass grade? I mean, you're reviewing the entire portfolio?

We're trying -- we're working our way through the portfolio.

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

I don't have that in front of me, William, sorry.

How long has the review been ongoing?

I have to get -- I don't have a date -- a start date on my mind. So I'll get back to you on that.

Okay. And who's in charge of it?

The Chief Risk Officer.

And are you ordering appraisals on the...

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

So for the past grade loans, what's the time frame and what are the characteristics that drive the dependence on when you would order an appraisal?

For real estate?

Yes.

I don't know if there's 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's 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'll order an appraisal at least once the year or once every 18 months or...

Yes, usually -- generally, it's once every 2 to 3 years because they're not complicated properties. But most often, it comes from a review of the loan. And that's done on a cycle basis. So it will come in a cycled way.

Okay. But with the internal review, you're accelerating that process to some degree?

Absolutely.

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

Yes, I agree with you 100%.

Right. For you guys, it's a frustration. For the investor community, it's a frustration. So any details that you guys will 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 paying could be less as you identify problems that maybe you didn't realize existed, I think, will probably go a long way to helping support the stock price because clearly, the prepaid business trends are very strong and it's great to see what you're doing in the commercial mortgage business. I think it's 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, can 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 will classify as nonrecurring. However, there are -- it sounds like there are some timing issues related to commissions that perhaps in the first quarter you did not have some commissions that will hit the second quarter. Is that why the...

No, no, I think it's the opposite. I think we had commissions in the first quarter that should not recur in the second quarter.

So shouldn't the expense line item go down then? Or are you reinvesting into different parts...

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.

Sure. Well, I mean, that's a good problem to have, right?

Yes, yes -- no. But I was trying to answer your question, which said specifically will that line item go down, and since it's related to whether the income line goes up, I couldn't answer it, yet.

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

Well, there are other commissionable items. Frank, do you want to...

Yes. The prepaid business and the leasing business also drive significant commission, right. And it's all related to 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's correct.

That's correct. So it's 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 at about 15 including Q2, which also included a fair amount of tax refund business. This year, there really were no significant delays from the IRS. A 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've added the tax business, this dynamic does occur seasonally.

Right. So the inference that I'm 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 of this year could and possibly should be higher than it was in the second quarter of last year because you're going to have less of the lower margin tax refund business?

Yes. But it's in part related to something that something we can't predict at this moment I was talking to Matt Kelley. I think about -- I think it was Matt. I'm sorry if it was Frank Schiraldi. But to someone previously before, that the outflow of those funds, so therefore the overhang of noninvestable 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's what you were asking.

No, I was talking about the prepaid margin.

Oh, I'm sorry. Then I'm answering the wrong question for you. I think also there's 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 business and -- well, not so much margin as it is rate business. And so if there is less of it in the second quarter and there was not another spurt of low-margin business, then the answer is yes. But it's a matter of portfolio mix in any 1 quarter.

Our next question comes from the line of Paul Woo with Endicott Group.

The company certainly has gone through a bit of a transformation since I started following you guys almost a decade ago. It's been exciting, a growth story. A lot of changes, a lot of growth and certainly differentiated from all the other typical banks that we follow. It's been interesting just to learn more on the calls and the meetings that we've had. But I was wondering if you'd 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're 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.

Our next question comes from the line of Jeff Bernstein with AH Lisanti.

Just a couple of more questions related to credit. Can you just tell us what the size of the legacy construction loan book is and if there's 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, just what are the normal terms on C&I loans in terms length of maturity?

It's not -- it's generally not -- it's a C&I relationship. That's why I said sometimes it has a component of real estate, the component of pure business, so to speak, working capital or other. And so...

I guess what I'm really kind of looking at is...

They have different components, sometimes the business leases equipment. And so that's amortized over a 3- to 5-year period. And then they have a mortgage on the property in which they operate, which might have a 5-year balloon on the 25-year amortization. And then they might have some working capital. So it's a -- I'm thinking of it as a total relationship.

So -- but fairly safe to assume that these are re-underwritten every 5 years?

Yes, absolutely.

So if we change our underwriting standards back in '10, '11, a significant portion of that portfolio should have matured and be then re-underwritten since?

I think it's always reviewed. If you're suggesting that all of these borrowers should have been shown the door earlier...

No, I'm really just trying to gauge...

I'm trying to get to what your question is.

My question is really if we had a static pool of loans 5 years ago that all had 5-year terms, by now, we would have cycled through re-underwriting all of them outside of any extraordinary looks. So obviously, it's 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 the previous questioner 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 is it correct to conclude that if it's a 5-year cycle, that 3/5 of that has been looked at?

I can't tell you that. I mean, by dollar -- by dollar amount not by year. I don't have that information in front of me, but I would like to get back to you.

That's great. I'd love it if you guys could give me a call this afternoon with those numbers. that would be terrific.

Our next question comes from Andrew Wessel with Sterling Capital.

So I guess one question I was just trying to clean up on credit. I think the statement was the 30 to 89 -- 30 to 89 going to fee right now is $4.3 million. Is that right?

I think it's $4.356 million. I just looked at the number, yes.

Okay. So that's the -- I mean, I think at the end of the year, it's $12.2 million. So I think in that quarter alone...

Yes, we've moved the stuff right along.

Okay. And then you talked about legacy construction has been an issue. Legacy C&I, obviously, has been an issue. I think in the past, you talked about trying to grow in your other kind of channels that are less credit sensitive and have given you fewer problems on the loan side and kind of keeping the commercial loan book, I guess, shrinking it. But when I look at what the -- really, you've kind of been growing C&I a little bit. You've been growing construction loans little bit and...

Remember that some of the growth in the real estate loan category is due to the 90-day warehousing of the CMBS loans until they go into securitization. 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 5 years, 3 years is under $100,000 for that whole group.

Okay. And then on the expense side, again, I guess I'm just trying to understand this. So at the beginning, you said there's $0.04 per share of nonrecurring expenses. And 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 $0.04 of nonrecurring, then really salaries and commissions are going up $0.04 if they were to be flat.

Salaries, we're hoping to keep relatively flat. Commissions are variable, which vary with income production. So the total line may not go down but...

Yes. So it's more of a statement on growth in the non?

Yes, that's correct.

Okay, all right. And the -- I'm just trying to understand from that 8-K the client that you're not renewing -- the customer you're not renewing. Was there a statement around that -- it wasn't clear to me. Was that its deposit variability? Was that the issue of deposit volatility?

No, no, no. I was just trying to say that much as we tell you -- that much as we have been, I think, transparent about large customers, and if there's small customers, which we clearly don't have to, it's 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's 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.

Our next question comes from the line of Patrick O'Brien with Fox Asset.

My questions have already been asked.

We have a follow-up question from the line of Matthew Kelley with the 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 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's really 2009.

Okay, got it. A question for Paul. What was the yield in the securities purchased in the quarter?

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

Got it. And then on the gain on sales loan item, the $5.5 million, how does that break out between the SBA loan gains versus commercial real estate multi-family gains?

None of it is SBA, Matt.

None of it. Okay, got you.

It was just -- the SBA sale we did last year was -- I think as we positioned it --

To try it out.

Yes, we just wanted to try it, make sure we could do it and make sure we had a system established to sell if we ever chose to. But that's not really the goal with the 7(A) loans.

Okay, got it. And then on the relationship that you're not renewing. What subset? Is that GPR or payroll or health care?

GPR.

GPR, got it. And then what was the GDV for that relationship?

I think we've 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. There's 2.1% of total deposit. As Betsy noted, though, it's not 1.7% of net income because of the outside expenses associated with the business. GDV...

We'll get back to you.

I'll get back to you on it, Matt. I have it on my...

Were there -- did you terminate at all because of any regulatory concerns or just profitability of the relationship?

We're looking at margin, and we don't discuss individual clients in that way, Matt.

We do have our last follow-up question from Frank Schiraldi with Sandler O'Neill.

Yes, just 2 more questions, if I could. Just on the -- with the deposit sale program going live, are you comfortable with capital or could there potentially given...

We're absolutely comfortable with capital.

Okay, 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've had occasion where we've increased pricing, actually. So I mean, it's all the dynamic of the client size and complexity and expense associated with any program. We certainly have negotiations where we've lowered pricing. We've certainly had negotiations where we've increased pricing with -- in the current book of business.

Okay. So it sounds like there's no trend towards decrease?

Yes, yes, there's no trend. And even if we are -- even if we are decreasing pricing, it's typically based on forward volume. We typically work to protect current revenue, current margin. So it's new business. It's growth essentially that might be priced better. But like I said, for every one of those situations, we have a situation where we've actually increased pricing on a specific client because of, like I said, expense or complexity or whatever it might be.

And I'll 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 the 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.