The Bancorp's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: The Bancorp, (TBBK)

The Bancorp, Inc. (NASDAQ:TBBK)

Q2 2011 Earnings Call

July 21, 2011 10:00 AM ET

Executives

Andres Viroslav – Director, Corporate Communications

Betsy Cohen – CEO and Chairman of the Bank

Paul Frenkiel – CFO, EVP - Strategy, and Secretary

Frank Mastrangelo – President, COO

Analysts

Frank Schiraldi – Sandler O’Neill

John Hecht – JMP Securities

Andy Stapp – B. Riley & Company

Matthew Kelley – Sterne Agee

Brian Hagler – Kennedy Capital

Operator

Good day, ladies and gentlemen, and welcome to Second Quarter 2011 Bancorp Inc. Earnings Conference Call. My name is Brian and I will be your operator today. At this time, all participant lines are muted and we will facilitating a question-and-answer session at the end of the call. (Operator Instructions)

I would like to now turn the call over to Andres Viroslav, Director of Corporate Communications. Please proceed, sir.

Andres Viroslav

Thank you, Brian. Good morning and thank you for joining us today to review The Bancorp’s second quarter 2011 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 01:00 PM Eastern Time today. The dial-in for the replay is 888-286-8010 with a confirmation code of 74045158.

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 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?

Betsy Cohen

Thank you, Andres, and thank you all for joining us today on what I am sure many of you will going to be a quite warm day. The second quarter of 2011 continues to show the strong operating income that we have been talking about over the course of his last several quarters.

As we always remind you, this is – our business has some seasonality in it and therefore we feel the most valid comparison are those on the quarter to quarter basis, year-over-year. And so that’s what I will be talking about this morning. Our core fee-based businesses grew we think dramatically. Non-interest income as a whole grew 62%. In the prepaid division that growth was 75% and the result of that is that core earnings grew by 30% June 30, 2011 over June 30, 2010.

If you look at the seasonality, we tried to remove the anomaly – remove the seasonal elements, and normalize the profits and therefore check our own progress by looking at what we think of as normalized net interest margin.

For the second quarter 2011, that number was 3.54 and for the second quarter 2010, it was 3.59. So you can see that we were within a consistent range on that second quarter to second quarter analysis. And that removes those deposits that are excess of deposits due to the implicit seasonality of the deposit business. Some of this income – non-interest income that I have been discussing is certainly a subject of the that Frank legislation and Durbin amendment and Frank is going to speak a little bit about that and what we see as our exposure to Durbin during his comments.

We also experience balance sheet growth. If you look at average assets on a six-month basis for example and this is as valid for the three months for 2011 is $2.8 billion, for 2010 $2.2 billion a continuing growth in an average assets. Loans also grew although I know that we have continued to grow even through a difficult period. It is gratifying to us that we can continue such growth through as we slog through, but continued to be difficult economic times for the country as a whole.

Our average deposit grew 27%, but if you back out CDs and we talked last time that our pruning deposits and taking at our highest cost deposits on a regular basis. Our core deposits as we think of them grew by 40%, and Frank will give you more detail on that.

The securities portfolio, which we have been using as a substitute for loans until the economy picks up, and we’re able to develop growth within each of our targeted asset classes. It grew from $230 million in 2010 to $370 million in 2011 and we’re in the midst of small repositioning of the portfolio, and Paul, would you like to talk about that and the resulting gain.

Paul Frenkiel

Sure. During the quarter we sold approximately $25 million for our longer term securities, primarily 30-year mortgage backed and we didn’t have large amounts to begin with, but we sold the majority of what we held. We replaced and made other purchases of other mortgage backed but much shorter. So those purchases tend to have average life in the four-year range, and while we don’t see any pending increases – significant increase in rates in this quarter or the next, we thought it was prudent that because we do see signs of inflation and we know that eventually rates are going to increase, we thought it was prudent to stat pruning and reducing our average life and duration.

Andres Viroslav

Thank you. I think that what we are focusing is minimizing our extension risk as Paul has described, and this quarter that repositioning resulted in about $600,000 gain. But we have identified various assets classes for both. You may remember us speaking about our push in the direct leasing portfolio, which is mostly leasing, which year-over-year grew by 30%. We have an effort within franchise – franchisees these under the SBA program, where we provide guidance lines to the franchisors and they recommend their eligible franchisees to us, $20 million of the $330 million in guidance lines that we have outstanding has landed on the balance sheet and we see a pipeline of continuing growth behind that.

And so the growth in that portfolio – in the total loan portfolio, 7% really takes into account the areas of targeted growth, but also our efforts to reduce still further our residential construction exposure, which was down year-to-year some 10% plus.

We did not have the economy at our back so to speak in terms of winds, and so we were proactive in identifying loans that we though may be the subject of recovery at some future time, but certainly where we should be out head and recognize loss, and so we had an increase in our write offs during this quarter, which really reduced the profitability on a GAAP basis from where, I think, we had all estimated it to be $0.2 a share. It was completely a function of what – of the amount it was provided for those loans.

However, when you look back to 2010, June of 2010, non-performing loans were at that time 1.82% and they have been reduced even in this quarter to 1.43%. So although they were up on a linked quarter basis, if you look across the last four quarters, except for the first quarter of 2011, the numbers for the second quarter is the lowest that it’s been in three or four quarters.

The consequence of providing more obviously is that the coverage has increased, and so in June of 2010 coverage was 1.42 and for this quarter 1.65. One of the indications that we look at to identify loan growth because loans don’t always hit the balance sheet within the quarter that they are originated is the extent of the originations and this quarter we originated almost $120 million in new loans. So we believe that overtime they will, in fact, find their way on to the balance sheet.

OREO was up this quarter, and we actually look at that as a positive because it means that the very tedious and long process of taking a property through foreclosure for sale has been completed and we now have the opportunity to sell it. We mark those properties at 90% of the current appraisal, so we think that that’s reflective of a reasonable opportunity to sell those properties at or perhaps above the appraised value.

I am going to ask Frank to both talk about that, Frank, and also to give you some more details on our fee income and our deposit growth. Frank?

Frank Mastrangelo

Thank you, Betsy. As Betsy had mentioned in her opening comments, year-over-year which is the – really we believe the right way to look at the growth as the business given seasonality of the business lines that we operate, on a snap shot basis deposit growth was only 18%.

As Betsy mentioned when you compare the deposit booked last year to the deposit booked this year and take into consideration that this year the bank is more than 99% core funded, there are $137 million roughly in appropriate deposits that we allowed to roll off and did not replace and further we actually decreased the deposits in one of our higher cost programs by $100 million during that period also. So kind of normalizing on an apples-to-apples basis, you get to just about 40% year-over-year growth number on the – off the deposit booked. growth, while at the same time you brought down the cost of funds substantially.

So all good things, as Betsy mentioned, we continue to prune higher cost relationships, higher cost deposits out of the – out of books.

At the same time, these new relationships that were adding and continued penetration of our current relationships are really driving not only the deposit growth, but also non-interest income growth and that’s how we achieved 62% year-over-year total non-interest income growth with the prepaid unit contributing 75% year-over-year growth to $4.4 million compared to $2.5 million in the second quarter of 2010.

A question that is often asked of us and Betsy asked me to touch on, of course, was the impact of Durbin on the bank’s non-interest income. I think as many of you are aware, banks under $10 billion in total assets of course were carved out of the legislation and both the associations, Visa and Master Cards, have commented that they will build multi-tier interchange rates based on bank asset size and the asset size and that process has actually begin and is underway.

So there is not directing that, but we still look at the underlying products themselves and how we are generating revenue to see what qualifies and what doesn’t from an exemption standpoint. As we look across the total private securities gain and the $7.2 million non-interest income for the quarter, what we find it that 29% of that today is driven through interchange, it’s about $200,000 in debt card income from our various non pre-paid related programs and then 44% of the $4.4 million in non-interest income related to the pre-paid business itself.

Now that 44% is actually down, two years ago that number was 82%, one year ago that number was closer to 68%. Roughly two years ago the bank made a decision to move away from interchange based pricing in the majority of its deals just feeling even pre Dodd-Frank, pre Durbin, feeling that globally interchange rates were under pressure, we began to move away from interchange based pricing and actually shifted to transaction fee based pricing.

We felt that by taking an equivalent amount in transaction fee, we could protect our revenue from what we saw as global downward pressure on interchange. We realized at the time if we were wrong, if we’d call that wrong and interchange rates began to creep up, that we might be giving up some future revenues and future income but we didn’t think that was likely. As we continue to book these deals, as we continue to renew deals that 44% will continue to come down also.

Betsy Cohen

Okay. With that information I’d like to open up the floor for questions, Brian.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions). And your first question comes from the line of Frank Schiraldi of Sandler O’Neill. Please proceed.

Frank Schiraldi – Sandler O’Neill

Good morning.

Betsy Cohen

Hi Frank.

Frank Schiraldi – Sandler O’Neill

Just a few questions if I could. I wanted to ask first Betsy on the commercial loan pipeline. If you could just maybe quantify what the pipeline looks like today versus this time a quarter ago?

Betsy Cohen

Community bank lending as a whole is I mean that’s how we look at it as opposed to – or did you want me to break out C&I I’m not sure Frank what.

Frank Schiraldi – Sandler O’Neill

If you could just overall maybe.

Betsy Cohen

Okay. I think that we see an uptick in demand and we also see a – an increased willingness of borrowers to grow their businesses and to transfer their loan relationship. Those are two elements or two aspects of sort of confidence in the market that we find very comforting. And so we do have a much larger pipeline, but I don’t have that number right in front of me on a June 30 to June 30 basis. But we do have a much larger pipeline than we had a year ago and we have been able to in terms – as part of growing the portfolio 7%.

We have had some of that growth coming from customers that we have done business with over a long period of time, who are activating loan request that made today be with other institution and may involve some additional new credit.

So we do see immature of your market and of course we are only talking about Philadelphia and we’re talking about parts of where the 12 county areas surrounding Philadelphia.

We are not talking about other parts of the country in that regard. One place where we do see a little bit more confidence now which results in a bigger pipeline is in the security pipelines have credit whereas may be last year around this time people were still reluctant to expand their credits through so called margin loans or securities backed lines of credit.

We see growth from both our existing partners and our new partners. In that regard, we’ve added in the last couple of quarters a couple of substantial new partners, and so we would not have expected to see any increased pipeline in that area for a couple of quarters or nothing that landed on the balance sheet. What we have seen even though it’s not gotten to the balance sheet yet is an expansion of our commitments. And so that takes time for people to take it down. But, I think, all of those are areas in which we do see growth.

Frank Schiraldi – Sandler O’Neill

Okay, great. And then, Frank, I just wanted to double-check with you some – the numbers you gave on interchange-related revenues. So, overall, is it about – interchange related is about $2 million a quarter, do I have that right?

Frank Mastrangelo

Yeah, overall it’s about $2.1 million.

Frank Schiraldi – Sandler O’Neill

2.1. And you’re either exempted from Durbin because you’re under $10 billion or you’re exempted from the new fees because it’s prepaid cards, is that right?

Frank Mastrangelo

Yes. So, when the Fitz rules came out, they were actually a bit different than any of the proposed rules previously. So we’re actually still analyzing, trying to figure out exactly what is exempted and what is not. It’s actually not quite as clear-cut as it was originally proposed in the initial rules. So, for example, on the general propose reloadable product offers, certain types of cash out function, it actually not exempt.

So, there were some provisions in the final rule and had not existed in any of the previous federation. So, Frank, the – as I said it’s – of the $7.2 million total, $2.1 is essentially interchanged. There is a portion of that that certainly is exempted, but it’ll take, it takes us one time to actually curve out which programs are, which ones are, but even beyond that as you mentioned $210 billion were wholly exempted.

Andres Viroslav

I think, Frank, throughout pressure that we have not yet seen, but I think is what we’re trying, we have been trying, and we continue to try to react to if whether there will be an across the board reduction in these fees whether you’re over or under $10 billion.

We don’t see it yet. It’s all we can tell you and we don’t see the market mechanism, which would be driving it. So, we can’t report any facts. We can only report that we’re acting defensively and moving our dependants away from interchange as you could see – the reduction from 80 to 70 or 68 or 44.

And that with new contracts that come online will continue to go down because some of the 44 is embedded in older contracts. So as we renew them as new contracts come on line and we reconfigure that income relationship of – you will see that number begin to come down even further and it’s so it’s should be a non-event.

Frank Schiraldi – Sandler O’Neill

Okay.

Frank Mastrangelo

It doesn’t mean we’re losing the 2.1 million, we may lose 200,000 at the door, something exactly.

Frank Schiraldi – Sandler O’Neill

Right, okay. Is there other – are there other fees that – is it still going to be a focus on fee income or there other free income sources or places on these cards to get fee income other than interchange?

Frank Mastrangelo

Well for us remember it’s about – our pricing structure to the third parties who are typically contracted with is a transactional-based pricing. Right, that’s the model that we shifted to, from our standpoint, no transaction is a transaction, if whether that be a load onto the card, direct deposit a swipe or pin at point of sale transaction-to-transaction and it ultimately how we structured that – we structured deals on a forward bases.

Andres Viroslav

That’s a number of transactions rather than the dollar amount of those transactions.

Frank Schiraldi – Sandler O’Neill

Okay. And then just finally I want to ask on credit, just maybe, if you could offer any color on the sequential increase in NPAs and maybe just your thoughts on credit going forward?

Frank Mastrangelo

Sure, thank you. You may remember that we had an uptick in March – it came about in March, but reflected in the first quarter of this year in delinquencies and with a secured credit, but when it became delinquent, which was first time in its history, we took a much closer look at it and decided to classify it differently and to write off a portion of it and to classify a portion of it as substandard.

So, we wanted to take immediate action on that. We do think that the lack of progress in the economy is not helpful, but we think that we have managed this portfolio through very difficult times and understand what the elements of risk are. The one factor that’s often difficult to anticipate because the credit profile or the creditor profile in this recession is a little bit different than we see – we’ve seen in the past, that it’s gone on so long that some people get tired and give up and that’s very hard thing to anticipate.

We try to prop up our borrowers to the extent that we can and work with them and give them support, and I think it’s why we fared so well, for example, in areas such as residential construction because overtime our losses have been very, very modest in that portfolio. So it’s a confidential action and we continue to work hard at it.

Frank Schiraldi – Sandler O’Neill

Okay. Thank you.

Operator

And your next question comes from the line of John Hecht of JMP Securities. Please proceed.

John Hecht – JMP Securities

Good morning and thanks for taking my question. First question is related to margins, just trying to kind of model out near-term margins certainly not asking per specific guidance, but Q3 you have a seasonal inflow of deposits and I know that the average cost of those tends to go down given the mix shift and I know you have a pipeline of loans you are generating, but it sounds like you are going shorter on the duration in terms of investing in securities. What would you suggest we kind of model for with the excess deposit inflow for the type of returns into the investment securities portfolio for the near-term.

Frank Mastrangelo

First of all we apologize for making the business so complicated John. But my suggestion would be in a way to ignore the seasonal inflows for P&L modeling and to assume them because the margin will be a factor of what the amount of the seasonal inflow would be. And that’s some tines very hard thing to be absolutely predictive about. So if you look at the portfolio without the seasonal component and model on the basis of – and I think I gave you what we call normalized net interest margins and I know that Paul or Frank could have a longer conversation with you about this.

They were pretty steady from June 2010 to June 2011 at 359 versus 354. So I think you can take guidance from that and we’d be happy to provide with you the normalized or anyone who would be interested in the normalized net interest margin for the other quarters as well. Paul, do you have any?

Andres Viroslav

Yeah, in terms of the modeling, it’s a very easy complication. You basically – our reserve requirements are under $100 million so if you take X-cash balances over $100 million and assuming they are earning 25 basis points which is what the Fed is paying us, you can just subtract that from the asset side and the liabilities side because those excess deposits, it is extremely difficult to invest them in any spread so we basically leave them at the Federal Reserve Bank earning 25 basis points.

So as I said if you subtract them from the assets on the deposit side and assume 25 basis points earnings on that, you can easily adjust the margin and as Betsy indicated, it’s been running between 350 and 360 fairly consistently.

John Hecht – JMP Securities

Okay, that’s very helpful. And one other minor question on the margin. You lease portfolio which has been growing, it looks like there has been an expansion of yield in that, is that something going on in the market place or you had better pricing or is that a mix shift within that portfolio?

Frank Mastrangelo

I think it is really emphasis in that portfolio. The portfolio has been around for a long time. We’ve had the opportunity to participate in RFPs for a variety of entities recently, and that has provided a significant uptick. I think there was a period about a year ago when municipalities, and they make up maybe half of the portfolio, not absolute municipalities but subdivisions such as Sheriff’s offices and school boards and things of that sort where they just were like deer in the headlights and they did nothing. So they are back in business and they are ordering cars, new cars for their fleets.

So each portfolio of – each fleet leasing portfolio has different characteristics, but ours which focuses in part of those businesses such as Sheriff’s offices, the FBI, et cetera are benefiting from the need now for those agencies to replace their vehicles.

John Hecht – JMP Securities

Okay. And then moving to credit, just the question was asked but it sounds like that the increased NPA and the charge off – large commercial charge off, is all related to – well predominantly related to this one loan that you took in and your reclassified?

Andres Viroslav

I would say a significant portion.

John Hecht – JMP Securities

Okay. And there is a modest REO charge in the quarter, I am just wondering was that related to the kind of inflows that you mentioned?

Andres Viroslav

Yes. We took – we sold something, we took some things into OREO and we marked them at 90%. We may have had some small expenses that we didn’t anticipate when we did a previous mark, but it’s essentially the marking to appraisal – at 90% of appraisal that resultant in that loss.

John Hecht – JMP Securities

Great. Thank you guys very much.

Operator

And your next question comes from the line of Andy Stapp of B. Riley & Company. Please proceed.

Andy StappB. Riley & Company

Good morning.

Unidentified Participant

Hi, Andy.

Andy Stapp – B. Riley & Company

Do you have the timing of the securities sales over the course of the quarter as well as the rate of the securities sold and securities purchased?

Andres Viroslav

Sure. I don’t know that we have it immediately in front of us, but if that’s of interest you, we’d be very happy to share that with you.

Andy Stapp – B. Riley & Company

Okay. And is it a reasonable assumption that the provision should revert back to roughly $5 million per quarter?

Unidentified Participant

I’m going to tell you just the safest answer I can give you is that we don’t make those predictions. Somewhere – you can take a look at our history, this is an outlier but I don’t want to make predictions.

Andy Stapp – B. Riley & Company

Okay. Do you have what early stage delinquencies 30 to 89 days were at quarter end?

Unidentified Participant

And if you ask another question, I have it. I just have to pull it out for you. I will....

Andy Stapp – B. Riley & Company

But that was my last question. So, you can get somebody else...

Unidentified Participant

I’ll get back to you when somebody else asks the question Andy, sorry.

Andy Stapp – B. Riley & Company

Okay. Thanks.

Betsy Cohen

Okay, or else I’ll e-mail it to you right afterwards.

Andy Stapp – B. Riley & Company

All right. Thank you.

Betsy Cohen

Okay. Andy, I actually do have it. Just based on a linked quarter basis 30 to 89 days for the quarter ending 3/31/2011 was about $18 million and it’s approximately for 6/30/2011.

Andy Stapp – B. Riley & Company

Okay. Thank you.

Betsy Cohen

Okay.

Operator

And your next question comes from the line of Matthew Kelley of Sterne Agee. Please proceed, sir.

Matthew Kelley – Sterne Agee

I guess first on the – just a subject of expenses the last couple of conference calls we’ve been talking about generating positive operating leverage here. You’ve had good revenue, growth trends but year-over-year expenses were up 20% and annualized running at a similar type of rate, just looking at the sequential changes here. So would you anticipate for expense growth of the $18 million you had this quarter to begin with.

Betsy Cohen

Paul, would you like to.

Paul Frenkiel

Sure. We have had some increases in expenses that you’ve seen especially in this quarter and they were significant compliance expenses we’re really building out a Compliance Department. We are – it’s really a new division, right. But once we’ve got those people in place and we already have a new third-party management person, a new general counsel and other related staff, that should be relatively fixed. So we’re trying to keep them more – a lot more flatter in the coming quarters and I think you will see that.

Matthew Kelley – Sterne Agee

Any idea on growth rate per expenses once that is fully implemented that department is still down?

Frank Mastrangelo

I can’t really give you a percentage, we’re actually doing some modeling. We’ve already started working on the budget and updating our projections right now, but I can say that they should be lesser than you – lesser increases than you have seen.

Matthew Kelley – Sterne Agee

Single digits or double digits?

Frank Mastrangelo

Low double digits.

Paul Frenkiel

Let me just help out by saying we’re hopeful to be half of with have enough that you have seen.

Matthew Kelley – Sterne Agee

Okay, all right. And then on the credit front, can you just give us a little more detail on what’s the actual credit was – the nature of the project, where it’s started out in terms of the dollar amount you extended right downs overtime, the type of collateral. Just a little more color on what’s going on there?

Paul Frenkiel

I will give it you in general now and I can certainly give you a greater specificity, but it was a series of – tale an eight separate trans loans all against real estate. This was a residential real estate construction borrower, not someone who build out project, but who build single family properties and has had been rented out that’s a nature of the transaction.

Matthew Kelley – Sterne Agee

So what’s the total amount of those eight separate loans in aggregate?

Paul Frenkiel

Approximately $11 million.

Matthew Kelley – Sterne Agee

Okay. And the $5 million or excuse me you had a $5 million charge-off this quarter how much of it was related to this credit?

Betsy Cohen

I am telling you substantial amount what we did we’ve did we’ve tried to assess as if they were going into OREO what the projects – what we thought the current appraisal was and write-offs about the difference.

Matthew Kelley – Sterne Agee

Okay. And how are you feeling about the rest of your C&D portfolio today, any other credits that have been downgraded recently that are on the watch list today that weren’t three to six months ago.

Betsy Cohen

We are always looking and they can be on the watch list for any number of reasons, but I think the portfolio has been steady state.

Matthew Kelley – Sterne Agee

Okay. And getting back to the eight separate loans are those projects completed and vacant or where do they stand?

Betsy Cohen

They are completed homes.

Matthew Kelley – Sterne Agee

Okay. And has the developer reduced costs and trying to move those losses?

Betsy Cohen

Yes. It is in the mix and we are together within the midst of trying to identifying buyers for these projects.

Matthew Kelley – Sterne Agee

Okay, all right.

Betsy Cohen

But it’s only been a short period of time.

Matthew Kelley – Sterne Agee

Okay and then Betsy just over the last couple of quarters again you’ve had some success in really moving the needle on profitability the growth in revenue has been fantastic, but the big concern has been dropping to the bottom line and generating real earnings improvements on EPS basis bottom line and ROE improvements, ROE improvements and so I think we have talked about eventually hitting king of a run rate of $1 per share in earnings, how do feel about that today and the timeline for achieving that?

Betsy Cohen

I think it’s in a way a function of the relationship is a growth in two aspects, one the growth in the non-interest income, resulting from our deposit portfolio, as it relates to the length of the recession and the opportunity for borrowers to have some success in moving projects that they thought they would move much earlier.

So I think it’s a complex answer and that’s where the ability to – we are very comfortable and confident that we have the ability to earn our way out and it’s just a matter of whether it will happen on a consistent quarterly basis or not. We think that based on, what we would hope to be a normalized credit situation going forward Matt that said we have the capacity to earn that $1 a share.

Matthew Kelley – Sterne Agee

Over what timeframe? It has been quantified in the past that’s why I asked.

Frank Mastrangelo

Are you asking when we will start earning?

Matthew Kelley – Sterne Agee

Yeah, yeah, I mean in previous discussions I thought you have talked about getting to that type of profitability run rate over 12 and 18 months’ time horizon?

Frank Mastrangelo

Yeah, I mean I really do think that that’s still true.

Matthew Kelley – Sterne Agee

Okay, all right. And one other things have you concerned just from the credit front, the tone here in credit is more concerned than we’ve heard for the last couple of quarters. So maybe a couple of their anecdotal examples such as projects that are not going as well or conversations with borrowers, what else is occurring?

Frank Mastrangelo

I think, we’ve identified for ourselves, those borrowers as we think are at risk. I don’t think it’s an increase in concern. I think the concern is that about the length of the recession. As oppose to get to the recession.

Matthew Kelley – Sterne Agee

Okay, all right. Thank you.

Operator

And your next question comes from the line of Brian Hagler of Kennedy Capital. Please proceed.

Brian Hagler – Kennedy Capital

Yeah, good morning.

Paul Frenkiel

Hi Brian.

Brian Hagler – Kennedy Capital

I think, most of my credit questions have been discussed, but just wanted to talk about the prepaid business continues to grow at a rapid rate, I think one of your larger wins in the last few quarters was the net spend business. Have we started to see any revenue from that yet or if not when do anticipate that happening I know there is a lag?

Paul Frenkiel

Yes, there is a lag and I think we had anticipated seeing it in the second quarter and the integration of the net spent business took us longer than we thought it would take and so that was an optimistic estimate. We now think of Frank into third quarter beginning of fourth quarters, is that right.

Paul Frenkiel

Yeah, that’s right. We should start to see some impact in Q4 and hopefully see further impact of that relationship in Q1 2012.

Brian Hagler – Kennedy Capital

Okay. Thanks.

Paul Frenkiel

Thank you.

Operator

And at this time, there are no more questions in the queue. I would like to now turn the call back over to Ms. Betsy Cohen for any closing remarks.

Betsy Cohen

Thank you. And thank you all for as always your good questions and we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, that concludes today’s conference call. You may now disconnect you lines and have a very nice day.

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