Customers Bancorp Inc (CUBI) 2014 Q2 法說會逐字稿

Good day, welcome to the Customers Bancorp second-quarter 2014 earnings call. This conference is being recorded.

At this time I would like to turn the conference over to Johnny Lai with MZ Group. Mr. Lai?

Thanks Rick and good morning everybody. Customers Bancorp's second-quarter 2014 earnings release was issued earlier this morning and is posted on the Company's website at www.customersbank.com. Representing the Company today are Jay Sidhu, Chairman and Chief Executive Officer and Bob Wahlman, Chief Financial Officer.

Before we begin we would like to remind you that some of the statements that we make today may be considered forward-looking. The discussion today may contain forward-looking statements which are made in good faith by Customers Bancorp pursuant to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 as amended and the Securities Exchange Act of 1934.

These forward-looking statements include statements with respect to customers Bancorp's strategies, goals, beliefs, expectations, estimates, intentions, financial conditions and results of operations due to the performance and business. Statements preceded by or followed by or that include the words may, could, should, pro forma, forward-looking, would, believe, expect, anticipate or similar expressions generally indicate the forward-looking statements.

These forward-looking statements involve risk and uncertainties that are subject to change based on various important factors some of which in full or in part are beyond Customers Bancorp's incorporated control. Numerous competitive, economic, regulatory and legal factors among others can cause Customers Bancorp's financial performance to differ materially from the goals, plans, objectives intentions and expectations expressed in such forward-looking statements.

Customers Bancorp cautions that the foregoing factors are not exclusive, neither such factors nor any such forward-looking statements take into account the impact of any future events. Forward-looking statements and information set forth herein based on management's current beliefs and assumptions as of the date of this call can speak only as of the date that they are made.

For more completed discussions of the assumptions, risk and uncertainties related to our business you're encouraged to review Customers Bancorp's incorporated filings with the SEC including its most recent annual report on Form 10-K as updated subsequently (technical difficulty) as well as any changes of risk factors that may be identified in its quarterly or other reports filed with the SEC. (technical difficulty) SEC filings including the report mentioned.

Now I would like to introduce Customers Bancorp's CEO Jay Sidhu to today's call. Jay?

Thank you very much Johnny and good morning ladies and gentlemen. Thank you for taking the time to be on our second-quarter call. We have about 50 investors and analysts on the call today and we really appreciate their interest in Customers Bancorp.

We are very pleased to share with you the progress that we have made in achieving our objectives. And second quarter is on its way to try to achieve our objectives we set out for 2014 and also for the next two to three years.

As you know our net income increased 26% over the first quarter and increased 24% over Q2 2013. Our return on equity was 10%. And our top-line growth which is really a very, very tough for the industry, we are very pleased to report a 38% year-over-year top-line growth with net interest income growing 41% and hence the core net income for us growing by 24%.

This quarter also marked the fifth anniversary of us embarking on Customers Bancorp's with a platform that used to be called New Century bank. So in recognition for all the team members who have done in our assessment a tremendous job over the last five years, I would just like to share a little bit with you on our journey over the last five years. And then I will hand it over to Bob Wahlman to really talk about the details of second quarter.

As many of you may be aware that it was exactly five years ago that I've was named by the Board of Directors of the New Century Bank to be the Chairman and Chief Executive Officer of a very troubled, $270 million asset bank and once again it used to be called New Century Bank. At that time this bank had about 30% nonperforming assets and based upon our diligence, but had about $17 billion of equity that amounted to only about 8% equity.

So with that sort of a situation which in essence was a failing bank and over the last five years we have charged off $23 billion of those bad loans. But we still have 20% of those legacy loans as nonperforming loans. So with that kind of a background, today we are very, very, very pleased and really salute all the team members who have built a very, very strong foundation on what is called Customers Bank today.

So that troubled, failing $270 million bank today is a $5.6 billion asset company that has made 2.5 times money for the investors who came in at that time. And our equity has gone up from the failing bank's equity to a $414 million equity and we really have not had any significant acquisitions at all. It is very much of an organic growth story.

So not only did we do what we did is in 2009 and 2010 we just identified all the problems and very, very aggressively working with all the regulatory agencies and we really as if it were in a partnership with the regulators to try to fix this problem. With the help of our regulators we were able to a year later do two small FPIC-assisted deals and they were both together were about $200 million in size.

And then we bought in 2010 only a $85 billion asset bank in Reading, Pennsylvania which is our headquarter area right now. And that is it.

The rest of the growth, so other than his $250 million type of a goods and assets from acquisitions, the rest of the goods has all been organic. And we have recruited tremendously experienced, proven lending teams over the last couple of years.

We have built out our commercial and multifamily lending platforms. We have built a very, very strong robust risk management system because we believe that is absolutely critical to have a strong foundation in risk management.

And we take safety and soundness very, very seriously in compliance as part of our DNA. And we are very seriously to the point whereby today that we believe we are, in the top-line growth, the number one bank in the United States based upon some of the analysis that we have done.

In terms of how does that compare with the industry as such because we measure and we do a lot of benchmarking. I am sure you are aware of it but the top-performing $5 billion to $10 billion asset banks are earning 1% return on assets. We are not satisfied because we are reporting 80 basis points.

The top performing banks in $5 billion to $10 billion category are earning 8.4% return on equity. We are not satisfied because we are only getting 10% because our goal, aspirational goal is to get to 12% ROE.

The top-performing $5 billion to $10 billion banks in United States have an efficiency ratio of 66%. We are not satisfied with our 58% because we want that number to go down to 45%.

And the top-performing $5 billion to $10 billion banks have nonperforming assets of 1.36% as of December 31 last year. Even though we are at 27 basis points right now but we are very mindful of our responsibilities to maintain strong asset quality. And we hope to try to be focused on that in that every single day the decisions that we make on the credit side of it.

So with that, I would like to hand it over to Bob Wahlman to go over the details of our financial results for second --

Thank you Jay and good morning everybody. The second quarter of 2014 was a quarter of records and firsts for Customers Bank.

The highlights for these include Customers' reported record net income for Q2 2014, so for end quarter, of $10.2 million compared to Q1 2014 net income of $8.2 million. As Jay noted, that was a 26% quarter-over-quarter increase in net income.

Fully diluted earnings per share was reported at $0.37 for Q2 2014 as compared to $0.29 on Q1 2014. Q2 2014 net income excluding securities gain was $10 million compared to Q1 2014 net income gain, net income excluding securities gains of $6.3 million.

That was a 59% increase in net income excluding securities gain quarter-over-quarter. Clearly a remarkable performance.

Customers reported record total assets as of June 30, 2014, of $5.6 billion. This compares to total assets of $5 billion as of March 31, 2014, a 13% increase in asset quarter-over-quarter.

Total assets have increased $1.5 billion in the past six months, a 36% increase year to date. All asset growth in 2014 has been an income producing investments, all of that asset growth has been in loans.

Customers reported record loan originations for Q2 2014 of $867 million including $375 million net increase in the mortgage warehouse. This compares with loan originations of $649 million in Q1 2014 including a $46 million net increase in the mortgage warehouse.

In addition, in Q1, (technical difficulty) 2014 Customers [$255] million of mortgage loans. It is organic loan originations that has driven the increase in asset. And it is that increase in the earnings asset that has delivered that increase in net income.

But we are also ever mindful of our asset quality as Jay was just noting and a few comments on that. Customers' level of nonperforming loans continues to move downward reaching a low of $17.1 million as of June 30, 2014. Of this amount, $4.4 million is covered by FDIC guarantees and $11 million relates to pre-2009 volumes. So loans made more than years ago that were acquired with the bank charter or the Berkshire purchase transaction.

Nonperforming loans not yet guaranteed by the FDIC were reported as only 27 -- nonperforming loans not guaranteed by the FDIC were reported as 27 basis points of total loans. And that includes loans held for sale.

Loans not covered by FDIC guarantee that it is 30 to 89 days past due as of June 30, total only $8.1 million or 0.17% of non-covered loads. So we don't see any low deterioration (technical difficulty) either.

In June 2014 customers issued a first $110 million in subordinated that's from the bank subsidiary and $25 million in senior debt from the parent holding company. The subordinated debt counts as Tier 2 capital; it increased the total risk-based capital ratio that was limiting customers' growth and better leverages our common equity.

The Tier 1 leverage ratio for Customers Bancorp as of June 30 is estimated at 7.8%. And the total risk-based capital ratio is estimated at 12.8%. These are preliminary numbers for June 30, 2014, that will be finalized by the time we file our regulatory reports and our Form 10-Q.

And another first, on May 15, Customers declared a 10% stock dividend. This was the first stock dividend of any type since before 2009.

All shares outstanding and earnings per share amounts have been adjusted for the stock dividend. And that includes all past periods are restated for the stock dividend.

So other matters of note related to the second-quarter financial performance, the net interest margin increased 3 basis points to 2.96% for the second quarter. This is notable because it goes against the industry trend of compressing net interest margins and Customers' trend over recent periods of declining net interest margins.

Related net interest income in Q2 2014, $38.9 million, up $7.1 million quarter-over-quarter, a 24% increase quarter-over-quarter in net interest income. Provision expense was $2.9 million for Q2 2014, principally, the result of Q2 loans held for investment asset growth. Charge-offs for the quarter totaled approximately $1.3 million, almost exclusively related to legacy load and FDIC-guaranteed loans.

Q1 2014 charge-offs were only $200,000. Customers' loss reserves has grown to 184% of nonperforming loans as the loss preserve has increased and the level of nonperforming loans is decreased as of June 30, 2014. And that is up from 165% of loans as of March 31, 2014.

Q2 2014 non-interest expense was $25.2 million and that remains the challenge for Customers as it increased $4 million over Q1 2014 expense of $21.2 million. The expense increase was offset by larger increases in net interest income and non-interest income. In fact, the increase in expenses was less than half of the Q2 increases of core income.

That relationship is consistent with our objective of the growth in revenues at least double the growth in and expenses. And as a result, our efficiency ratios did decline to 58% for the quarter. However, we will need to do more, we will need to do better to achieve our goal of an efficiency ratio in the 40%s, as Jay had just noted 45%.

In fairness, while the expense was generally across-the-board as expenses were incurred to support the asset and income growth, there is a notable amount of expense incurred during 2014 related to regulatory matters that we hope will go away by the time we get to 2015. So Q2 was truly a remarkable quarter. And the first half of the year was equally remarkable.

Customers has set very ambitious goals. We set very ambitious goals at the beginning of the year that the team would build a new and more profitable bank and those goals have been and are being achieved. I look forward to your questions at the end the presentation and I'll hand the microphone back to you Jay.

Okay, thank you very much Bob. Let me just go over a few things before we open it up for questions.

We have five questions that were submitted to us (technical difficulty) so we will address these first five questions and then open it up for Q&A. Our model for shareholder value creation has really strong, organic top-line revenue growth, have a scalable infrastructure and have double-digit EPS growth and that should result in shareholder value creation.

So on top of that, we believe a clear risk -- a simple risk management driven business strategy. And you combine those two ending up and continue to build our tangible book value per share ever single quarter, be very mindful of book value dilution from any acquisitions. And hence we have set a very disciplined strategy that if we do any acquisitions, we must recover any book value dilution within one to two years.

So it is really the superior execution to a proven management team is what we are focusing on. And so talking about teams, this year so far in the first half of the year, we are very pleased to welcome four teams that joined us in Pennsylvania as well as in the New York markets. And we have just completed an acquisition of a team from a large New York bank that is expected to join us in August.

We will be making an announcement on that. We are very pleased to see these, these fantastic revenue producers are very experienced who are deciding and choosing to join our team.

A little bit on our strategy and about the market that we are facing right now. Our strategy is what we call the single point of contact which is the private personal bankers, relationship managers, concierge bankers, those are the terminology that we use with our value segment. And they deliver their entire bank to the customer.

So that is how we get earning asset growth. And we are very mindful of the need to diversify earning asset growth and not take excessive concentration risk.

So on June 30, our loan mix was that multifamily loans were about 38%. I will follow it by mortgage warehouse loans which were about 20% and also very, very close to that is our C&I portfolio.

And C&I business is 20% for us. And we have a small 10% commercial real estate portfolio. It is not for a lack of market opportunities but it is a very disciplined approach that we take all the way from all aspects of risk including credit risk as well as interest rate risk.

So that is why we are very mindful and very careful not to build portfolios that can create any undue risk for us. And our consumer and residential loan portfolios are only 10% and shrinking because we are a business bank not a consumer bank. And we will talk about our consumer banking strategy a little bit later on.

What are we seeing in the different loan categories? In the C&I area, we have been targeting companies which are very much in the below $100 million in annual revenue. At the same time we have the SGA group and continue to build that group for the smaller businesses.

So we saw growth, our total originations in the small business and business banking was $135 million in the second quarter. That was up from $75 million of new volume in the first quarter. So the strength of our business banking continues to show a tremendous improvement.

In the multifamily area, multifamily remains a very competitive business. And we originated $520 million of multifamily loans in the first quarter. And we originated $270 million of multifamily loans in the second quarter.

That is in line with our strategy. We maintained our pricing discipline. Our average yields was somewhere in the 3 3/8% to 3.5% for the five years.

We this past quarter didn't do any at all of significant, anything more than five year loans. And we didn't really have any prepayment penalties go through our margin either.

So it is just focusing on what we call the high net worth families who own and their asset allocation they own income producing multifamily real estate. And that is what we are focusing on.

On deposit activity is something we are very, very interested in seeing and divulge. You will see us improve our performance in that area.

Our deposits from small, medium size businesses today are at $570 million compared to our business, commercial and industrial loan book of $900 million. So we are saying about 60% of our business customers or our deposit are coming from 60% of our total loans from businesses are actually being -- those same businesses providing us deposits.

And in the multifamily sector, our deposits are running at about 30% of our loan outstandings. And deposits about 30% of that in the multifamily segment.

Mortgage warehouse. Mortgage warehouse we are really pleased that our teams who are in the whole banking, the mortgage companies really adapt to the changing environment.

We believe that the refi activity will remain so. We are seeing some slightly slow down in the residential activity also in the month of July. But we have attracted some new clients.

We have also successively embarked on our financing very selectively servicing portfolios. We do not expect still to see any materially higher outstandings in 2014. And we maintain about 10% of our balances and loan balances -- our deposits are 10% of our loan balances.

So that is why we were at a little over $1 billion in outstandings for the second quarter. And we are at$111 billion in [deed years] in the second quarter.

So in spite of the fact that on an annualized basis, our non-interest income from banking, the mortgage companies, was down to $8 billion down from $13 billion last year. But we have been able to adjust our profitability and still show the revenue growth that I shared with you of 30% year-over-year.

Now in terms of looking ahead, we are very, very clear about our goals and those goals that we stated once again for the next 24 to 36 months our return on assets of about 1% or greater, return on equity of 12% or greater. Net interest margin of 3% plus minus 10 basis points. EPS 15% annual compounded growth rate on average.

And efficiency ratio about in the mid-40%s. Our guidance, adjusted for the 10% stock dividend that was declared to improve essentially and the liquidity in our stock, adjusted for that our guidance for 2014 is around $1.50 to $1.53 a share.

And for 2015 is $1.75 to $1.80 a share. And we hope to either reach those or exceed those.

So our focus while in terms of execution will remain in these four categories. Number one, is continue with our business model of single point of contact which is high touch supported by high tech.

Number two is only focused on superior credit quality niches. And principally focus on organic growth so that we ought to have above average organic growth in both the lending side of the business as well as the deposit side of the business.

Maintain our deposits so that the non-interest-bearing would be about 18% to 20% of the deposits. And continue with a tremendous amount of focus on managing expenses while you build a strong foundation.

So we're willing to spend the money first and revenues later on. And never sacrifice the need to build a very strong risk management infrastructure.

And on the consumer banking side, we have been operating in a very unique branch model which is a branch like where we have taken our average branch deposits now to about $180 million. Five years ago we started the bank, our total was [80] years.

We're only 29. Today they are 611.

Five years ago 70% of our deposits were CDs. Today 38% or CDs.

Five years ago, our total money market deposits were $83 billion, today they are $1.7 billion. And five years ago our average grant size was only $35 million and today it is $178 million.

So we look at to managing our cost and all-in cost model to look at the branch -- this unique branch model and which is to 24-hour concierge bankers. In other words our bankers are willing and able and do meet with customers at whatever time the customers find it convenient.

And rather than simply changing the technology inside a bank branch, and still they are continuing to expect people walking into a bank branch and then having video tellers in a bank branch, we think that is antiquated and not necessary. We think that you should have on your iPad be able to do a video chat. Why make somebody walk to a bank branch to have a video chat with you?

That is kind of ridiculous in our opinion. So we want to go out to the clients and have video chats with them over their iPads and iPhones. Continually look at alternative channels and hence bank mobile is going to be launched by us in second half of this year.

It is well on its way. And we are in a test mode on that and it is going to be a very, very attractive opportunity for these times, for the technology-dependent consumer segment.

And next year, we intend to launch bank mobile's business. That we intend to approach and learn from our experiences and also attract small, medium size business clients with some unique, cool features on technology.

And then continue to build our deposits, our non-interest income channels through bank mobile for small, medium size businesses. So we will continue to update you on that as the time goes by.

So with that, I would like to first answer the questions or my colleagues will help answer the questions that were submitted. There were only four questions, rather five questions that were submitted. And then we will open it up for questions from the audience.

First question that was submitted to us was any updates on Religare, Bank Mobile, Tier 1, and prepaid business since the Analyst Day in mid-May earlier this year. Very good question. Let me just give you the updates on that.

As far as Religare is concerned, we have informed you that we are going to wait until the third quarter for Religare to get a banking license. Because we do see an opportunity to serve the small, medium size businesses who trade with India and the wealthy families. But we have concluded that we need a banking partner, not a non-bank finance company partner.

So the bottom line is, if Religare does not get a banking license by about the end of the third quarter, we will take steps to liquidate our investment and bring that capital back to the United States for our own organic growth. So that is nothing, no change, just confirmation of our strategy on Religare.

Number two is Bank Mobile. Like I said, Bank Mobile will be launched, and it is already in a beta test stage right now. It is really going to be a cool offering. It will be the first total bank offering using mobile as a channel of distribution for consumers in the United States.

We do want to serve not just the millennials but also the under-banked as well as the tech-dependent segments elsewhere. And we are incorporating some of the latest in technologies and in partnerships into our offering. And it will be better than and based upon our analysis than what you saw or may have seen from BankSimple or from mobile type of competitors which are the other mobile-based channel competitors we have.

So look for more information on that. But we are looking at either late third quarter or sometime in the fourth quarter launch. But we have got to do it right the first time, and that is why it has got to be spending a lot of time testing, all the way from features to security. And we are taking security very, very seriously. And that to us -- so we just, in fact, reported to the Board today on some of the testing that we've done on the security side of Bank Mobile.

Our third bid is on Higher One. And we knew on Higher One, there has been a lot of -- that company has been in a lot of news because of Cole Taylor. But let me just update you that we view every single client that was introduced to us by Higher One as our own customer. We take the compliance responsibility very seriously.

We don't think that in any way there are too many comparisons that anybody can make between the Cole Taylor situation and our situation. Higher One is not in our eyes not a bank. In our eyes, they are just a processing company. And that is why you should not draw any parallels between the Cole Taylor situation and Customers Bank situation.

And we will keep you informed about it, but we don't -- we have concluded that there should be no material issues at all regarding Higher One to the best of our knowledge at this time. But if things change, we will share with you. We are also at this time looking at bringing all the compliance functions being performed for us by Higher One perhaps inside our Company. Because we view that as compliance, it is something that is in our opinion a strength of ours.

We have approximately -- this is seasonally a low point, so we have about $225 million in non-interesting-bearing deposits from Higher One that we are serving. They are not necessarily very profitable for us, but we are gaining a lot of knowledge about how do we serve the underserved and how do we serve the low balance customers, because that is the challenge in the United States today.

And banks are totally ignoring the low balance customers because they don't believe they can make money on them, but we want to find a way with technology to serve them as well as make them profitable.

The next one is on prepaid business. We talked about that in May. Our diligence is well underway, and we have not concluded yet anything. We are in the process. The most important critical element for us would be recruiting the best team possible as we get into that business. But if we cannot find the best team possible, we are not going to get into that business. So I hope I answered those questions, but otherwise if there are any follow-up, you look for them.

Question number 2 that was submitted to us was the consensus estimates for you in Q3 are $0.40, and in Q4 are $0.41. Do you expect to meet those consensus estimates?

Well, that looks like a forward-looking statement, but I will try to answer that in a way that if you look at our guidance, our guidance for second half of the year is going to be greater than $0.81. It is greater than $0.81, which the consensus estimates indicate. So we are very comfortable in meeting the consensus estimates. Hopefully, they are meeting them or exceeding them.

Another question that was submitted to us, let me read it to you. It is a pretty long question, statement. And it was like I asked this question on your last call in mid July, also. My math tells me that your year-end tangible book value should be over $16 a share. With a return on equity up above 10% and a ROA of 80 basis points or higher, and earnings growing about 19%; when do you think you will trade at 175 to 2 times book, or about 15 times your 2015 earnings estimate? Because my math tells me your stock should be at $27 to $30 a share and not $19.

Well, thank you for reminding us. We are in the business of executing, not in the business of predicting stock prices, and we do not look at stock prices every single day. But you are absolutely right, if we meet or exceed our street estimates, our book value should be above $16 a share. Our return on equity should be about $10 a share.

Our return on assets should be about 80 basis points. And our earnings-per-share growth should be at double-digit, high double-digits, 19%, 20% or higher. And we are very mindful of what it takes, but we are just focusing on execution of the strategy. I think some of the analysts might be in a better position to comment. But we are very confident that the Street eventually rewards performance.

We just completed one year as a publicly-traded company, and we are just focused on continuing to execute on what it is, and we are positive that the Street will reward our shareholders. So thanks for your comment, but let's be patient.

Next question was, why are your regulatory related expenses including professional fees continuing to stay high? Well, as I mentioned, this is a very important environment to be in [top] from a compliance point of view. So we are continuously building our teams and our processes, all the way from the Bank Secrecy Act to fair lending to every aspect of compliance.

So it means not just adding to your staff, but it also means continuing to use the best resources available to make sure that we are and ahead of what the regulators would expect us to be, and that is why we think it is an investment, not an expense.

We think it is important to have, and it is painful for shareholders to see some of these expenses, but we consider that to be necessary. And eventually, the rewards will be there for shareholders. Like Bob Wahlman mentioned to you, hopefully you will see lesser of these expenses in 2015. But in 2014, we are not going to back away from spending whatever we need to spend to make sure that our regulatory strength is a strength of the Company and not a weakness of the Company.

The last question that was sent to us from email is -- here's what it is. Would you consider buying Sun Bancorp? I'll tell you, we don't comment at all on M&A, but we have got to be -- you have got to wonder where our heads at if we consider looking at any company that is trading at a higher multiple than us, has lower high-credit risk, has lower performance than us; why would we ever do that?

So I am just sharing with you what I shared with you about our discipline for M&A. And our discipline for M&A is that we will only look at M&A, whenever we do, if the book value dilution is recovered within one to two years and it enhances our shareholder value. Otherwise, we are all about organic growth.

So with that, Greg, if I can ask for your help in opening it up for questions from the folks on the call.

(Operator Instructions) Bob Ramsey, FBR Capital Markets.

Hey, good morning, guys. Nice quarter. I wanted to touch first on balance sheet growth. I know I think last quarter, Jay, you had said that you targeted $800 million to $1 billion in loan growth over quarters two through four this year. Could you just maybe update us, given sort of the pipelines you're looking at and what you have done in the second quarter, what you expect in the back half of the year; and then maybe talk to about how the warehouse fits into that?

Sure, Bob. Yes, our pipelines remain very strong and yes, we have to at a certain time control our growth, because we are not going to be accessing capital markets at [higher] levels. I want to make that very clear. And we are not going to dilute the value of the shareholders until we are creating at market multiples.

Third quarter, you should expect similar growth in multifamily as well as in C&I that you saw in the second quarter. We are building a mortgage banking platform for multifamily so we can move to a model of (technical difficulty) and sell. So that we would exceed the $800 million that we had shared with you in the first quarter because of the demand that we have.

But definitely our guidance remains that you will see us somewhere in the $6 billion to $6.2 billion range by the end of the year. I think that is what we had said in terms of our asset size by the end of the year. We remain focused on that. So that we want to continue serving our customers, but originate for other earning assets of our banks, and look at other ways that we can generate value for our shareholder based upon our capabilities to originate good quality assets.

Keep on our balance sheet C&I loans, keep on our balance sheet mortgage warehouse loans. Mortgage warehouse is not expected to go beyond $1 billion or so on an average for the rest of the year. It is probably going to be in the $800 million range with our best guess by the end of the year. So we will replace those loans with C&I and multifamily for our portfolio, but not portfolio [every loan average].

Okay, great. And then talking a little bit about expenses, which I know, Bob, you sort of highlighted as a challenge this quarter and always a challenge to manage expenses. FDIC expense was up about $1 million this quarter. Is this $3 million level a good run rate to build on, or was there any sort of true-up in that line?

Well, there is a number of things that are included in that line. It is not just FDIC expense, and so we call it regulatory cost with the FDIC. And I think that for what we have right now, Bob, I would expect to see that about that level for the rest of the year.

It reflects both growth in our assets, which is what the FDIC insurance assessment is on, as well as other regulatory related costs, and professional fees and so forth are also embedded in there, as are certain non income tax items.

Okay, great. That is helpful. And I know too, you guys highlighted the increased regulatory expense over the last year. Can you quantify in any way sort of how much of your expenses are regulatory related or how much of maybe the growth in the first half this year has been regulatory expenses?

I will answer that question a little bit differently, Bob. I think that there is between $1 million and $1.5 million of expenses in there that over time as we resolve matters and can move forward, that are temporary.

That is per quarter.

That is per quarter.

Okay, that is great. And when you say those should come down as items are resolved, is it contingent on sort of resolving the CRA issue in Philadelphia to bring some of that down? Or is some of this stuff that you have got the buildup, but at some point hits sort of a steady-state; you don't need to invest at the same level?

I think it is the latter. You build up and you don't -- and obviously, the regulatory parts are not just for those Department of Justice referral to us. That will go away because we have always made loans to minorities, and we have never ever discriminated against anybody. And we will continue to earn the privilege that the Federal Reserve and the Department of Justice is going to recognize that.

So it is really some operators, professional fees, regarding the Department of Justice referral. But it also is professional fees and making sure that we have a very strong infrastructure that we built. It has been tested, it has been tried out. It is the right kind of systematic (inaudible) systems that we have, and we are using the best practices in the industry.

And we are paying consulting fees and professional fees to make sure that they are putting the good housekeeping seal on all of the things that we are doing.

Okay, great. And then I assume as those regulatory costs sort of come down over time that they are offset by investments you continue to make in your business, and hires and so forth. How are you guys thinking about maybe the absolute level of expense growth in 2015 versus 2014?

I think as Jay has mentioned that the size of the bank and the activities that we have in the bank is driving the general expense increase. And I think that Jay had made the point that we will reach a level of about $6 billion to $6.2 billion in terms of total assets at the end of this year. And that we will not do any significant Tier 1 capital additions subsequent through that until we get our stocks traded at a higher premium.

With that, that will limit our growth going into 2015. From an asset perspective, we will be generating significant volume loans for sale, but it will limit our growth and I think it will limit our expenses. I think we have the infrastructure in place now to do what we see doing throughout 2014 and 2015.

The only thing I would add to that is we will not stop recruiting high-quality teams. And to us, that is the most important thing is to ask of this Company. So if we are off of that kind of a guidance or [tempered] expenses, it is because we decided to invest in high-quality teams which will produce the revenues for us.

It is just a matter of some timing, and Bank mobile if we're going to invest in that. So that will be an expense, but we are still on the $5 million total budget. But you will start to see some of those expenses flow through. They did flow through in the second quarter, but they were not very material in second quarter, but third quarter they will start to flow through.

Okay, great. And then two just real quick questions, and then I will hop back out. But I couldn't find a couple numbers in the release. Could you just tell me what was the total amount of net charge-offs in the quarter, and what the end-of-period share count is?

The total amount of charge-offs during the second quarter, Bob, was $1,250,000 roughly. And the share count at the end of the quarter was just a few thousand shy of 27 million (technical difficulty).

Great, thank you very much.

And I think, Bob, if you just look at our press release, we have given that share count.

Okay, great, I must have missed it.

Matthew Kelley, Sterne Agee.

Just (multiple speakers) the loan to deposit ratio pick up a little bit, and maybe you could talk about what we should (technical difficulty) changes in the deposit pricing strategy to help bring the net ratio down over time (technical difficulty).

Yes, Matt. First of all, you have got to look at it this way. Our investment portfolio is less than 10%. It is about 8% -- 7%, 8%. We look at the mortgage, banking and mortgage companies offering, which is mortgage warehouse, sort of like an investment because it is a very liquid portfolio.

So if you take out that loans held for sale, which are really mortgage warehouse loans, our loan to deposit ratio is just about 100% -- 98%, 100%. That is the way we would like for you to look at things. Because we think a mortgage warehouse is much, much better and much less riskier. We are much better (technical difficulty) than other banks that you may follow who have 10%, 20% (technical difficulty) of assets in their investment portfolio.

Our deposits will continue to grow. There is seasonality. We are focusing on non-interest-bearing deposits first and money markets second. You will continue to see CDs come down. They are about 37% or so of our deposits right now, CDs. So next quarter, you ought to see about a $200 million increase.

This would not be out of question in our (inaudible) this quarter because of seasonality and our emphasis. And the best way for us to manage risk, expand our margin, is to have core deposit funded bank. And that is what we are focusing on.

Okay, got you. And then if the multiple doesn't improve over the next several quarters here, and you'd just have to moderate the overall size of the balance sheet and try to pick that up with sale activity, straight mortgage banking (technical difficulty) also multifamily. Talk a little bit more about your capacity to originate enough volume to generate revenue and keep those line items solid. You know (technical difficulty).

Matt, we can originate $2 billion dollars of multifamily a year. We have done it, we have shown it, and we are not going to be putting $2 billion on our balance sheet. (inaudible)

But most of what you (technical difficulty) is already a brokered market.

It is.

I guess I was assuming that you would be originating yourself outside of Metro New York (inaudible) [selling] that.

We love New York market, and we will be originating with a strong credit quality. And to us, we have done a very thorough analysis, which we have already answered that question in middle of the tune. We don't see any risks to our portfolio at all from the 1% (inaudible) limitation. We love New York and we like the quality of New York market, and we will remain focused on that.

Thank you. Just help me understand, most of the production that you put onto your balance sheet is already coming through a broker, correct?

It is coming through our direct originations and coming through some brokers, yes.

Okay, all right. What do you see for gain on sale margins, resell, sell those multifamily loans in a secondary market? What kind of -- if you sold $1 billion worth of those, what type of sale revenue would that generate?

Matt, we are not going to answer a hypothetical question. We don't give guidance line by line, but it is going to be a profitable business for us. And once we start executing on it, we will be happy to discuss the details of that. There are so many different ways that we are exploring right now, all the way from direct sales to a couple of banks, to packages, to REITS. And that is why it would be inappropriate for me to comment any more on it.

Okay. On the subject of provisioning and credit costs, I think on previous calls you've talked about kind of an incremental (technical difficulty) expense for your new loan growth of 30 to 40 basis points. Is that still a good benchmark to use?

It is higher than that which we have been using. It is a minimum of 40 basis points, and we've taken that up to 50 basis points now, so that we remain very conservative. This is for the multifamily business, but we are resulting 1% against many of our other commercial loan products where we see, relatively speaking, higher risk.

So adequacy of loan portfolio is not just a mask, but we look at risk-adjusted allocations, Matt, and that is why we continue to look at that on a quarterly basis. But you've got to look at our pretax, preprovision income and all the revenue increases, and we are poised for some very strong growth in earnings over the next couple of quarters.

Then you had commented on the multifamily lending market in New York, which saw (technical difficulty) yields and spreads, and the changes in term. It sounded like some banks were doing some (inaudible) stuff that you weren't willing to do. Can you talk about what you saw in the second quarter?

I think like I commented, our average yield was between 3 3/8 and 3 1/2 for the five-year paper. We are not doing anything more than five years unless it is a major accommodation of our existing clients. We have seen some ridiculous pricing including 2 7/8 by some of our competitors. We want to have nothing to do with that. And they are the ones who do not understand. They only look at rate as the only way to pick a client.

You have got to promise a quick turnaround time. You've got to have an infrastructure in place to do all the analysis that needs to be done so that -- and you have got to have relationships with top-notch, high-quality, high net worth families who own these properties.

And you have got to follow through on what you say, which means the turnaround time and not at the eleventh hour changing all conditions and creating stress for the customers. It is as basic as that. And when you don't have the right kind of infrastructure, but you suddenly think like multifamily loans are important for us and you look at that as a commodity and you just reduce your prices, you get the junk.

And you don't necessarily get the consistency of performance. That is what some of the banks are trying to originate right now at those low rates, they will pay us a premium to buy our originations.

Got it.

We already see those requests in front of us.

Got you. Okay, thank you.

Sterling Edmunds, Edmunds White Partners.

Thank you for taking my question. Jay, you talked about the asset mix, where you are today with multifamily, C&I, mortgage warehouse and the commercial real estate and the consumer piece. And is where you are now where you want to be, or what is your target next?

We want to --.

Specifically with regard to the multifamily and the mortgage warehouse piece.

I think we will be in the 15% to 20% of the mortgage warehouse space. That is what we have said. We think that is a perfect place to be in. Also, in response to Matt's good question, I said we look at mortgage warehouse as a much better substitute (technical difficulty) that investment portfolio. You have better liquidity, higher margins, same kind of credit risk, and much, much lower interest rate risk.

So that is why we love that business, and we will continue to be in that business. But we don't see how that business is going to grow in this rising rate environment. That is the reason we expect it to be in the 15% to 20% range.

We expect C&I to become about 20% of our business. We like that business. That is a franchise business. The deposits being provided from that business are 50% of our loans (technical difficulty), and that is why that business should be in the 25% range. That makes it a very successful franchise.

Consumer lending, we don't think that you ought to see anything above 10% in that area. We are not a consumer bank. The kind of focus that we are (technical difficulty) have on consumer is (technical difficulty) responsibilities in (technical difficulty). But we believe our responsibilities with CRA can be met by affordable lending in multifamily.

But we are still having continuous outreach programs to serve the majority minority neighbor market area, and we want to improve our performance in that. So that is why we have the portfolio. Some of these low-margin consumer loans, that we see that as our responsibility to our regulators. So that is how we see it. You should not expect our multifamily to be ever more than 50% of our loan portfolio.

Yes, you mentioned adding a couple of teams in the quarter. In which segments were the teams? Were they in the multifamily, C&I, or mortgage warehouse?

C&I.

C&I. Okay, that is all my questions.

We don't need teams in mortgage warehouse or multifamily. Our mortgage warehouse business could be 3 times the size with the same team.

All in C&I. Okay.

(multiple speakers) quality of the team.

Thank you.

Bill Dezellem, Tieton Capital Management.

Thank you. I'd actually like to circle back to a point that you made on your June analyst call where you do not anticipate taking assets over $10 billion, so that your interchange is not reduced.

And given the rate of your asset growth and the amount of originations that you pointed out that you can generate with the organization, does that ultimately mean when you reach that point that the business model will be changing (technical difficulty), where you will have more income coming from gain on sale and more income coming from loan service fee income? Is that the right way to be thinking about that?

I think why wait till we get to be a $9 billion and for you to expect that. You will start to see that starting in (technical difficulty).

As your evaluation is not as high as you would like for (technical difficulty) capital, you are going to basically going begin that process now, halfway to the $10 billion mark, and continue to have a foot on the origination throttle. And yet, turn those into gains in the long-term. So that is kind of the way to be thinking about it.

That is correct. We are focused on higher ROE, not necessarily raising equity.

Thank you.

Gentlemen, it appears that we have no further questions at this time.

Well, thank you very much, and please give us a call if you have any other questions.

That does conclude today's conference. Thank you for your participation.