Customers Bancorp Inc (CUBI) 2014 Q3 法說會逐字稿

Good day and welcome to the Customers Bancorp third-quarter 2014 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ted Haberfield, MZ North America. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Customers Bancorp's third quarter 2014 earnings conference call and webcast. A press release summarizing our results were issued this morning. Joining us on today's call will be Chairman and CEO, Jay Sidhu, and CFO, Bob Wahlman. After Jay and Bob complete their prepared remarks, we will open up the call to your questions.

Before we begin, we would like to remind you that some of the statements we make today may consider forward looking. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual performance or results to differ materially, including the risks that the results may be different than currently anticipated. Please note these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable security laws.

Please refer to the SEC filings, including our report on Form 10-Q, and for the 10-K for the period ended December 31, 2013. For more detailed description of the risk factors that may affect our results, copies may be obtained from the SEC or by visiting the investor relation section of the Customers Bank's website. At this time, it's my pleasure to introduce Customers Bancorp's CEO, Jay Sidhu. Jay, the floor is yours.

Okay. Thank you very much, Ted, and good morning, ladies and gentlemen. I, too, want to welcome you to this third-quarter call. We are very pleased to report to you very strong quarter earnings for the quarter. To this morning, joining me, besides Bob Wahlman, also is the President and Chief Operating Officer of Customers Bank, Dick Ehst.

The format we will follow this morning is I'll have some introductory remarks, then Bob will go over some of the details on the financials. And then, I'll come back and give you some color on what's going on in the different lines of businesses and our expectations for the future, and then we will entertain questions from everybody. In the past, we have had some questions submitted to us ahead of time, pleased to share with you. Well, we didn't get any questions submitted to us ahead of time, so we will just open it up for Q&A from everybody on the call.

As you know, our third-quarter 2014 net income was up 41% and over the third quarter 2013 and 14% over the second quarter 2014. Our earnings per share were also up by similar amounts. Earnings per share for the third quarter were up by 40% over last year and 14% over the second quarter. On a linked quarter basis, we are very focused on return on equity and we are glad to share with you that was 11%. And our efficiency this year dropped to 54.5% on the way to being where the numbers starting with a four, so we expect to be sometime over the next year or two to have an efficiency ratio in the 40%s.

Year-to-date, net income has grown about 27% over the same period last year. On a per share basis, we are -- it is going to be an easy one for comparison purposes, because our total number of shares outstanding in the third quarter were about the same as the total number of shares outstanding in third quarter last year. So the comparison becomes easy for us on a year-to-year basis.

In terms of our core revenues, they were driven principally by higher net interest income as well as higher non-interest income. And net interest income was driven by, of course, the growth rate in our earning assets. But just focusing on this quarter, because it is very unique, we are seeing a lot of strength in our C&I business because we've recruited a lot of teams over the last 12 to 15 months and those results of those teams are very evident right now.

But let me talk about the three main categories of loans and their performance during third quarter 2014. Multi-family loans increased by $357 million. This is after we sold about $100 million of multi-family loans to another bank in our market area. Mortgage warehouse loans were up by $187 million and we expect that average balances in that sector to remain about the same in the fourth quarter, so that was a good increase that we saw.

And our C&I loans were up, including owner-occupied commercial real estate, were up $200 million during the quarter. And they are up about $325 million year to date. So you can easily see that the C&I business, as a result of the teams that we have accrued over the last two years, is really starting to show results. So we are very pleased to show a $200 million increase in the C&I and a $56 million increase in commercial real estate.

All of these have resulted in the net interest income for -- from an annual -- for third quarter 2014 to be up, as I mentioned earlier, by about 48% over third quarter 2013. And our non-interest income was up by about 9.5% over 2013. So now I would like to hand it over to Bob Wahlman to go over a lot more details on the financials.

Thank you very much, Jay, and good morning, everyone. As Jay noted, Q3 2014 was another very strong quarter for Customers and a continuing of our trend of a strong quarter. Growth assets increased by $900 million in the third quarter alone. Average earning assets increased by over $500 million in one quarter. Asset quality, which is already outstanding, continued to improve.

Deposits continued a growth path and everything came together in the income statement to show increased net interest income, solid non-interest income, a tempering of operating expenses, actually a small decrease, and increased profits. Let me spend a few minutes walking you through some of the details on each of these.

Customers reported earnings of $11.7 million for the third quarter. Q3 earnings were up $3.4 million, or 41% over last year's third quarter, and they were up $1.5 million on a sequential quarter basis. That is 14% in sequential quarters. Earnings per share were $0.42 per share for Q3, compared to $0.30 for Q3 2014 a year ago and $0.37 last quarter. Improved earnings were driven primarily by our increasing interest earning assets and slowing and even stopping for the third quarter, our operating expense growth.

Total assets were gross at $6.5 billion at September 30. This was, as I noted before, up $900 million in the quarter at 16%, and it's up $2.4 billion this calendar year to date through September 30. That is 58% growth in those assets over the nine-month period of time. Average interest earning assets grew to $5.7 billion in Q3 2014, up from $5.2 billion in Q2. We do expect a substantial increase in the core earnings power these assets generate going into Q4 2014, as our average assets catch up with the growth assets as of the end of Q3 and some modest growth in the Q4. But we are planning to moderate our growth in future periods from that experience in the third quarter.

While assets have grown rapidly, Customers have been adamant about maintaining our underwriting standards and seeking out and making only quality loans. This asset quality vigilance can be seen in the level of non-performing loans, which continues to decrease despite the increase in the loan portfolio. Non-performing loans were only $14 million as of September 30, down from $19 million at December 31, 2013. And our short-term delinquencies, those are loans left to 90 days delinquent that are still considered performing, are not showing any sign of deterioration. There is no increases, significant increases or decreases in that area.

If you back out the FDIC guaranteed loans, our non-performing loans are only $10 million or 0.18% of total loans. And of these, less than $2 million were underwritten after 2009, though the bulk of the remaining $10 million, after the FDIC guarantee, or $8 million, are what we refer to as legacy loans, those loans that were inherited from institutions that were consolidated to form today's customers.

During Q3 2014, our net interest margin declined to 2.78% from the prior quarter's 2.93%. 13 basis points of this 15 basis point decrease between quarters results from the issuance of the $110 million of bank subordinated debt and the $25 million of bank holding companies senior notes. This tells me, when I consider that, that we have generally been able to maintain our loan pricing, even with the asset growth. So maintaining loan pricing and we are maintaining asset quality.

For the full year 2014, and eliminating the 13 basis point effect for the debt issuance in Q2, our NIM has been flat. So from our core asset portfolio, we are continuing to receive the same net interest margin with the same kind of net interest performance. Adjusting for the 13 basis points, as I have noted before, we are down 2 basis points Q3 over Q2.

And then Q2, which does not have this new debt in them -- in those numbers, Q2 was up 3 basis points over Q1, so essentially flat there quarter over quarter. There has been a lot of competition in the market place as we all know. So maintaining on the yield on our asset portfolio was a notable accomplishment in today's marketplace.

We made a turn in our non-interest expense during the quarter. Q3 non-interest expenses were $24.7 million, which is down $500,000 from Q2 2014. There were lots of ups and downs in the expenses as we looked to control our cost of this growing business model. We are going to have some growth because we are growing.

But to give you some insight as to the sources for the decrease in costs, you know, what happened. Salaries were up $500,000 quarter over quarter, occupancy was up $400,000, but we had decreases. $200,000 on our technology spend, $200,000 in advertising, $200,000 in professional services, $400,000 in loan OREO workout costs, and $750,000 in just miscellaneous other costs. But we are continuing our efforts to rein in our cost growth. We are happy we have some results from that in the third quarter. But we will expect some increases in cost as our business model continues to grow, but they shouldn't be what it has been in the past.

Customers is reporting Q3 2014 provision for loan losses of $5 million. Of the $5 million, approximately $3 million is due to the growth in the loan portfolio and recognizing the full provision charge at the time the loan has originated. As we moderate our growth, we won't see as much of the provision as what we have historically been seeing during these periods of very heavy growth.

An additional $1.8 million of the Q3 2014 provision is due to increasing our estimate for the payments we will receive on the loans required in FDIC assisted transactions from 2010. Because the indemnification assets showed, the amount we expect to collect from the FDIC increases in the estimated performance of those loans that we acquired from the FDIC. Results in lower collection of payments from losses from the FDIC, and thereby a lower indemnification asset and, of course, a charge to the indemnification asset which comes to the allowance.

We reviewed all the cash payments expected to be received in the future during this quarter, as we came within one year of the commercial loan guarantee expiration period of five years in these assisted transactions, they took place during the summer and early fall of 2010. And so, we are hitting that five-year period, and we reviewed all those, gave a detail review to all those cash flow forecasts.

Customers used the non-core earnings items of an increase in the provision expense in indemnification asset and a decrease in the tax expense item to the deferred tax analysis to be largely offsetting. And believe the reported net income $11.7 million, in general, reflects the earnings power going forward for Customers.

Couple last items I want to note before I turn the microphone back to Jay. First, Customers tangible book value, which we have on numerous occasions committed to protect, increased to $15.79 at September 30, compared to $14.18 a year ago and $15.34 at June 30. Second, our return on common average equity increased to 11% this quarter, from 8.6% a year ago and 10% in Q2. Third, and as noted by Jay, our efficiency ratio declined to 54.5% for the quarter ended September 30, down from 57.5% from a year ago and 58% as of June 30 this year.

And then, finally, these are all trends that we are happy to have accomplished, working to accomplish, we'll build on these, and we will maintain these as we are going forward. Jay, those are the financial highlights. Back to you.

Okay, thank you very much, Bob. And I just wanted to share with everybody, Bob is celebrating his birthday today. So, happy 34th, that's 34 years of banking experience. We won't talk about how old you are. (laughter)

Now, in terms of our core business, let me first talk about strong core deposit growths. During the quarter, we had a $585 million increase in deposits. Of that $585 million, CDs practically grew by $0, money market accounts grew by about $430 million, and $155 million increase was in non-interest-bearing demand deposits.

Year to date, our deposits are up about 45%, and to $4.3 billion. So we have been very, very successful with our teams that we have acquired of not only growing the lending business, but also the deposit business. Our CDs are only 30%-some, about 35% of our total deposits, so the core transaction accounts make up approximately 65% of our total deposits, but non-interest bearing DDAs grew at about 16% of our total deposits.

It is a very unique deposit strategy for us, as many of you may be aware of it. We call it from the consumer sector, concierge banking. And that is taking the banker to the customer's home or to their office 12 hours a day, 7 days a week, appointment banking approach. We recruit top-notch, very experienced branch, where people, our team members and leaders, from the different very successful banks. While banks are having real trouble in justifying their branch operations, we are not into branch banking, but we are into including the top-notch people from branch banking and giving them incentives to bring business over to us. So this is a very low-cost banking model and this allows us to give us more pricing flexibility.

And in our model, we are expecting the Feds to increase rates around the middle of next year, irrespective of all the news in our 24-hour news hype that people are talking about. We think that is bound to happen. And hence, in our deposit strategy, we are extending the liabilities and we expect no increase in our cost of deposits for the 25 basis points, or plus-minus increase in the rates because of our relationship-oriented deposits from our core customers. So that we expect to maintain our margins, even in rising rate environment.

In terms of the lending side of it, our portfolio, lend-loan portfolio, strategically, we have been looking at diversifying it. And today, about 20% of our total loan portfolio is made up of C&I loans and owner-occupied commercial real estate, which are all C&I loans. Our commercial real estate loans are only 10% and we reduced our mortgage warehouse loans down to about the 22% to 23% range.

We being a business bank, 95% of our revenues are coming from businesses, so we have a very small consumer or residential mortgage portfolio. And that gives us a huge advantage over many of our peers, who are keeping a lot of fixed rate residential mortgages on their portfolio, and our multi-family loans are today about 38% of our total loan portfolio. So we believe that this diversified loan portfolio is going to protect us from not only interstate risk, but also gives us a very strong credit quality that Bob discussed with you.

A little bit about our strategy in the lending side of it. And let me just share that with you a little bit. Our main strategy is very similar to what you find at banks, successful banks like Signature, and that is called a single point of contact. And the single point of contact is where the customer just makes one call and they deal with our private bankers. We have a similar model for consumers, like I just shared with you, and the consumers deal with concierge bankers.

These private bankers, or concierge bankers, provide all consumer products, all business products, all non-credit products, every single thing to the customer and you don't have any 1-800 calls into the bank at all. And that is why this high touch supported with high tech and the single point of contact is working. You should expect to continue to see this difference here, that strategy continue to show results for us in the future.

Our loan credit committee approval is all centralized. All our loans are stressed test for higher rates in a slower economy, and that is why we are fortunate to report that no losses on loans have been taken by us since this new management team took over about five years ago. And we believe that our diversified and the growing loan portfolio has created a very strong foundation for future earnings.

You can just well imagine if we stopped growing. We would add $3 million to $5 million to our earnings just by not having to provide for provisions for possible loan and lease losses. And indeed, the other banks were growing at 2% to 4% and showing higher ROA, as you can see what happens to our ROA and ROE if we stop growing and we have no intentions to stop growing. We have intention of moderating our growth and making the growth compatible with the equity that we would create as a result of retained earnings.

Let me just talk a little bit about the C&I business for us. It is mainly or exclusively in the New England, New York, Pennsylvania, and New Jersey markets. We have added a team this quarter from which we recruited from Citi team of SBA lenders, and that team is now located in Melrose or Long Island. And so that small business for us is the SBA lending for us as a nationwide business. But so far, we've only done it in New Jersey and Pennsylvania. So you should expect to see, in the future results, coming out of the SBA lending -- nationwide SBA Lending Group, with a sort of a focus on certain niches, rather than just geography.

And supplementing our SBA business is also our private banking business for small-, medium-sized, or the middle market companies. We are doing that with very experienced teams. The teams are located in Pennsylvania, New Jersey, New England, and Metro New York area. They are principally targeting companies with about $100 million in annual revenues. These teams are very, very experienced and these teams all have goals and strategies and tactics to support them.

And let me share with you that at Q3 end of September 2014, these groups together had the C&I book business was $1.000099 billion. And the deposits from these business customers was $942 million. So this is, by itself, a $1 billion bank that we created over the last few years, principally in the C&I area, all organically. So we expect to continue to see the consistency of performance from this group.

In the multi-family area, our strategy has been to focus on families that have income producing real estates in their portfolio. We call it banking to high net worth families. It is again a private banking approach. Our focus has been very much on New York with a little bit extra emphasis in the Philadelphia area. Our average loan size has been $4 million to $7 million.

We are also gathering deposits from the sector through remote banking, and this portfolio has grown organically from a start up with very experienced teams that we have included over the last few years. And this is an extremely strong credit quality niche and we are very much focused on managing the interest rate risk from this, and we are managing that extremely actively.

So from a zero, this business has grown to $2.1 billion, and from zero deposits from this business in 2012, today we are getting $120 million in deposits from this business. And we have opened up a new avenue, where, based upon our own desire, if we need to sell some of these loans, we know we are successful. And contrary to anybody's expectation that there is no market for this, well, let me tell you, folks, there is a bar market. There is a market and we have sold these loans without criteria, and we have put $150 million of loans in held for sale. A part of the balance sheet on this and our demand for buyers exceeds our supply today.

So this, we will selectively continue to sell these loans and they meet our criteria because of our superior credit quality. So we, in terms of pricing, we will not book loans in multi-family below 3.25% here. That is the pricing discipline that we have. All the crazy pricing that is going on, we let other people pick it up. We only focus on things which make sense for us, and hence, if it retards the growth rate in our multi-family loans in the future, so be it, but we are not going to be putting on assets on our balance sheet that don't meet our hover rates.

Because we already have a very strong C&I business, as well as we expect the mortgage warehouse business to stay strong. And we do have yet not capitalized at all on the CRE business, because that is only 10% of our entire loan portfolio. So we have the flexibility and we are not going to be entering any price war over there and let others keep on messing up their own margins.

In the mortgage warehouse business, we are doing business with about 75 strong warehouse clients and that business remains very strong, although competition has driven our October profitability in that business somewhat down, but we are now seeing some stable results.

In terms of overall how we are looking at the future, we've set some very clear targets on return on equity, efficiency ratio, non-performing assets, and hence, the growth rate in earnings as well as return on assets. Today, we are reporting we reported only 80 basis points ROA. Our goal is 1%. If you adjust for the provisioning that we are doing, we are close to 1%, to 90 basis points at least -- in that 90 basis points to 1% already. So we expect to reach the 90 basis points level within the next two or three years that we made public and we are very confident about that.

In terms of return on average equity, the industry in our peer group is at 8%, we are at 11%, and we are intending to try to reach a 12% level as soon as our ROA improves, you can expect our Company to be at the 12% ROE. In terms of efficiency ratio, our peers are at 66%, we are at 54%. As Bob indicated, we are heading in the right direction down from 58%. And you should expect us to be in the 40%s within the next year or to two years as we have shared with you already.

From an asset quality point of view, the industry our peer group is at 1.36%. We are at 18 basis points, and so we are very focused on simply dealing with the strong credit quality niches, and we expect to be better than the industry average in this sector completely.

In terms of earnings performance, we have given you guidance. We think that we will meet or beat those guidance numbers without any doubt in our mind. So anybody who is below our guidance numbers, you might want to look at them. We just are very confident about the future, and we are excited about the future and let me share a little bit about bank mobile.

This is a segment, as you know, we are 95% of our revenues are coming from a business bank. But, we see opportunities going forward in the consumer banking sector, also. So that's why we decided to focus somewhat on the consumer banking sector going forward. But the model that we will pursue for that is going to be very different from the model pursued by others in the consumer banking arena.

We believe that the technology changes that have sort of really changed the entire environment, and technology dependent consumers and small businesses are really not visiting branches. We don't believe branches are dead but we believe branches are becoming extinct, and we believe banks will be looking at selling or getting rid of somewhere between 1500 to 2000 branches every year for the next three to four years. We believe while that rationalization of branches and the focus on expense reduction is going to be driving majority of our competitive strategy, it creates opportunities for us.

Our opportunities will be exploited by us with bank mobile. That is going to be launched, gradually, starting this quarter, and we'll be making some announcements in November. We've already put a team together. We have recruited a team, which is very, very excited about this. And we actually expensed about $500,000 of bank mobile's expenses in the third quarter. And so that we believe this was not going to effect, in any negative way, our ongoing earnings. We believe that the way we are doing it, we should be able to start to see revenues coming from bank mobile in 2015 and beyond.

One of the main drivers of revenue for the bank mobile is going to be their interchange income, and not going to be the nuisance fees that every single bank is charging the consumer sector. To give you an example, $32 billion in overdraft fees were charged by banks from consumers last year. That's over $1 billion overdrafts a year. On top of that, $7 billion in fees were paid by consumers to check cashing companies.

Well that $39 billion, ladies and gentlemen, is three times what America spends on breast cancer and lung cancer combined. And if you take away these overdraft fees, consumer banking sector for majority of the banks becomes marginally or it becomes unprofitable. We believe the tech savvy customers and the shadow banking bankers are taking advantage of lack of innovation taking place by the banks. We think it is about time that disruption takes place in the banking industry for the benefit of the banks. So we will be offering no fee banking worry through bank mobile.

Our marketing strategy is going to be to target the technology dependent, below 35-year-old, underserved or under banked, as well as some large depositors who are generally 50 years or up so that it is really the millennials and as well as the baby boomer's market segment. And we also intend to reach customers through our affinity banking model, which is really getting very good traction so far in the groups that we've contacted.

And we are putting the total investment of about $5 million by end of next year into this venture, and that's already been factored in by us in the guidance that we have given you -- in the conservative guidance that we've given you. And we expect to achieve above average return on efforts and return on equity in this venture.

So in summary, let me just share with you that we are, we believe we are a very high performing Company, targeted to become a high performing Company. Today, we are sitting at $6.5 billion. Our goals are very clear. You should expect from us 90 bps to 1% ROA within a two- to three-year period. You should expect from this base for us to achieve greater 12% or greater ROE. You should expect for us to have pool margin of 3%, approximately, which is exactly sort of where we are if you take away the effect of our debt capital. And you should expect us to report 15% or higher average annual compounded growth rate in earnings.

In terms of capital, for those of you who might be wondering, so we expect to look at issuing some preferred tier 1 qualifying equity at the holding company level this quarter. We have been very opportunistic. We have been considering every form of capital, and I want to mention, once again, we will not issue common equity in a way that dilutes our existing common shareholders. That will not happen at all. Okay? So we have a lot of opportunities to continue with our growth and will be looking at different forms of capital. But expect we are evaluating the preferred equity and you shouldn't be surprised to see issued some in that $50 million plus/minus range this quarter to support our growth.

So with that, Bob, Dick, and I will now take questions. Alexi, please open it up for Q&A.

Certainly.

(Operator Instructions)

Frank Schiraldi, Sandler O'Neill.

Good morning, just a few questions, if I could.

Just you obviously talked about reducing the growth rate to something more sustainable, given growth in retained earnings. And you talked about selling, perhaps some more multi-family.

I'm just wondering where you think we could see that multi-family portfolio migrate to as a percentage of total loans? And then, similarly, wondered in terms of C&I, is that growth seen in this quarter, is that a pretty good anticipation of what we should expect going forward here? Or could we see an acceleration there?

I think, overall, you should expect the same kind of similar growth rate in C&I business. You should expect us to see a little bit of a more growth rate in the CRE business. You should expect us to moderate our growth rate in the multi-family business.

You should expect about a third, in the longer term, about a third of our loan portfolios to be multi-family, about a third to be C&I, and about third to be everything else, including CRE. That is consistent with what we had shared with you, Frank, at our analyst day.

So nothing has changed. We are sticking with that same model and just continuing to execute on that.

Okay, great.

And then it sounded like -- Jay, you mentioned the 3.25% hard stop in terms of multi-family pricing, as far at Customers is concerned. Just wondering, as we look out here to a somewhat shifting balance sheet, sounds like you are still pretty comfortable with a flattish NIM going forward here, after having been adjusted for the debt?

That is correct.

Okay.

And then just on the preferred equity front, you mentioned the chance of that this quarter. It sounds like you are still comfortable with your stated guidance, even with that preferred equity raise that you are thinking about this quarter?

Yes.

Okay.

Okay, I mean, sorry, just finally, the $1.8 million, I just want to make sure I understand the accounting here. The $1.8 million that ran through the provision, the reduction in the FDIC asset this quarter, that's in part due to the improvement in cash flows, right, on that covered long book?

So is there an offset in the NII this quarter? Is there any sort of one time adjustment to NII? Or does that flow through on a life alone basis?

Frank, that is a very interesting question and I don't want to get into too much detail here. But there is no offset that is happening elsewhere in the income statement. This is happening only through the indemnification asset provision expense, which we are including in lost long lease losses.

And the reason that you see this happening this way, there is a little bit of an account anomaly, let's call it, in that the indemnification asset is required to be over the entire life of the portfolio, entire life of the commitment, whereas you would normally see a bit of an offset in the a lost lease losses, but that is an incurred loss model. Where you essentially have the new seek through accounting compared to the incurred loss model specific to this portfolio. So that is why you have it coming to and there is no offset any place else.

Okay. I definitely want to follow with you offline on that. Okay, that is all I had. Thank you.

Bob Ramsey, FBR Equity Research.

Hey, good morning, and happy birthday. Especially to you, Bob Wahlman.

(laughter) Thank you, Bob.

First question I've got for you guys, Bob, I know in your prepared remarks you talked about how even though growth will slow in the fourth quarter, there is the pickup in average balances as they catch up with period end. I guess I did a quick look and it looks like you all ended the quarter with $6.2 billion in earning assets.

One, does that sound right? And then as we think about the fourth quarter, should we expect average earning assets to be something maybe a little bit higher than that, given a much more modest amount of growth in the fourth quarter from the starting balances?

That would be fair, Bob. $6.2 billion is approximately the amount of earning assets we have today. Have at the end of September. And we would expect to maintain those and grow those, somewhat.

Great. That's helpful.

And then, what is the right way to think about, on a go-forward basis, what you are willing to grow the balance sheet? Is the plan to basically use capital that you generate and grow at a similar pace?

So if you are generating am 11%-ish ROE, you grow the balance sheet 11%? Or would it be to build that 6.5% TCE to something -- I think in the past, you all have talked about maybe targeting a 7% TCE ratio to build it back to that level and grow at something less than what you are generating in terms of the capital in the near term?

I think -- I'll take that Bob. I think in the near term, it is ridiculous, we are such an attractive opportunity we believe for our investors. And so our focus will be on controlling our growth rate to about 11% or 12% range. And then looking at other options for you once we are fully valued.

Okay. Fair enough.

And then, you all have talked a little bit about the opportunity to sell multi-family loans. Jay, I apologize, I missed the number in your prepared remarks. Did you say you all had sold $57 million this quarter?

No. In the last quarter, Bob, we sold about $100 million. And this was in the third quarter. And we expect to sell at least that much this quarter. Maybe a little bit more.

Okay.

And then with that sale, does that fee income go through the line item on your income statement that is titled other loan sales, or something like that, where the SBA gains have gone in the past? Gain sale on loans there?

That's correct, yes.

And what was the gain on sale on that $100 million in the third quarter for just the multi-family piece?

We had about 70 basis -- had we sold them at 70 basis points over par and then we were carrying them below par. And with the release of the reserves, our gain was greater than 1%.

Okay.

When I look at that line, it's I guess only about $700,000, and 1% of $100 million should have been more like a $1 million. Was there some offset somewhere else where something pulled that back down? Or am I not thinking about the math right?

As noted by Jay, yes, you're not quite there yet. There's two component pieces that Jay was telling you. There's the actual gain on the sale and then there is the reserve release that comes as a result.

So we sold $100 million, that is on our books at 40 basis points, there's the other $400,000.

And then we had put out expenses to -- also from the same line. Net of all expenses.

Okay.

In support of those loans through Sandler O'Neill. And then, so Sandler made the rest of the money, yes.

Okay. And so, I guess, how much of that $700,000 that I see there is for the multi-family loan sales and how much is for SBA or anything else?

It's practically all. There weren't any SBA gains this quarter.

Okay, great.

That will be in the fourth quarter you should expect that.

Okay. That is helpful. The mortgage banking line obviously was weak this quarter.

I'm just curious how you all are thinking about the mortgage banking income line on a go-forward basis? And then, specific to both mortgage banking and the mortgage warehouse, with the pull back we have seen in rates since the end of the third quarter, what have you guys been seeing in terms of the pipeline or application data?

I think in the mortgage banking, Bob, as we have shared with the investors, since the beginning of the year, we have been deemphasizing, and basically, other than in our own community, mainly CRA related loans, we are really deemphasizing mortgage banking. It is not a profitable business for us, so you shouldn't expect us to see anything different in the mortgage banking in the fourth quarter than what you saw in the third.

As far as mortgage warehouse is concerned, like I had mentioned, we think this quarter we were expecting it to be about 15% lower, until we saw the bond market rally. So there is a seasonality in the fourth quarter, there is a seasonality in the first quarter. We'll probably see somewhere between where we were and maybe 10% lower than the September 30 numbers is the latest that we see in that business.

Okay. That is definitely a better outlook than I know you guys had a quarter ago. Is that just because of market conditions today?

Or do you have a sense that, over time, given where your business is today, it should remain stronger than maybe you guys used to think about?

I think housing is -- the economy is better. Housing is generally a little bit stronger, housing starts have been better. So plus, we added a few more customers.

We have seen a compression in the margin. We have seen a compression in the fee income, and because of competition. But I think when you combine all that, we are more optimistic about this business staying about 20% of our revenues going forward in 2015.

Okay.

20% of our loan portfolio, I shouldn't say revenues, sorry.

Sure.

20% of our loan portfolio.

Great. And I know you mentioned you have seen some compression in fee income. Was a little surprised to see, with balances being up, the fees sort of not seeing a similar lift.

What is the best way to think about fees? I mean, if I look at it as a percentage of average warehouse balances this quarter, is that a good way to model it forward or do you expect continued compression in the fees?

That is a good way to look at it.

Okay. That is all helpful. I'll go ahead and hop out here. Thank you.

Thank you.

Bill Dezellman, Titan Capital Management.

Thank you. A couple of questions. First of all, relative to that incremental $1.8 million loss provision, to put a kind of a broader brush on it, is it a correct understanding that that reversal happens because the FDIC loans that you purchased earlier, that they are performing better than you have predicted?

And as a result of that positive development, you end up taking the $1.8 million charge?

That is correct, Bill. As illogical as that may seem, that is what happens.

Okay, great. I just wanted to make sure that my illogical understanding was correct. (laughter)

And then, secondarily, the India Religare investment, would you please update us there?

Yes, sure. We are, as we had mentioned to you, by the end of the year, we want to do it, so we are in the process of really doing our diligence and determining what is the best course of action.

As you know, there is a lot of positive momentum in the business community and the business sector and the government in India right now. And they have made some statements that they are going to be looking at really handing out a couple of banking licenses. But it is not going to happen in the fourth quarter, it is probably going to happen next year.

So there is a chance that we may hold on to that investment for longer than what we were originally anticipating. But the final decision will be made by us by the end of this year.

Great. That is helpful. And thank you both and happy birthday, Bob.

Thank you, Bill.

Matthew Kelley, Sterne Agee.

Yes. Hello, guys.

Just staying on the Religare really quick. Can you just remind us your dollar cost basis in US dollars? And then you're -- the Religare, excuse me, the rupee cost basis so we can track that? And what pushed that out a little bit further compared to what you guys were talking about over the summer?

Well, first of all, let me just share with you we are not under any kind of -- we are not taking a hit on that investment when you combine the currency as well as the market price.

Okay.

And so, that is the bottom line. And what was your other question? That is what you wanted to figure out?

What is the cost basis again on that?

It is about where market is today.

So what is the dollars you have invested in Religare?

$23 million. $22 million, $23 million.

Got you. Then just turning to capital, I know that it was discussed a little bit earlier. But is 7% still the bogey you would like to get back to on TCE? Or are you comfortable running sub-7% for awhile on TCE?

We are comfortable between 6.5% to 7% for awhile.

Okay, all right.

And then the tax rates, so year to date your tax rate is running about 30%. You guided to 33% for the year. I guess going forward, are we still looking at with a 35%, 36% type run rate for 2015?

Yes, that would be --

Okay.

That would be appropriate, Matt.

Okay, got it.

And then on the fees. So at period end, you had $150 million of loans held for sale included in that total balance of, what was it, $1.3 billion, something like that? Is that right? Those are -- $1.4 billion total loans held for sale, that includes $150 million of multi, is that right?

That's correct.

Okay. And so, getting back to Bob's question on the profitability of fees relative to balances, it was a pretty good step down even if you account for that. What's going on there?

What do you mean? Can you be more specific with the question?

Well, look, the fees relative to the average warehouse balance, it had been running 100 to 110 basis points. And if you adjust for the loans held for sale in multi-family, it is still down to about 75 or 80, and just --

Yes. I think, Matt, like I'd shared earlier, there is pricing compression.

Okay.

And that is the main thing. And then there is some timing difference, also. So it is not all of that income is lost, but we recognize it as collected.

Okay. Got you.

And then, your multi-family loan sale, so it is 100 basis point kind of gross gain on sale type of margin. What was the coupon on the loans that you sold? What was the average coupon?

Between 3.25% and 3.5%.

Okay, got you. Okay.

And then, last quarter, you talked about some higher regulatory costs. I think it was like $3 million you expected to see throughout the course of the year. Is that still coming through or is that a lower number now?

Let's hope it's a lower number. You know.

But I think our professional fees were down this quarter. That is regulatory costs. There's no question about it.

Okay. Last question, how much of the multi-family market right now in your view is below that 3.25% bogey that you are not willing to put onto the balance sheet?

I think you should ask the others that question. You know, we will report to you what we are doing.

Yes.

We are you know, in some cases, direct business. We are still getting there. So I don't know what others are.

Yes.

We are not focused on, but we have seen some ridiculous pricing. And we don't agree with that.

Okay, all right. Thank you.

Jason O'Donnell, Merion Capital Group.

Good morning.

Hello, Jason, how are you?

Good, doing well. Most of my questions have been answered. I did have one remaining.

It just looks like your costs of interest-bearing deposits stabilized this quarter. How should we think about, just trying to understand the dynamic underlying the margin guidance, how should we think about deposit costs specifically going forward in advance of interest rate increases? Do you expect to see that level move higher as you continue to extend duration or remain relatively stable?

I think it is a combination, Jason. We keep getting non-interest-bearing deposits and his we keep extending our deposits. When the two are offsetting each other, so because our duration of deposits and duration of borrowings is really aligned with the duration of our assets.

So that's why I wouldn't count on us, even though we could easily take our deposit costs down by about 25 basis points if we didn't care about there is a longer-term interest rate risk management, so that is our cost of interest managing interest rate risk is about 25 basis points built into the cost of our deposits. So that is what I meant by saying that the first 25 bps increased in rates, we don't see any outflow of deposits based upon the work that we have done.

And you shouldn't expect us to have to increase our deposits, also. That is somewhat different from what you may see in the industry in terms of the analysis that companies have done.

Sure. Great. Listen, thanks a lot, guys.

Thank you, Jason.

Steve Emerson, Emerson Investment Group.

First, congratulations on a really great quarter.

Thank you, Steve, how are you?

Good.

I just want clarification on the $5 million you mentioned of investing next year in the mobile banking initiative. Is that $5 million net of revenue? Or is that $5 million in expenses?

Steve, with our assumptions we have used $5 million net of revenue. Obviously, we are assuming fewer revenues, but like I mentioned, to at least expect us to see some revenues come in next year. It is very difficult to predict exactly at P&L statement went for a brand new start-up business, matching revenues with expenses, so we took a conservative approach.

Another way of looking at it is you can see $5 million in expenses and zero revenue, or you might see $6 million in expenses and $1 million in revenues. It comes to one in the same thing.

Okay. Now, would that be P&L effect? Or is there a CapEx involved in the $5 million you are mentioning?

No, it's P&L

Okay.

It is already baked into our budgeting and our profit planning process.

Excellent.

Going to your apartment house loans in New York, has the price point for the average loan gone below your bogey? I believe it was 3%, and therefore, you are not generating many? Or have those been just one off very unusual competitive situations? I'm trying to get into what seems to be the flow of these loans going ahead?

Steve, two things are happening in the New York multi-family market. One is that the cap rates have gotten very low, which we are obviously not interested in changing and financing. And the second thing is that the competition that is starving for earning assets is starting to not rationally price these assets, based upon the expectations or based upon the future slope of the curve.

That is the reason why our discipline is actually 3.25% or higher. You should not expect to see a decline in our margin and our yields in that sector. We are not starved for earning assets like many of the other banks might be.

So that's why there could be some seasonality and some volatility in the amount of those multi-family zones that we book on a quarterly basis and we sell on a quarterly basis. But we are managing our margin and managing our interest rate risk in our tactics and strategy in this sector.

Okay. But what I hear you saying is you expect to see a continuing very strong flow of booked assets, and the price point in that market has not moved, really, away from your 3.25% on an aggregate basis?

That's one way of looking at it. But what I added to that was that was that the amount of bookings that we may see could fluctuate. Because if the market is at 2.95% or whatever, and we are at 3.25%, there could be a quarter we may not book money many assets.

Okay. Thank you very much and I'm glad you have so many flows coming into you that this won't hurt you.

Thanks.

Bob Ramsey, FBR Equity Research.

Hey, thanks for taking the follow up.

Just wanted to touch base a little bit more on net interest margin. I think you were asked earlier, you said you guys think you can kind of keep it in the same zone.

I was just curious, as you deploy some of the debt that was issued in the second quarter, is there any opportunity claw back a little bit of the 13 basis points of compression that that drove? Or do you think that this is a new level from which every day is a new day going forward from this 279 level?

I think every day is the same day. We are not planning to call back in the near future any of the debt that we recently issued.

Okay. Yes, no, I guess I understand you are not calling the debt back. I just didn't know if, as you deployed some of those funds, if there was the opportunity to get back a little bit of the compression?

Let's hope so. But we are not giving any guidance. (laughter)

As you know, Bob, we are in the business of trying to improve our profitability. There are some people who are not as confident about us, like Matt, I think he is going to get surprised by our performance. That is enough said by me.

And I guess on the margin, I mean, being at 280, you are a little bit below where you guys target being. Obviously this was a tough rate environment for all depository institutions. But how do you think about what is the opportunity over time to push that margin become a little bit higher?

We will do everything possible to do that. I think we could do that by decreasing our deposit costs, Bob, like we discussed just a moment ago. But our model is that we should be able to achieve our profitability goals, even with the current margin.

And so, we are addressing efficiency ratio, as much as we are addressing margin. And when you do the two, and then we are addressing asset quality. Even more than margin inefficiency ratio.

So when you look at the whole thing combined, picture combined, we are not chasing margins, but we are chasing ROA, ROE growth rate and earnings, and quality of our earnings and quality of our assets.

Fair enough. I appreciate the additional color. Thanks, guys.

Matthew Kelley, Sterne Agee.

Yes, hello. I just wanted to follow up a little on the --

Hello, Matt. Once again, yes.

Yes, just a quick follow up on the multi-family loan strategy. I was curious when were those loans originated by you? Clearly, at a premium to where the market is now. When were those originated?

No, Matt, they were not. They are today at premium, they were originated this year.

Okay. Got you.

Premium to originations is all we are selling.

Right. I think that's, going forward, if the market is, call it, 2.875% to 3.25%, it is not going to be as big of a premium going forward to be able to sell those and generate gross gains of 1 point, net gains of 70 basis points forward. Is that correct?

That is not correct. We are seeing a better pricing on better bids on the business that we have for sale today than what we saw in the third quarter.

Okay. So what is the coupon on the $150 million that you have for sale at period end?

3.25%

Okay, and because --

Index here is thin, seems to be --

-- written profits over incent now at a bigger premium, I guess? Is that why?

You're right. Right.

Okay, got you. And what is the total multi-family portfolio yield? Your $2.2 billion overall?

$366 million. I think I was told at $366 million.

Got you. So going forward, the stuff you are going to sell is current production. So basically, it is a broken multi-family loan through Meridian Capital and you then you guys are turning around and flipping it to someone else.

Is that someone else like an in-market party, or somebody in another part of the country who wants exposure to this asset class? Is that what is the attractiveness of this type of deal for you guys?

We are not limiting it to just inside, although the bonds we bought at last quarter was in market.

Okay.

But to us, we are using your investment bankers --

Yes.

-- to try to approach and we are looking at ways to execute our strategy, and as long as it meets our disciplined returns, we will continue to execute it. And if it doesn't, we'll change it.

Okay. All right. Thank you.

Thanks.

And we have no further questions over the phones at this time.

Thank you very much, ladies and gentlemen. And please give us a call if you have any follow-up questions. Have a good day.

And this concludes today's conference. We thank you for your participation.