Customers Bancorp Inc (CUBI) 2015 Q2 法說會逐字稿

Good day and welcome to the Customers Bancorp Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Ted Haberfield, President, MZ North America. Please go ahead, sir.

Thank you, operator and good morning everyone. Customers Bancorp's second quarter 2015 earnings release was issued last night after the close and it's also posted on the Company's website at www.customersbank.com along with the accompanying presentation. 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 we make today, maybe considered 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 risk that the results are different than currently anticipated. Please note, that 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 securities laws.

Please refer to our SEC filings, including our report on Form 10-K and 10-Q that we filed with the SEC and for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

At this time, it is my pleasure to introduce customer Bancorp's CEO, Jay Sidhu. Jay the floor is yours.

Okay. Thank you very much, Ted and good morning ladies and gentlemen, thank you for dialing into our second quarter call. About this time yesterday morning, I was really looking forward to reporting to you record earnings of $0.50 per a share for the second quarter 2015, when our risk management team detected a potential fraud committed by one of our Pennsylvania based commercial customers. I will talk more about this and why we are absolutely convinced, that this was an isolated incident, just a little bit later.

First of all, let me begin with reviewing with you where we stand with our three publically stated financial reports. They were; number one, earnings per share of between $1.95 to $2.00 a share for 2015 and goals of achieving above the 15% growth rate in earnings going forward. Our second goal was, NIM between 2.75% to 3% and efficiency ratio of in the high 40s within two years to three years. Our third goal was return on equity of about 12% and return on assets of about 1%, all within two years to three years of beginning of 2015.

Now regarding goal number one, which is EPS of between $1.95 and $2 per share for 2015, without this one and first one unfortunate isolated incident we expect we would have exceeded our guidance numbers and reported in excess of $2 per share of GAAP earnings for 2015. We do expect to report in excess of $1 per share in EPS for the second half of 2015, so we remain on target in that.

And regarding goal number two, which was NIM between 2.75% and 3% and efficiency ratio in the high 40's within two years to three years, we are on target for this. Although this quarter's NIM is slightly below our targeted range, we believe the average NIM for the next few quarters will be over 2.75%. We have been aggressively lengthening our liabilities and focusing primarily on the growth of variable-rate loans and swapping our fixed rate term loans in to variable rate loans. We've also been involved in selling or delaying booking any term loan on our balance sheet. We believe this to be a very prudent risk mitigation strategy, considering the guidance the Federal Reserve has been giving, they are giving to us regularly [about] the expected duration of short-term rates.

Our internal model shows about a 4% or about $8 million increase in our net interest income with an instantaneous 1% increase in short-term rate. Regarding efficiency ratio, we are hopeful our efficiency ratio over the next few quarters will average in the high 40%. However, based upon our projection for expenses related to some infrastructure improvement, hiring more teams, compliance and also Bank Mobile, our efficiency ratio may go up temporarily to about 50% or so over the next two or three quarters, and Bob will talk more about our efficiency ratios in his comment.

Number three goal, was return on equity of 12% and return on assets of about 1% within two years to three years. As you know, we have achieved our return on equity goals and expect it to remain in the 12% or higher range over the next several quarters. Our core, operating return on assets for second quarter 2015 was 87 basis points. We believe our ROA next year will be close to 90 basis points, could even be higher as we go forward, including our growth related extraordinary expenses that we expect to see them remain in this kind of an environment.

Our strategy has been to only focus on superior credit quality measures, except a somewhat lower NIM, that is in the 2.75% or 2% to 3% range and make it up in the lower efficiency ratio. Obviously, we are very disappointed about the fraud that I'll discuss with you in a minute or two, but our model does work and that is why we are confident and we expect to meet or exceed our short-term and long-term goals that we have articulated for you.

Now, talking a little bit about this fraud incident. We in 2013 entered into a lending relationship with a local business in Pennsylvania, for a development of a facility in their core business. We accepted a letter of credit from a top 20 bank as incremental collateral. This letter of credit was verified by our relationship manager with the issuing bank. The loan has been current and the project proceeding somewhat behind schedule. When this loan came up for renewal, we decided to exit this relationship as the customer was behind schedule. When we presented the letter of credit to the issuing bank two days ago, we were told yesterday that it was a fraudulent letter of credit. We immediately launched a full investigation and decided to take the specific reserve of $6 million immediately. We believe this to be still a potentially viable project and there is evidence that we may have full collection of our loan balance. However, we acted prudently by taking 100% of our possible collateral shortage as a possible charge off in the near future.

Why do we believe this to be an isolated incident? Number one, we perform regular loan quality reviews and remain very confident about our credit standards, our credit culture and the performance of all our loans. You can see that as evidenced by our very low non-performing loans and our very strong coverage. It blows our mind to see reasonable well established individuals come to believe that they can outsmart everybody, be above law by creating phony documents or numbers. This customer of ours was known to our team leader in Pennsylvania for many years and has a clean history. They claimed their consultant or adviser got them into this mess. Whatever it was, we have a very thorough investigation launched and we'll take all steps to hold those who violated the law or our code of ethics completely responsible. If we find any processes or procedures that we can make them stronger or tighten further, we will learn from our mistakes and take steps to never repeat them. I take full responsibility for this unfortunate incident and assure you that we will not, we will learn from this and this should not happen again.

Enough on this for the time being. I would now like to hand over to Bob Wahlman to go over our financial results in detail.

Thank you. Jay, and good morning everyone and thank you for calling into Customers Bancorp's earning call.

As noted by Jay, Customers is reporting Q2, 2015 earnings of $11.6 million in net income and $11 million net income available to common shareholders after the preferred dividend or $0.39 per share. Adjusted for the $6 million provision for loan losses specific to the isolated essentially fraudulent activity previously described, with an after-tax effect of $3.9 million Customers' Q2, 2015 non-GAAP core income was $14.9 million or $0.52 per share.

Looking at the components of the second quarter income, net interest income was $46.6 million for Q2, 2015 up $9.6 million or 26% from Q2, 2014 and flat relative to Q1, 2015. The increase in net interest income in Q2, 2015 compared to Q2, 2014 resulted from a $1.8 billion increase in loan balances or up 32%. Specifically, mortgage warehouse lending loan balances were up $920 million or [86%], commercial loans year-over-year which include the CRE balances are up $531 million or 38% and multi-family loans are up $436 million or 24%, a very strong loan growth year-over-year.

Total deposits also increased by $1.8 million to $5.5 billion as of June 30, 2015, an increase of 48% year-over-year. Non-interest bearing DDA accounts increased $84 million or 12% to $584 million, money market accounts increased $821 million or 50% to $2.5 billion and CDs increased $878 million or 63% to $2.3 billion over the past 12 months. And I think, it is of note that our growth in our deposit liabilities was equal to our growth in loans over the first -- over past 12 months. This has been a target of ours also.

Partially offsetting this very strong growth in loans and deposits over the past year was a 21 basis point compression in the net interest margin to 2.73% for the second quarter of 2015. While customers have seen some limited compression in yields on the commercial loan portfolio they have received or have experienced a 21 basis point compression in the mortgage warehouse portfolio yield and a smaller 15 basis point compression in the multi-family portfolio quarter-over-quarter. We did shorten the duration on the new multi-family loan portfolio from what we originated a year ago focusing on five-year loans, which accounts for a significant portion of the multi-family loan yield decrease. On the liability -- and it was important for us to manage that duration liability.

On the liability side, the cost of deposits has declined year-over-year by two basis points on $5.4 billion of deposits. However, the cost of borrowings increased 49 basis points due to -- largely to a $110 million of subordinated debt and $25 million of senior debt that was acquired at the end of Q2 2014. The subordinated debt accounts as Tier 2 capital for regulatory capital purposes and was needed to support the $1.8 billion growth that we experienced in the loan portfolio and overall has contributed to our net income growth. Total borrowing have increased only $340 million year-over-year to $1.5 billion, the bulk of which are short-term borrowings from the FHLB, used to fund that short-term variable-rate mortgage loan portfolio.

So overall, interest-earning assets were 9 basis points lower, at 3.49% in Q2, 2015 compared to Q2, 2014 and the cost of [funds] including the subordinated debt rates to enable the increase in assets increased 12 basis points to [280] basis points.

On a sequential quarter basis, the Q2 2015 net interest margin of 2.73% was down 17 basis points, versus the Q1 2015 net interest margin of 2.90%. The compression resulted largely from the Q1 2015 receipt of approximately $1.3 million in a special FHLB dividend, which increased the net interest margin in the first quarter by approximately 10 basis points, resulting in a decrease in the second quarter, when that special dividend was not received.

Other significant items in the quarter-over-quarter comparison results include lower prepayment fees in Q2 2015, down 2 basis points, cash payments received on fully amortized purchase credit impaired loans, down 2 basis points, and cumulative adjustment on the purchase of 1 to 4 family prepayments faster than what has been expected and that increased -- that decreased the 20 -- the second quarter net interest margin by 2 basis points. Exclusive of these specific items, the yields on the loan portfolio of deposits and borrowings were generally unchanged quarter-over-quarter.

Q2 2015 non-interest income of $6.4 million was down a $0.5 million from Q2 2014 and up $0.6 million from Q1 2015. The decrease in Q2 2015 compared to Q2 2014 results from the gain on sale of residential loans during Q2 2014 of approximately over $1 million and the loss on securities generating a small gain in Q2 2014 versus a small loss in Q2 2015. That was offset by a $0.6 million increase in the mortgage warehouse transaction fees as our volume has increased significantly over the volumes of a year ago and an increase in income from bank-owned life insurance, as our investment in that asset has increased by 46% year-over-year to about $150 million. The increase of $0.6 million in the quarter-over-quarter result largely comes from a $0.5 million higher mortgage warehouse transaction fees, as the volume was higher.

Regarding non-interest expenses, Q2 2015 expenses of $25.7 million were flat, relative to Q2 2014 non-interest expenses of $25.2 million and are down $1.8 million compared to Q1 2015. There is a considerable variability in the expense amount between Q2 2015 and Q2 2014 and Q1 2015 with consultation cost up $2.8 million and professional services up $900,000 over Q2 2014 resulting from increases in the size of a bank required increased level of resources to conduct the bank's businesses. Headcount increases, -- and headcount at the end of the second quarter was approximately 450 versus 390 a year ago. These cost increases were offset in part by a $2.1 million decrease in the FDIC assessment taxes and regulatory fee and a $1.7 million decrease in loan workout costs or OREO expenses Q2 2015 compared to Q2 2014. These expense decreases result largely from the timing of certain activities and events, such as recoveries of past loan workout expenses from customers that have paid off or we've collected from, sales of foreclosed properties at a gain that we've previously written-down and valuation adjustments related to certain properties. These are sometimes chucky items [in estimates] of liabilities like taxes and regulatory charges.

Customers were also issued preferred stock in May 2015 and accrued to preferred stock dividend recognizing that, that the $57 million of preferred stock was outstanding for a portion in the quarter. And then expense accruals approximately $500,000, no preferred stock was outstanding during Q2 of 2014 or Q1, 2015.

Regarding the provision for loan losses, as Jay had noted earlier in his comments, we recorded a Q2 provision for loan losses of $9.3 million. The $9.3 million provision includes a $6 million specific provisions for isolated case or potential fraud related to one loan with the total principal balance of $9 million. The circumstances of this loan appear to be unique and isolated to this one loan.

In addition to Q2 2015, provision includes $1.3 million for the growth in the loan portfolio for the new loans and $4.4 million predominantly for amounts estimated to be paid back to the FDIC related to the assisted transaction due to the callback provision and our performance in collecting loans significantly better than the FDIC's original expectation. This was offset in part by $2.4 million reduction of the provision resulting from Customers' strong credit quality and lowest charge-off experience and our need to periodically update our reserve provisions for the different categories of loans that reflect our actual experience relative to our loan performance.

Regarding asset quality, as of June 30th, Customers is reporting non-performing loans of only $10.5 million on its loan portfolio of $6.6 billion or only 16 basis points. Of this amount only $1.4 million or 0.02% relates to loans originated after 2009, and also as Jay pointed out the $9 million loan that we have talked about earlier today, has been performing according to its contractual terms and is not delinquent.

I want to go back and revisit the expense management for just a few moments. Expense management is very important to Customers' profitability as Jay was discussing. As we have regularly discussed with our investors, Customers is willing to take a little less yield in order to build a high quality loan portfolio, pay a little more for deposits in order to fund that portfolio and run an efficient bank operation. As we have discussed this morning, we have built a high quality loan portfolio. Our NPLs at 16 basis points, is top [drawer] amongst the industry. Also we have funded the $1.8 billion loan portfolio growth over the past year with $1.8 billion increase in deposits. However, we have experienced a little -- we do have run with a tighter than peer net interest margin. But as we have talked about, we offset that tighter NIM we experienced with lower cost on our -- from operations in our peers and expenses.

Our expense control is really a key differentiator for us. Our staff expenses are only 81 basis points of total assets in Q2 2015 to compared to our peers of 1.34% in industry of 1.75%. Our occupancy expenses are just 19 basis points compared to peers' 35 basis points from industry of 33 basis points. Overall our costs are 1.44% of total assets or 97 basis points, esentially 1% better than our peers and 139 basis points better than the industry comparable. Our employees generate on average $431,000 in revenue per employee compared to $260,000 per employee for the industry and it is this focus that results in Customers' efficiency ratio of 48.4% for Q2 2015 compared to 58% for Q2 2014 and 52.8% for Q1 2015. While we continue to target an efficiency ratio in the 40s% as Jay suggested, we believe that the efficiency ratio because of the investment and because of the compliance costs will be around 50% for the remainder of 2015.

Jay I'll turn it back to you.

Hey, thank you very much Bob. So as you heard, our deposits are up about $2 billion since last year, our loans are up also about $1.82 billion since last year, our credit quality has improved, it's very disappointing to see this fraud and over the first quarter this year, our deposits were up about $600 million and our loans were up about $459 million.

So we really in the fundamental core business remained very strong.

And where do we our mortgage warehouse business looking forward? We expect it to be slower in the second half of the year. So, that's why we are really beaten up our earning asset originations in what we call the banking high net worth families or the multi-family business. You should expect a very significant growth in the second half of the year on our -- on balance sheet loans in the multi-family area. Our pricing over there will remain very disciplined, that's running approximately 3.5% on all the business that we're booking right now. Our commercial and industrial loan book of business remains very strong and you should expect to see a much faster growth rate in the second half of the year in that business, compared to the first half of the year.

And in terms of the second quarter, we saw a lot of closings take place later on in the month of June. So, we expect to benefit in our net interest income and even though with lower mortgage warehouse outstandings expected in the second half of the year, but we will not -- we don't expect to see any significant impact on our net interest income projections.

Regarding Bank Mobile, we expect it to report within -- by the first quarter of next year, which is in the first year of operation, at least 25,000 accounts, which equates to having typical bank, if they would have opened up about 100 new branches in the first year at best high performing they would have opened up approximately 20,000 new checking accounts compared to us being able to open, without any branches 25,000 checking accounts.

We're always being asked about guidance for 2016. And as I mentioned earlier, we are shooting for an average annual growth rate in earnings of about 15%. However, we are more bullish for 2016. Let me share with you our guidance for 2016. We expect to report somewhere between $2.40 to $2.50 in earnings per share in 2016 or at least a 20% growth rate in earnings. We are putting the press release out just now and as you can well imagine, we have to put our 8-K also on this guidance for 2016.

We remain very bullish, and -- but we once again, we regret to have to report this fraud, but it's an absolute isolated incident I can assure you about that, and we're going to try our best to get every single dollar and that would be the day that we can tell you we are reversing some if not all of our special provision.

So with that, Tom, I ask you to please open it up for Q&A.

Thank you, sir. (Operator Instructions) Bob Ramsey, Friedman Billings Ramsey.

Hey, good morning guys. I appreciate the 2016 guidance that you have given. I'm wondering if you could just talk a little bit about, sort of what the capital backdrop is in that guidance? Obviously tangible common equity drifted a little bit lower this quarter than last and so I'm curious, how your thoughts of capital through the end of the year? And then, whether there is any capital offering baked into that guidance?

Bob, we are absolutely convinced that we have enough capital onboard and enough common equity onboard right now and we have no intentions of issuing any common equity at all. So I want to be very clear about that. We expect to gradually start to increase our tangible common equity to asset ratio. We will -- we have a guidance given, I think that we will have at least 50 basis points cushion in every single capital category above the Basel III, a fully implemented standard. So we remain committed to that. We will remain opportunistic to look at any opportunity that we see there to beef up our capital ratios using sub debt or those kinds of capital options available to us, if we need to, because there are also fluctuations that you normally see in our mortgage warehouse business that we might find to do that. But you should expect on an average capital ratios to be equal or higher next year.

Okay. And is that true, I mean you are talking about sub-debts for a Tier 2 capital element, is it true for just tangible common equity is 6.1% this quarter an absolute floor for TCE or could that drift lower?

No. TCE will not drift lower.

Okay, great. Couple of follow-up questions on the fraud situation. I'm curious, if you could help me understand a little bit better, maybe how you all can verify the letter of credit and has that issuing bank come back and say the letter is fraudulent after the [fact]?

Yes. Bob, we are investigating that. There could be a collision involved over here, with several parties involved. But it would be premature for me to say --

For me to comment on this anymore, but I will tell you we'll fully disclose that once we completed our investigations. It was just yesterday at this time. You're raising a good question, but we have to go through a detailed investigation and we will hold people accountable and we will take every single step to make that. So -- but you are absolutely right, we're going to pursue the other bank, we're going to pursue every single way that we can do --

Okay. And what is the total size of the loan in question? And is that loan the only piece of the client relationship or there are other loans to the same client?

No. The total size of the loan is $9 million. There is -- we have other collateral over here, which has a minimum value of $3 million, so we took the 100% of the collateral shortfall. We are -- letter of credit was actually bigger than $6 million, but so we -- this was an over collateralized loan. And so there are no other relationships with this client. This was a client of one of our team leaders for many many years and it is very unfortunate that they claim that they got some guidance from consultant, who referred them to this bank and gave them (inaudible) whic appears to be fictitious now.

Okay. And then could you also give any color around, what sort of type of business or industry, this customer is in and sort of what type of facility it was for -- the loan was for?

Yeah, Bob, we -- this could be a criminal activity and this could be a very serious bank fraud activity, so before we give you too much of color, I want to be sure that, we've completed our investigation and we will inform you about that. And there not too many business surrounding Pennsylvania and we just want to be a little sensitive of not in any case getting into any legal issues of defamation or (inaudible). So, please understand that issue.

Okay.

It is a full business, it's not a mortgage warehouse business, it's a CNI business and that's all I can say.

Okay. And I take it at this point, while you're fully reserved, you haven't actually charged off any of this exposure yet?

That is correct.

Okay. What were sort of total net charge-offs in the quarter? I could not find that anywhere in your release.

The total charge-off year-to-date Bob, is $1.99 million.

Okay and how much of it was in the second quarter? I mean, was it about a million in the first, I guess about the same in the second, is that right?

I want to say that that's about right. Bob, I know that we went through this last quarter too.

It'd be great if you guys can include that in the release.

It was $961,000 in the quarter. We did ask that, Bob.

Sure. We'll put that in the release. Bob, the reason why it's a little bit confusing on some of our disclosures on the charge-offs and what not is, that we have covered loans and uncovered loans. Bottom line is, that our credit risk management group has done a tremendous job, that we owe the United States Government and FDIC money. But in our charge-offs, we are actually, as rightfully, so we are expected to maintain exactly the same treatment for all our charge-offs, whether they are guaranteed by the government or by FDIC or not. So, all our internal reports combined FDIC guaranteed loans with a non-FDIC guaranteed loans. But, now going forward since the FDIC covered loans are going to be disappearing in the commercial real estate area I think it'll become a whole lot easier and we will put that in.

Okay. On that line of thinking, I noticed the FDIC loss share receivable went to zero on the balance sheet this quarter. I was hoping if you could help me to understand that? And then maybe explain to, I know you mentioned the provision included $4 million for sort of callback on previously charged-off FDIC loans. I'm thinking you should get a benefit there somewhere else. I mean, if you have to pay the FDIC back, you should be recovering more on the loans. Just help me think about, what the offset in that piece of provision is?

Bob, there is a -- in regards to the FDIC contracts, there is an overall provision for a callback and if your performance significantly exceeds what the FDIC was expecting, they want to share in that benefit and there is no recovery that comes back from the -- we're not getting a recovery from customers at this point in time in relationship to those. So what has happened in terms of the indemnification asset with the recognition of this charge is no longer an indemnification asset, but we have a net liability on to the FDIC and that liability is included with other liabilities, it's not material enough for us for a separate disclosure.

Okay. And so does that better loan performance, does it come through in a higher yield accretion over the remaining life of the loans or where does that better performance come through?

That better performance doesn't come through any place Bob, that better performance is that this is a further [shown] to the contracts with the FDIC, they have a callback. So, what has happened in past periods is that we have, pursuant -- how do I say this, we have pursuant to the contract recognize the loans when we receive collections and remitted the 80% portion and we'd recognize that as a liability as it comes through and that's the part that you're used to seeing and that's the part that, we would have some benefit come to us but the bulk of the benefit goes to the FDIC. So you'd see the receivable increase and you'd see our piece come through as a part of the collections of the loans and a decrease of the loan balance. In this particular case, with the indemnification, with the callback provision, there is no similar type recovery. It is a liability to the FDIC based upon the overall performance of the last 5 years.

It's a cleanup quarter Bob, and essentially when we did the cleanup, we realized appropriately that there's nothing receivable from FDIC. We've already taken that and we now have to give 80% of the gains to FDIC. And so net net net that 80% of our gains to FDIC are being expansed with the provision.

Okay. I'll think that through and maybe circle back if I don't quite get it, but that's helpful. Last question and I'll hop out, but the FDIC expense line item showed a tremendous amount of improvement this quarter. I'm curious if any of that is, is another sort of true up, catch up and what we should expect in FDIC expense next quarter?

I think Bob as I mentioned to you on that, and I'll take it Bob. So it's because -- yes, you're absolutely right, there were some timing differences and from the year-end analysis that we had done and we cleaned it up, and that's why there were some recoveries to us were we had over accrued some of our expenses, but it's not material. We think in the next two quarters, you are to see that line, go back to more normalized, but like professional services and some of the other areas, you might see some expenses go the other way. Bottom-line is that, it's not material on the expense side, it's true reflection of our expenses and Bank Mobile expenses are also somewhat cyclical and we expect them to be greater in the second half, because we started a Bank Mobile technology team, which is -- we have our own development team now and we know that there are expenses for that and we are developing an awesome app, something which doesn't exist in United States today. So those are the kind of things that we factored into our guidance given to you that on what we expect in the second half of the year. Our efficiency ratios to be more like 50% and still we will beat the guidance that we've given.

Okay. All right. Thank you guys. That's all helpful. I'll hop back out.

Sameer Gokhale, Janney Montgomery Scott.

Hi. Thank you. Good morning. I had a couple of questions, one was again going back to this fraudulent loan that you had discussed. I know there are a lot of details you cannot share at this point. But the one thing I just wanted to clarify was it seems like there was a consultant involved in referring this particular borrower to your Company and I just wanted to clarify that if I heard that correctly and is there a sense for how many other borrowers this particular consultant may have referred, because I think one of the concerns maybe (Multiple Speakers) basis?

Let me correct this please. There was no consultant who referred this borrower to us. No. This is a customer of our team leader who we hired in 2011 or 2012 and in the process was contacting every single business that this person had done business with, that is how -- so we solicited this customer on that.

Okay, so then investors will probably get more comfortable with this issue, just to make sure it's not pervasive once you actually go through a review of your policies and practices and we look at Q3, because I think one of the concerns clearly is, could this be the case in more loans but that's only something that probably time will tell, it seems like, so that's helpful color. The other thing I wanted to get a sense for was your preferred issuance that you did in Q2. Can you remind me what the cost was of that issuance and when in the quarter you did that issuance? And also what kind of sense you can give us for additional preferred issuances you might be planning for over the next 12 months to 18 months or so?

First of all, we are not planning for any preferred issuance over the next 12 months to 18 months at this time. Second thing is, your firm was co-manager in that journey and the cost was 7.5% for the preferred. We did it in May, so our five hundred and some thousand dollar expense was for half a quarter and we've already factored in that expense going forward and we expect that to be totally non-dilutive to our earnings based upon the guidance that has been given for 2015 and 2016.

Okay, that's helpful. As you can see, the walls between banking and research are well in place at our firm in my question. But the other thing I wanted to get some color on was the CRE loan environment. Some of the larger regionals, like M&T for example, have talked about stronger demand say from existing customers, especially in the CRE space and in Pennsylvania, and I wanted to just get your take on, what you're seeing in your key markets?

Well, we are not much of a CRE lender. Why? So called CRE is what we call banking of high net worth families, which is principally New York based smaller multi-family loans in the $4 billion to $5 billion average size range. Our average loans in our so called multi-family category is $4.3 billion right now. We don't do any big packages, we don't do buildings with other builders et cetera. It's really the family office of high net worth families, the portion of their assets that they have allocated to income producing real estate is what we do.

So, I may not be the best person to give you guidance of what's happening in the CRE world, but I can tell you what's happening in the high net worth family of the owned portion of the multifamily business. It's a very high credit quality business. There continues to be in the New York competitive forces and new entrants are trying to come into this. The new entrants however are basically competing on the basis of price, we've seen some over the last 12 months [ridiculous] pricing. Our pricing has and our structure has remained totally unchanged for the last 18 months. If anything, we are now with the movement of the curve a little bit and that [could be] the rates a little bit are increasing our pricing gradually for our customers. And that market for us is very, very attractive because we're well known over there and we go directly to the customers besides going through some of the mortgage brokers in New York.

As our CNI business, I think that CNI business is getting better throughout the franchise, in Pennsylvania, in New Jersey, New York and New England. So, unlike other banks, we're not focused on non multi-family CRE that much.

Okay. Then it doesn't sound, based on your commentary, you're pretty clear that it doesn't sound like you're planning to ramp up within your footprint in Pennsylvania, within the CRE space either. So -- Okay, that's helpful color. Thank you very much.

Thanks Sameer.

Don Destino, Harvest Capital

Hey, guys. I'm not sure how much more you're going to be able to tell me, but just going to ask a couple more -- couple of questions that have been asked in a different way and see if I can get a little more color on the fraud. Just can you give me banking 101 just the mechanical, what happens when somebody brings you a line of credit? How do you determine that, that's not somebody's word processing project and that it's an actual line of credit, like what's the actual due diligence compliance practice within the bank if someone brought in a line of credit? Let's not say today, but let's say last week, before you heard about this fraud?

Yes, it's a letter of credit and letter of credit is a certificate that a bank can issue saying that you can present this to us and we will be permitted to give you cash to the issuing person. So that's what happened for this letter of credit.

No, I understand what a letter of credit is, my question is, if I walk into your bank with a letter of credit, how do you determine that I didn't just type it up myself?

Yes. So our procedures are, we verify it with the issuing bank whether you in fact did issue this letter of credit. We take every step to make sure that it's verified and then that's the only way we look at it.

So what happened when you went to the bank to get this letter of credit verified, (Multiple Speakers)

Yeah. It was verified that it's genuine.

So you don't -- I'm sorry, you don't go to the bank and verify that it's legitimate letter of credit before you need it, you only go it to verify it once you actually need it?

No. We verified this before we extended the loan.

Okay. So, the bank verified that it was a legitimate letter of credit and then when you came to collect on it the bank went back on its previous verification?

That is correct.

And it was a top 20 US, top 20 US bank?

That is correct.

Wow. That sounds, that sounds -- and you must have it documented that they verified that it was a legitimate letter of credit?

Of course.

I mean, there's -- okay. So there's...

There is something going on here -- there is something here which you can view as sort of hitting the nail on the head. It's going to be very thorough investigation by us, okay. This is not a systemic problem, this is such an isolated, such a big thing. And if this is a fraud there is a solution involved in some case or another, you know, all those kinds of things involved over here.

So just to be clear, you're -- what you're saying is that, it was a letter of credit that you verified its legitimacy with a top-20 US Bank a while ago, when it was presented to you, had that documented, and when you went back to that same bank, that bank said, no, that's not a legitimate letter of credit, even though they had previously verified it?

That is absolutely correct.

That's interesting. Okay. And then you've made it very clear, that this is a isolated incident, can you just give -- I was going to ask the same, some of the same questions that were asked previously about the industry, the type of borrower, is it a traditional borrower or a traditional bank borrower that you would expect to have commercial credit out with a commercial bank, not any kind of interest, not any kind of?

Absolutely so called if you consider traditional borrowers as just a kind of borrowers that bank serves, yes. This is not broker loan or shared national credit or a warehouse facility or whatever, this is big market area and I'm sorry, I can't talk, describe to you anymore about the customer, because this is going to be going to the FBI.

Okay. Well yes, it sounds like the bank might me in a significant amount of trouble as well, if they are verifying things and then going back on their own verification. Okay, and then last question, the more traditionally on the on the P&L, so Bob can I take it that, that I should go back to using kind of the $3.1million, $3.2 million run rate for the FDIC and the other line that was down sharply in this last quarter?

I think that would be a reasonable thing to do.

But, other categories, you might see some reduction in expense in these other categories.

Yes, that's absolutely correct.

Hey, last question, why did you guys issue the guidance this morning? It seems a little reactionary. Was it just because this fraud and the stock opening low or were you always planning on issuing guidance right now or why today?

We were planning to do at the (inaudible). And with this situation, we just wanted to make sure that customers who were -- investors who were ready to buy our stock maybe next week could have an opportunity to do it today.

Got it. Makes perfect sense. Thank you very much, guys.

Frank Schiraldi, Sandler O'Neill.

Good morning. Just a couple of -- first on the guidance $2.40 to $2.50 next year is, can you give a little bit more in terms of trends that you're expecting to drive that sort of growth year-over-year?

I think it's going to be the fundamentals Frank. Build your loans, build your deposits, watch your costs, manage your risks, get the non-interest income up, do all the initiatives including SBAs, lending initiatives, continue to hire teams, then hold people accountable, manage your risks and get it done. That's it.

I think Frank, if you take a look at what we did in 2014 and 2015, that has a repeat in 2016. As Jay was saying, it's basic banking.

Okay. It just, it seems like if the TCE ratio, you noted that you still not expecting any sort of common capital rate. So, the TCE ratio is going to build from here. So you're still, in terms of growth you're bit restricted to your retained earnings growth. So just wondering is that more sort of margin expansion and I guess really what I'm getting at is wondering what sort of interest rate environment or what sort of increase in short-term rates maybe is baked into this guidance?

Frank, we do not take into (inaudible). And that's why it's whether rates move up, it's not going to slow down, it going to only help us. If the rates don't move up, it's not going to slow to us and it's not going to avoid us from reaching our guidance. Our growth rate is going to be slower next year and that's why we are confident that our capital ratios would be higher. In the past, we've had 40% to 50% growth rate in earnings and now we are talking about 25%. So, please as you run your model, look at that.

Okay. I'm just -- so you're talking 20% growth at a minimum next year. I mean would you be able to say if there is any -- I missed, I've heard in the past year your margin guidance. Was there any margin guidance attached there and do you expect margin expansion from here into 2016?

All our guidance remains the same, margin of [2.75% to 3.00%] (corrected by Company after call) that's all we covered at this point.

2.75% going forward?

Between, in that range. It depends up on certain quarters, but 2.75%, yes.

Okay. And then in terms of, you talked about the efficiency ratio perhaps being above 50% the back half of this year I think, I would imagine next year you would expect it to trend again below into the high 40s%?

Correct.

Okay. In terms of just thinking about it, maybe some expense build, you talked about compliance, you talked about new teams coming over, if I think about you know the, call it $25.5 million call it, expense base in the quarter, what are you sort of thinking in terms of growth from there in the back half of the year?

I think our expenses would be somewhere in the $27 million to $29 million range.

Okay, great. And what would you think would be your best sort of in terms of thinking about compliance build versus more direct revenue support in terms of new teams coming over, what sort of, if I am thinking of from $25.5 million to $27 million to $29 million, what sort of growth is in the compliance front versus maybe more customer facing builds?

I think as I stated earlier, it's going to be related to three main areas compliance and regulatory and then revenue producers which is made up of teams, we hired three teams already this year and there is one more team we expect to announce in the month of August and they are all revenue producers. And the third thing is which I talked about is our continued expenditures and investments in Bank Mobile which we are putting zero value to but it could be as we execute worth extremely valuable for our shareholders.

Okay. Was there any change to expectations on, what Bank Mobile expenses will be for full year?

No.

No, okay. And then just a couple of follow-ups on the fraud, I mean in sort of response -- just sort of follow-ups to one of Don's question, is it fair to say that, since this is still very new in terms of the discovery here that the initial verification process on the letter of credit, is that still being looked into, is that possibly a breakdown in risk management or you are already confident that that verification did take place as it was supposed to?

It is not a breakdown in our risk management. I can assure you about that.

Okay. And then just wanted to follow-up on, I thought I heard you know in terms of the, so it's a $6 million provision none of its been charged off yet and so it's all still performing right, and $9 million loan, so you hadn't talked a little bit, I think about the collateral behind it. Could you just maybe give a little more color on what collateral is standing behind the loan?

It's the real value behind it. That's all I can say, that it's collateral that's been verified by us, including [risk].

Would it be, could you say if it's real estate or not?

It includes real estate.

Includes real estate, okay. And I guess the real estate included would be a part of the business of this individual -- commercial?

Yes.

Okay. All right, that's all I have. Thanks.

Thank you Frank.

Matt Schultheis, Boenning.

Good morning gentlemen.

Hi Matt. Good morning.

A quick question on deposit growth. Can you discuss in any sort of detail what channels your deposit growth are coming from? Whether that's Bank Mobile? Whether that's the property management firms? Or some of the multifamily lending? So it's generally what type of customers are putting these deposits in your bank at present?

That's a good question, Matt. It's not coming from Bank Mobile. We are not -- Bank Mobile's purpose is not to generate high rate deposits. So it is to have established relationships with principally the millennials and the GenX, which is very tech dependent and tech savvy. So total Bank Mobile deposits are going to be absolutely immaterial in the first two quarters of this year. This is coming from C&I customers. This is coming from commercial customers. This is core deposits. This is not broker deposits. It's really -- the deposit opportunities for us has been that we continue to look at different avenues and calling on different customers, calling on all our local customers, governmental authorities and that's between the combination of government and municipals and small medium-sized businesses in our own local market area. We see huge deposit potential opportunities. We haven't added any branches which traditional banks do. So there is also a certain seasonality to deposits. In fact, our DDAs were down on June 30. So you know they will be higher expected, based upon the past seasonality, at September 30 the next time we report to you. So deposit generation has been a focus of ours. We want to generate more deposit, more core deposits than our loans and we are very pleased to share with you that we have achieved that goal for the last couple of quarters.

**part 25** Okay. Thank you. Most of the other question I had, have been answered already. Thank you.

Dallas Salazar, Atlas Consulting

Yes. Hi Guys. Given the short time, I am assuming that you guys found out about this possible fraud, what gives you the confidence that the assets are valued at or around what you are exposed to? And then if you can elaborate on what is the policy or the procedure if you do foreclose on those or get some value from those assets and then it also turns out that this was fraudulent and maybe there was some other assets you can go after? I guess I am just trying to figure out like sort of backend long dated, if everything sort of works out and you may not be able to comment, A, what led you to believe that your exposure is limited and then B, could you potentially have zero exposure? And then I will sign off. Thank you, guys.

Okay. I think the prudent thing to do, in our opinion, under these type of circumstances, is to take a conservative view. And that's essentially that we took. We looked at our collateral with very conservative valuation of all our collateral. We looked and then we assumed no improvement in the business. We assumed absolutely no market value appreciation whatsoever in this customer's business. If you talk to the customer, that customer believes that there has been no deterioration at all in their business plan. We took a view that there has been a tremendous, significant deterioration in their business plan. So the chances of our coming back and saying, it's $8 million as of right now, zero. All right. The chances of us coming back and saying, guys, it wasn't fixed, [lot higher].

So with that any more questions, Tom?

We've no more questions in the queue, Mr. Sidhu. I'll turn the call back over to you for any closing comments.

Yes. Thank you very much, ladies and gentlemen for taking the time with us once again. We hope to see some of you at the KBW Conference next week. We will be there and we are very optimistic and we regret that this fraud happened. We take responsibility for it and we will be investigating it further and answering any questions you may have about it during the third quarter call. Thank you so much.

And ladies and gentlemen, this does conclude today's conference. We appreciate your participation.