Ted Haberfield - Investor Relations, President of MZ North America Jay Sidhu - Chairman and Chief Executive Officer Robert Wahlman - Chief Financial Officer.

Joseph Gladue - Merion Capital Group Michael Pareto - Keefe, Bruyette & Woods, Inc. Robert Ramsey - FBR Capital Markets Frank Schiraldi - Sandler O'Neill Partners, L.P. William Dezellem - Tieton Capital Management Sameer Gokhale - Janney Montgomery Scott.

Good day and welcome to the Customers Bancorp Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jay Sidhu. Please go ahead, sir..

Yeah. Thank you. Thank you so much, Jamie and good morning ladies and gentlemen. Thanks for dialing in. Before we get started, I would like to have Ted read our forward-looking statements..

Thank you, Jay and good morning everyone. Customer Bancorp third quarter 2015 earnings release was issued yesterday after the close and is posted on the company's website at www.customersbank.com. Representing the company today are Jay Sidhu, Chairman and Chief Executive Officer; and Bob Wahlman, Chief Financial Officer.

Before we begin, we would like to remind you that that some of the statements we make today may be considered forward-looking.

These forward-looking statements are subject to a number of risks and uncertainties that cause actual performance results to differ materially, including the risk that the results of 2015, results that are different than currently anticipated.

So, please note that these forward-looking statements speak only as of the date of this presentation and 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 also the 10-Q for a more a detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC 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..

Yes, thank you so much Ted and once again good morning, ladies and gentleman. Thank you so much for joining us. Sorry about the little delay there was some technical problems, but everything is behind us now.

We are really pleased to report a strong third quarter, as you know third quarter 2015 net income was up 23%, EPS of $0.50 per share for the third quarter and its up19% over the third quarter last year.

On a pre-tax basis, our net income is actually up 52% rather than the 23% we are reporting and on a pre-preferred stock dividend basis our net income is up 31% over last year. On a nine-month basis net income is up 31% and EPS is up 27% over the first nine months of 2014.

We are very focused on tangible book value accretion from ongoing operations and we are very pleased to share with you that the tangible book value is up by about 13% or 12.8% over last year. The fundamentals of the company, the core business is what's driving our performance, deposits grew by about 35% and our loans grew by about 18% over last year.

The loan-to-deposit ratio at September 30, 2015 was 82.4% and when you add loans, commercial loans that we are making through privately held mortgage companies or what we classify as loans held for sale, the loan-to-deposit ratio then does go up to 112%.

Borrowing, as a result of our strong deposit growth, borrowings were down 33% over last year and our broker deposits are down about 25% over last year and now they are only about a $1 billion. From an asset quality point of view, it remains very strong.

Non-performing assets are only 34 basis points of our total assets and our return on common equity was 11.8% and our return on assets was 82 basis points. Now, I'd like to hand it over to Bob Wahlman, our Chief Financial Officer, to go over some details of the financial results..

Thank you, Jay. The third quarter was a great set of quarters for Customers Bancorp. As noted by Jay, customers reported net income to common shareholders of $14.3 million. Fully diluted earnings per share were $0.50 per share achieving that $0.50 mark for the first time.

Q3 2015 net income per share $0.50 compares to $0.42 per share net income a year ago and reported GAAP per share net income of $0.39 in Q2 2015. Let me walk you through the key drivers of Q3 performance. Net interest income increased $9.7 million in Q3 2015 compared to Q3 2014 of 24%.

Net interest margin was flat in Q3 2015 compared to Q3 2014 at 2.79%. So the growth in net interest income was driven by growth of the loan balances or the loan portfolio.

September 30, 2015, loan balances compared to a year ago, balances increased $1.0 billion with loans to mortgage companies up nearly $500 million and commercial loans up nearly $300 million. Deposits increased approximately $1.5 billion over the year period with CDs up about $650 million, [MDA] is up $550 million and DDA is up about $150 million.

The growth in deposit exceeding growth in loans provided customers with improved liquidity or to help with future growth. Customer's net income in Q3 2015 or net interest income in Q3 2015 was up $3.4 million from the second quarter of 2015 or 7.3% quarter-over-quarter growth. NIM was up six basis points to 2.79% from the second quarter of 2015.

A portion of the increase in NIM from the second quarter results from an increase in prepayment fees received on the multi-family loan portfolio of approximately $1 million. The multi-family loan portfolio was maturing and has significant size, nearly 600 loans now and $2.5 billion.

And we do expect to receive some prepayment penalties or some prepayment fees on the portfolio each quarter as properties are still to be financed. However, this contributor to income will vary from period-to-period.

The remaining $2.4 million increase in net interest income Q3 over Q2 is attributable to the increase in average loan balances up $272 million quarter-over-quarter. Multi-family loans accounted for about $180 million of the increase in these average balances and C&I loans were up about $70 million.

Overall, the end of the period loan balances were flat, so the outstanding end-of-period balances were flat, but the average outstanding balances over the quarter was $272 million higher in the third quarter as compared with the second quarter.

And specifically speaking about the commercial loan to mortgage company balances, those balances were down in the period balances by $300 million, but average balances were flat quarter-over-quarter. We expect NIM to remain relatively flat in the current interest rate environment in the fourth quarter and future periods.

We are planning to increase our loan balances during Q4, largely in the C&I and multi-family space. Non-interest income for Q3 was $6.2 million up $1.1 million or 20.9% from Q3 2014.

Customers had greater volume flowing through its commercial loans from mortgage companies business which increased the sales we achieved on the volume process, increasing the fee income by $600,000.

In addition, customer's sold some multi-family loans in the third quarter of 2015 resulting in a gain of approximately $360,000 or roughly 1% of the loan balance sold.

Customers does anticipate another small sale of multi-family loans in Q4 2015 and we are anticipating larger sales in 2016 as we liquidate excess production and limit the size of the balance sheet. Sequential quarters, Q3 non-interest income was down approximately $200,000 compared to Q2 2015.

Customers experienced a $600,000 reserve adjustment for derivative counterparty risk and the value of a back-to-back, the revenue of portfolio increased and we have a counter-party risk on that and that was offset in part by the gain of multi-family loans described previously.

Moving on to non-interest expense, non-interest expense of $30.3 million in Q3 2015 is up by $5.6 million or 22.8% in Q3 2014. The year-over-year expense increased results from the $1 billion growth in the loan portfolio and $1.5 billion growth in deposits.

These growing portfolios increased operating costs for staffing, for loan and deposit origination, operations and maintenance, increased cost for administrative support, increase in occupancy costs, depends on larger work force, increases technology fees for the volume and for additional people and we also experience an increase in professional expenses.

In the aggregate these growth related expenses come to approximately $3.1 million. In addition, we experienced a $1.1 million increase in REO write-downs from the non-guaranteed portion of the FDIC associate properties on which we had foreclosed and this contributed to the additional $1.1 million.

The $1 million increase in professional expenses reflects increased loan review, legal costs, internal audit costs and accounting work that were contracted to third-parties due to the growth.

Sequentially, non-interest expense increased $4.6 million to $30.3 million in the third quarter reflecting - compared to the second quarter, reflecting a $2.3 million increase in REO expenses as a result to the REO valuation write-down I just discussed, combined with the net recovery of previous REO charge-off and expenses that were experienced during the second quarter of 2015.

Also in the second quarter of 2015 customers experienced or recognized a benefit of $2.3 million for the one-time reduction of the [indiscernible] that we talked about last quarter.

Moving on to the provision for loan losses, the provision for loan losses in the quarter was $2.1 million for the third quarter of 2015, the provision for loan losses reflect a $1.2 million provision for the approximately $300 million increase in the Held for Investment loan portfolio.

So, overall the loan portfolio was flat in sequential quarters, the decline in the Held for Sale portfolio of about $300 million, which does not require a loan loss reserve that is accounted for on a lower cost of fair value basis, was offset by an increase in the Held for Investment portfolio, which did require an increase in the loan loss reserve.

The remaining net $900,000 reflects conservative changes in estimates and amounts to be collected on a variety of impaired loans, loans purchased at a discount and purchased loans. There are a few other financial matters, other than earnings; I'd like take just a minute or two to comment on.

First, during Q3 2015, the FDIC guarantees a non-residential loans portfolios. So largely the commercial loans we acquired in assisted transaction back in Q3 2010 expired. The FDIC guarantee on the residential portfolios acquired in 2010 remains in place for an additional two years and covers approximately $13.8 million in loan balances.

Customer has reviewed all the loans previously covered by the FDICs guarantee and recreated those loans in accordance with customer's underwriting standards.

To the extent customers expected losses on the covered loan or from the related REO properties; we have obtained current valuation recognized losses as appropriate and have submitted reimbursement requests through the FDIC.

We continue to work on recovering amounts previously charged off and such recoveries will be shared 80%, 20% with the FDIC whereas the FDIC gets the 80% of [indiscernible] of the losses. Therefore, we do not expect any adverse financial impact from the expiration of the FDIC guarantees on commercial loans as we move forward.

Second, non-performing loans increased approximately $7 million quarter-over-quarter and REO properties declined approximately $5 million Q3 2015 compared to Q2 2015, resulting in an increase in the non-performing assets of approximately $2 million.

The increase in non-performing assets did include $3.7 million related to the loan identified as fraudulent in the Q2 2015 earnings release. Without this fraudulent loan, non-performing assets would have declined slightly period-over-period and non-performing loans was increased by only $3.3 million.

We remain very confident about the overall quality of our loan portfolio. Third, regarding the $9 million fraudulent loan to which a $6 million provision was made during Q2 2015, customers charged off $5.3 million during Q3.

As we shared with you in July, customer has reviewed the loan portfolio in which this loan was maintained and collateralized loan and concluded that the fraud was an isolated incident. Customers continue to pursue all adoptions for collecting the loan proceeds and the matter continues to be investigated by various law enforcement authorities.

We remain optimistic that there will be recovery; however, they could take some time. Finally, customers' capital levels continue to exceed the floors for well capitalized bank as defined in banking regulation and exceed the 2019 fully implemented Basel III levels required to avoid limitations on certain [indiscernible] distribution.

The Customers Bancorp, the CET1 ratio, as of September 30 was approximately 8.28%, the Tier 1 leverage ratio was approximately 7.27%, Tier 1 risk based ratio was 9.23% and total risk based capital was 11.52%, the capital ratio of customers banks are also higher than the holding company ratio, which I just gave you.

The risk-based capital ratios, all increased by approximately 35 basis points compared to Q2 2015 as customers generated over $14.3 million of net income to common shareholders during the period while holding assets flat. And the common tangible equity ratio also increased by a light amount.

So that completes the financial review for the third quarter, Jay. Let me hand it back to you then..

Okay, thank you very much, Bob. I'd like to cover with you a little bit about our overall strategy and the market conditions. I'm going to start, which are affecting our business.

As you know our strategy is strong organic revenue growth and scalable infrastructure and that should result in sustainable double-digit EPS growth and hence, growth in tangible book value also and hence, eventually growth and increased shareholder value.

At the same time, we are very focused on extremely robust risk management driven business strategy and our strategy regarding M&A is to stay away from any deals at all, unless any dilution in book values can be overcome within one to two years. So, we are very focused on organic growth.

Let me talk a little bit about different aspects for that organic growth. First of all the deposit growth, over the last five years our deposits have grown at a CAGR of 66% and DDAs have grown at 83%, that's all organic growth.

And at the same time five years ago, our average size of a branch was only $35 million and we are pleased to share with you today, it's over $300 million and that's the tremendous, tremendous improvement in our efficiency ratio in acquiring clients and getting their deposit business.

Our business model is that we are a business bank and if we call it a single point of contact, the strategy, client just deals with one private bankers at the bank and there are really three market segments that we serve. First is banking the privately held businesses and that is 41% of our loan portfolio as to the privately held businesses.

The largest segment of our privately held business are the mid-size privately held mortgage companies that's about two-third of our 41% portfolio and the rest is one-third is to manufacturing companies, service industries, technology based companies and other wholesale companies, but they are basically all companies where we are in most of the cases, majority of the cases the primary contract and therefore those businesses.

The second segment we are going after is banking, what we call banking a high network families, that's principally multi-family loans in the New York metro area.

Our average loan size over there is between $4 million to $5 million and for the year this year, based upon our controlled growth and improving our capital ratios we actually increase that portfolio only by about $150 million because our other production, we ended up selling it to others at a gain.

And our strategy is to grow our C&I business, grow our other businesses, commercial loan businesses, manage the multi-family portfolio on our balance sheet depending upon our expectation of where we expect commercial loans to privately mid-size mortgage company to be.

And so that's essentially how we are managing and having the consistency of earnings improvement as well as managing the growth of our balance sheet.

Our commercial real estate focus is minimum, we only have about 50% of our business in commercial real estate, because we do not like to take credit risk and we believe that commercial real estate other than include multi-family loans to high net worth families poses excessive credit risk and we don't get paid for that credit risk, that's why we do not expect any significant increases in that portfolio.

For the first nine months of this year, we only saw about a $100 million increase in that portfolio. From a market conditions as the loan portfolio yield last year it was 3.99%, this year at September 30 it was 3.95% so we pretty much held on to the overall yield.

In our C&I portfolio, it was 3.90% at third quarter and for the first nine months it was 4.12% because of our emphasis on basically originating variable-rate loan.

And in the multi-family portfolio, our average yield at third quarter was 3.88% and that is up from 3.77% for the first nine months, because we ended up selling our lowest yielding multi-family loan principally in the first three months or six months of the year, but also a little bit in the first nine months so we are very, very disciplined in terms of maintaining our margin and our overall yield.

In Banking, commercial loans to the mortgage companies, our average yield at third quarter was 3.27% and that's up a little bit over the first nine months of the year of 3.25%, that's because the LIBOR moved up a little bit and that's what caused that. So we see some irrational pricing in the marketplace. We are very disciplined about it.

For the first time, we are seeing some irrational structures in the marketplace, we are seeing banks were getting that credit quality is very important and we are very, very focused on that and we are not focused on growth for the sake of loans but credit quality remains the most important critical success factor for us.

In terms of teams acquired, we acquired four teams this year, actually its five, but one was an addition to an existing team, so let's say four and a half teams with 15 professionals, they included some addition to our SBA team as well as the large team, which helped us get started in our commercial finance business, which is principally equipment finance.

I'm pleased to share with you that the equipment finance business, which we started around the middle of the year, we've already closed $40 million and by the end of the year, that should have outstandings of about $60 million and by middle of next year it will be a profitable business. Right now, their expenses exceed a little bit of their revenue.

On the SBA side, we are very, very encouraged by the progress that we've seen, we also entered into a strategic partnership with a company called Biz2Credit, which gives us an ability to generate new digital technology, to generate small business loans and being extremely competitive with some of the alternative lenders and so that should be a very good and we are looking at much higher returns from our SBA line of business in 2016.

As Bob shared with you our capital ratios remain very strong and we are very focused on managing our capital and increasing our tangible common equities ratio also in addition to the Basel III requirements.

I want to once again assure you that we have no intentions of issuing any common equity, we will be generating in excess of $15 million a quarter of common equity next year, well in excess of that and that should support our growth more than support our growth and we're looking at actually improving our capital ratio somewhat next year gradually, while we report to you approximately a 20% plus growth rate in EPS next year based on the guidance that we've already given to you of $2.40 to $2.50 in earnings per share in 2016.

From an asset sensitivity point of view, we remain asset sensitive, we envision that when the rates rise that 100 basis point increase in rates would result in somewhere between 4% to 5% increase in our net interest income.

As Bob shared with you the credit quality metrics, let me just draw your attention to page 16 of our Investor deck and as you would see over there we compare ourselves to the industry, we compare ourselves to the Northeast United States, peers in our size category.

And consistently over the last five years, we've been at least three times better in non-performing ratios including the unfortunate fraud that we reported to be at least three times better than our peer groups and we are about 10 times better than the rest of the industry in asset quality as measured by non-performing loan ratio.

In terms of efficiencies, our efficiency ratio did move up, we had given to the guidance, that it would be in the low 50s, it was about 51%, as such when you take into account the normal expenses, but let me just give you a breakdown and draw your attention to page 19 of our investor deck, that shows that our staff expense over the last five years is running approximately 40% better than our peer group and about two times less than the rest of the industry.

Our occupancy expenses because of our business model is similarly significantly better, it's about 40% compared to the peer group and the rest of the industry and hence our total cost as a percentage of assets are running around 50% or so close to that number 40%, I should say less than the industry, and that gives us an ability to report to you the higher ROA and ROE goal that we have shared with you all along of close to a 1% ROA and 12% ROE, we are already there on an ROE, but we are not there yet on the ROA.

But with these kind of efficiency ratios, we believe we will be able to get to those ROA numbers, without having to have shown you a significant increase in our margin, but continued improvement in our expenses side of it, continued improvement on focusing on the credit quality.

Our assets per employee are $15.3 million that compares to only $4.8 million for the industry. Our revenues per employee are $464,000 and that compares to less than $200,000 of revenue per employee over the banking industry as such. So with that, I would like to now – Jamie, if you can please open it up for questions and answers..

Operator:.

[:.

]:.

Hi. Thanks, good morning..

Hi, Joe. Good morning..

Let me start I guess just want to make sure I understand what's all the things that are going on with the OREO expense. Yeah, I'll start with one specific.

It looks like there was a big increase in the OREO on non-covered acquired loans about $4.5 million increase from the second quarter, was that just a single loan or was there a couple of things going or closed on there?.

Well, Joe, there you will have to consider both the second quarter and the third quarter event in doing that.

And as we talked about it during second quarter, in the second quarter, there was a significant amount of recovery on several loans that were largely covered at the same time and have resulted in recovering both expenses that we have previously charged off that we're able to recover as well as recoveries on some loans that have been completely charged off and that's why the expense number – we actually had a net recovery number during the second quarter..

I actually was talking about the balances of the OREO..

The balance in OREO results from two things, there was write-downs on the OREO balances as well as liquidation of some assets.

The predominant portion of it was – there was a particular property largely driven by one property, it went to auction, but that came in low, but we decided to accept that and it was below our price values and we took loss during the third quarter..

Okay..

That property will actually be divested during the fourth quarter..

Okay.

And I also was wondering if you could just give me a little bit of flavor for the process with OREO properties and revaluations and everything, is that something that's sort of on a continuous basis, a little bit out in quarter or was a big portion driven by the expiration of the loss share this quarter, just like better understanding of how that works..

It works both ways, Joe, we wanted to make sure that with the expiration of the FDIC guarantee, that we clean house completely and so we've done that and at the same time it's an ongoing process.

So it was accelerated regarding all FDIC guarantee loans, but otherwise its ongoing process and we envision that our non-performing assets size fourth quarter will be lower than they were at third quarter..

Okay. And also like in terms of the deposit growth, it looks like I guess non-interest bearing deposits grew basically 33% from the second quarter.

Could you just give us an idea of what's driving that growth and I assume that phase can't continue, but I guess in terms of non-interest bearing where do you expect that to go?.

I think there is a seasonality in that sort of thing, you are absolutely right, we're not going to see the same kind of a percentage growth rate, but if you look at year-to-year as Bob indicated to you, we've seen the non-interest bearing growth and I think in the core business, core relationships and C&I, we are business bank, and there will be continued increases in our - along the business..

And I draw your attention to if you just look at our investor deck you will – we feel given the segment-by-segment..

Okay, And on the net interest margin, there was a bit of an increase in the cost of borrowings from the second quarter to third quarter about 24 basis points on average volumes, I am just wondering what was driving that?.

We are just extending our borrowings, nothing else..

Okay.

And I'll just ask one more, clearly with yes I guess the picture with Fed interest rate rises is I guess seems to be further modeled from last quarter, when you held a conference call, changing anything you are changing you’re positioning at all or when you are expecting with regards to interest rates?.

We've been very, very consistent, Joe, that we have been asset sensitive, and we remain asset sensitive, and we don't have to take that based upon rumors or issues and timing of that increases, given position for increases in rates for years now and that nothing needs to change..

Okay. All right. That's it from me. Thank you..

Thank you..

We will take our next question from Michael Peter with KBW..

Good morning, Jay and Bob..

Hi, Michael. Good morning..

Jay, question on kind of outlook for on-balance sheet growth and capital, and so the balance sheet was relatively down a little bit on 200 basis but referring to deck and also to comment that your goal is to still reach about $9 billion by the end of 2017.

So I guess over the next few quarters here, how should will be thinking about overall balance sheet growth, I mean you guys, like you said are generating some good capital internally is the talk to keep it kind of flat here for bit, and let the capital build and then kind of start growing the balance sheet or is it going to be kind of gradual as we go forward..

I think Mike, that's a good question. I think there is some cyclicality in our growth because of our commercial loans to mortgage company. So there are times, that you know we will grow certain aspects of our balance sheet faster than other times, I think upon the expectation we really see our balances and commercial loan to mortgage company.

So, we envision the higher growth rate and the pipeline is extremely robust in the C&I area and the multi-family area in the fourth quarter, and you should expect us to be showing a very strong earnings growth in the fourth quarter as well as positioning ourselves for the kind of earnings guidance that we've given to you for next year, because we are totally, totally committed to delivering that.

For those of you who are below our guidance, you are probably wrong.

So that's how we manage our overall balance sheet, so I think rather than giving you a guidance line by line, I can, but we will manage the growth of our balance sheet and make sure, that it is consistent with the growth of revenues, the growth of earnings, and as well as managed capital.

So, that is part of our, the way we run the company, we do envision commercial loan to mortgage companies to be down, in the fourth quarter to be down and remain that way maybe in the first quarter, our expectation and that's why C&I growth and multi-family growth might show above average balance sheet growth in those two quarters and then we will stabilize..

So something here, you're right, it sounds like, I mean generally, you guys are expecting to grow the balance sheet a bit more than perhaps this past quarter, although it could just depend on some seasonal aspects here or there..

Yes..

Michael Pareto:.

– :.

Mike, we are always opportunistic, there are lots of people available. We are extremely selective because of our business model.

We prepare profit and loss statements by team and it's very similar to the signature model that I am sure you are very familiar with, keeping that in mind it's the kind of the teams that can operate and grow the business and manage the profitability in our model, single point of contact model.

So yes, we have added to our teams, selectively even in Pennsylvania in this past quarter but that's not a new team and we remain opportunistic, so we are talking to couple of teams right now, but as we decide to close on those deals with those teams, we will report to you as that happens.

But for right now, we believe that the 15 folks that we added this year as the private bankers, relationship managers, they are going to be all profitable next year. That is what we are very focused on before we take on new teams that we don't may or may not be that comfortable about..

Okay. Great and then just one more question from me, I don't think it was brought up last quarter, we're just I was wondering if you could just give a quick update on the Religare Investment and the status of the India banking license and the capital that's kind of locked up there? Thanks..

Yes, that's thank you for reminding us about that. Well we had discussions with Religare this quarter and they do not expect to get a banking license, in fact they have decided perhaps to withdraw their application.

So we are in the process of reviewing our entire strategy over there and the looking at, was being and it might make sense for us to review it, but we will review it on a quarterly basis and keep you informed..

Okay.

So I mean if there is a timeline, do you expect to kind of have an idea whether you are going to stay in or get out by the end of the year or to this I don't know, uncertainties probably too strong word, but I guess the decision kind of process get drawing out through the end of this year?.

I think Mike like I said, we will look at it on a continuous basis because obviously it's public security and we have to divide our strategies based upon the best place for us to execute and whether we want to keep some of it, all of it or take out all of it, all those options are available to us and we will effectively looking at the market conditions and the liquidity and what not, but our strategy is definitely not to look at establishing relationships and focusing our energy over there, it's now how do we exit that strategy..

Okay, great. Thanks for taking my question..

Thank you, Mike..

Our next question comes from Bob Ramsey with FBR..

Hi, Bob..

Good morning, guys. So I just wanted to follow up on the Religare question, I thought you guys were pretty clear in the past that if they did not get a banking license this year that the plan was absolutely to exit that position.

It sounds like they are not going for a banking license anymore, but you also are more like now you're reviewing, are you no longer committed to an exit, if they don't get a banking license?.

Hi, Bob. I think if you just read you know I mentioned to you I in fact used the word exit, from that strategy that we are very consistent, but we are just got to look at the best way for us to evaluate and the timing of those kind of things to exit..

Okay. Okay shifting gears, wanted to talk a little bit about expenses and the expense trajectory. I understand the OREO expenses a little lumpy and you can't really predict whether or when that may shake out, but even if you kind of strip that out, it was a little bit surprise in the double-digit growth in expenses quarter-over-quarter.

I was wondering if you could help us, may be think about what the expense level should be in next quarter, I mean will it be lower once you kind of take out that OREO expense and how we should think about expenses and efficiency and kind of the near-term here?.

Bob, in regards to expenses, I think that what the exception of the OREO related reviews and the charge that were taken, I think that probably a reasonable indicator as to where our expenses were, there wasn't a whole lot of abnormalities included in there.

I think that it's important to consider expenses relative to the revenue growth and that I mean there is the one additional item, there is the bank global expenses that are included in there that are remaining stable at their current levels, but that do create some inflation to what we call our core efficiency ratio.

And I think that we have to take a look at where we're running from a core efficiency ratio over time and you'll see that our efficiency ratio is continuing to improve.

So as the business increases in size and as the assets increase, the deposits increase, it seems to me that on a relative basis that we are controlling those expenses and they are growing in the ratio through the way the business is growing. So I think your assumption is probably correct.

You are not going to see this kind of growth as you saw quarter-to-quarter basis between second and third, we don’t envision higher, significantly higher bank mobile expenses in the fourth quarter..

Okay.

And then obviously you guys are providing some pretty optimistic or I should say bullish guidance with the 2016 EPS guide, you're well above where the consensus is, wonder if you could comment a little bit on maybe where you think the street is missing or what are kind of the key levers to get into that targeted EPS range? It would seem that the balance sheet growth is somewhat constrained by capital, I mean it will grow, but there is not a lot of upside if you will to the balance sheet growth versus where people have it modeled, is it a question of driving greater efficiency or there are opportunities to grow the fee income or what are kind of the levers to get you into that $2.40 to $2.50 range?.

Yes.

I will just give you the big picture, and then let Bob maybe comment a little bit more, but otherwise Bob, we are going to have a Analyst Day in the first quarter or early part of second quarter and we will give you a whole lot more at that time and we are not prepared to give you a lot more disclosures other than that we are very confident about our ability to deliver between $2.40 to $2.50 in operating earnings per share for next year.

Now, if you look at our overall target for return on assets, we've been very consistent, last year we were saying two to three years you should expect us to get close to about 1% ROA, now we're saying two years. We are not considering the two to three years.

So we are at 82 basis points ROA but if we get to about 1% ROA, let's say 90 bps ROA for next year and you will look at a balance sheet that flows from $8 billion to $9 billion, it about 90 bps ROA, you divide that by 28 points some million shares outstanding.

You got to get a number which is higher than $2.40 and $2.50 and the question, which you will probably be asking us is, are you going to show that guidance if it’s given.

No, we're not saying we're going to beat those, because we've - there is some - we want to have conservative posture towards capital or I guess you see an opportunity to improve our capital ratios; we will do it rather than just maximize profits as such.

So with that I will hand it over to Bob, Bob, if you want to add anything else to that?.

I am going to say at a high level - a pretty high level also, but I'm going to note that there will be, from where we are today that we have growth in the balance and expected growth in the balance sheet, in terms of the assets and income producing assets, we think that we have the teams in place and so that there won't be a comparable increase in the expenses that we'll actually see our efficiency ratio continue to drop down.

So you will see both topline growth and you will see some expense growth moderation that is it will not grow as fast as what the - as what the revenues are growing.

And in addition to that, there will be some fee-income growth there has been - Jay, has mentioned in particular the SBA effort and we do expect to see significant improvement along those lines in the quarter.

And then I was again, just before until we have that Analyst Day in the first quarter and second quarter, we would be happy to provide more detail..

Okay. Thank you for that. I guess one other thing, I will touch on, I will set back out, but I know you all took the charge-off on the fraud related loan from last quarter.

Just wonder if you could provide any other commentary around sort of that process, the recovery process, your discussions and negotiations with the other bank or with whoever is sort of behind this fraud, whether or not you will have determined, if it's possible that any customer's employee was in any way complicit or not.

And then sort of thinking on a forward basis, does that increase in your net charge-offs this quarter affect the provisioning methodology and that it sort of affects loss given the default numbers on the calculation, just curious there..

I think that - Bob, it's not going to affect our provisioning methodology, this a one-time unfortunate item and it doesn't affect that. I think I wish I could tell you a lot more than what Bob indicated to you in his comments.

You will see us initiate some litigation this quarter or over the next 90 days, this has to be extremely methodical, whenever you have a fraud involved, we have to be coordinating all our activities, with all the government agencies, which are very interested in working with us to really find all the appropriate culprits who were engaged in this.

We have notified our carriers also and I believe the other banks may have notified their carrier also, it's very strong possibility on our part.

And I think when you combine all that effort, it was definitely an isolated event and we are very rigorously working to resolve it and we are not counting on it, it is not factored in at all in any of our financial guidance that we've given to you.

That's going to be icing on the cake and a very nice pleasant surprise for our shareholders, but like Bob indicated, we are optimistic that, that doesn't surprise us when it happens, so we don't know when..

Okay.

And you may have given this, but is there any reserve against the remaining exposure that's on the balance sheet and how did you all sort of size the amount of charge-off to take this quarter?.

What we had shared with you in last quarter Bob, that we have a collateral underlying and we conservatively value that, so based upon that, whatever collat was un-collateralized portion of the loan, we know it all.

And what is collateralized we still have it, and if that valuation or future issues ever change, we will take appropriate steps, but we are very confident that we have adequate reserves and if anything, we would hope to see some recovery and you should not expect any financial impact of that fraud on our financial statements going forward at all..

Okay, very good. Thank you..

We’ll next go to Frank Schiraldi with Sandler O'Neill..

Hi, guys good morning..

Hi Frank. Good morning..

Hi, Frank..

Just a couple of questions, just on the - Jay, you mentioned it that on the returns, you're already at 12% ROE basically and you got some more work to get to the 1% ROA, so to me that would imply that there could be some significant accretion to capital levels, is that not the way to think about, if I just think about leverage needed to get from a 1% ROA to a 12% ROE, I'm thinking you guys are targeting a TCE a little over 8%, is that not the way to think about capital levels over the next couple of years, where they may go to?.

No, that's not the right way to think about it, because Frank, what you may have missed from our comment is that we are not intending to increase, to do any kind of an equity offering, or to do any kind of the common equity offering at all. And no, we are not talking about capital ratios getting to those kind of levels.

What will happen is our return on common equity will go beyond our target of 12%, and that 12% was a minimum that's what we should expect and gradually capital will continue to improve, but I wanted to make sure that you understand we don't expect our TCE ratios to get to 8%, 8.5% by anytime next year at all..

Right, so okay. So the accretion to, I think you mentioned maybe slight accretion, so it's a decent way to think about is TC ratios where they are and just may be very slight movement up over the next 12 months, something along those lines..

Frank, let me just once again over the NIM stuff that we shared with you, we gave you that we will not - we don't expect to go beyond $9 billion or so in assets, so you can calculate our earnings guidance that we've given, you can calculate how much of accretion in capital from retained earnings will happen and you can figure out what do you think our TC ratio, would be rather than just about where it is today.

I think it's going to be higher than where it is today..

Okay and then just on the balance sheet growth, if I think about $9 billion, I think was what by the end of 2017, obviously very simply you're just talking a little less than 10% balance sheet growth over the last two years.

The end of 2016?.

Correct, Right, $9 billion deal by the end of 2016, Frank..

Okay. So, you are talking about so 18% balance sheet growth then. Okay.

And then I just wondered, if you had in the past, maybe you haven't, but have you talked about where you want - where you think fee revenue could be as a percentage of the total revenue in a given quarter?.

I think that frank, all we can say to you right now is that, we are looking at – we recruited a lot of people this year and last year, also to build our SBA business, and that SBA fee income which we hope to have in a couple of million dollars next year, will be incremental over this year.

We will discuss a whole lot more about that on our Analyst Day with you, but as Bob indicated non-interest income growth is built in our assumptions for profitability growth and growth in ROE for next year..

Okay.

And if you could just share with us Jay, in terms of geography, where do you think the most opportunity is here, be it maybe based on teams hired or just strength market, where do you think the most opportunities for ramp up in the C&I?.

Yeah, sure. Good question, Frank. Our C&I business we are seeing it's very interesting, we are seeing about equal growth in New England. In New England, right now our C&I portfolio is around $600 billion, but in the next 2.5 years we expect to see that $2,000 billion that's all C&I business.

We've added eight individuals of our team in the New England market this year. And in New York, our C&I business is somewhere around $400 million or $500 million in that range right now and we expect that also to get about $1 billion in two years to maximum three years.

And we are over a$1 billion when you look at, including some commercial real estate shares, but our C&I business is improving even in the Pennsylvania sector, at similar growth rates.

So we see that to be above equal in all, the market, but in New England and New York its brand new team and in Pennsylvania it's our legacy team supplemented with the new team..

Thanks.

And then just finally I realized, if I look at credit levels overall, they look very good, in terms of the quarter it looks like NPLs in the originated book ticked up a little bit beyond the $3.7 million you added on the fraud loan, is there anything bulky in there that you could give any color on?.

No, nothing bulky in there. Some of them are loan still from that old New Century Bank that we inherited and then we were very aggressive in this quarter in cleaning up all the commercial loans which was guaranteed by the FDIC. So we took a very aggressive posture rightfully so in putting them on non-performing status if that's what it meant.

So there we already given your guidance and we expect our non-performing assets to actually be same or less at December 31 compared to where they are right now..

Okay, great. Thank you..

Thank you, Frank..

We’ll next go to Bill Dezellem with Tieton Capital Management..

Thank you. This is Tieton Capital..

Hi, Bill..

Good morning. Couple of questions.

First of all, I'm going to show my ignorance here, if you exit the regular investment how if at all, does that impact your capital ratios?.

It does not impact our capital ratios..

Bill, there is a provision in the capital [indiscernible] of the capitaland 10%of the capital is risk weighted 100%, so we don't have a capital surcharge that much, if that's what your question was. So this come up with a100% risk weighted asset..

Thank you. And then secondarily bank mobile, you had mentioned that the expenses have been relatively steady.

How do you anticipate that expense line to look going forward, does it get larger before you move towards breakeven or are you anticipating holding it?.

We envision that once we disclose it to the $10 billion mark that we would be exiting and in one form or another, the bank mobile business.

And so when I say exiting, it means doing an IPO or a spin-off or selling it to some other bank, you can continue with the revenue tree, that bank mobile expect to achieve over that two, three, four or five year period.

Our guidance to this tree was that we expect bank mobile to get to the profitability number in three to five years, that's what we had said. It was very difficult to start off business to really inform exactly when.

And if everything remains on target, we envision that we will be reporting at least a 25,000 customer base, when we meet with you for our Analyst Day. We are not there yet but that's where we expect to be. And we think once there is activity rolled by these customers who are recently acquired that will generate the revenues.

And as far as the expenses are concerned, we are assuming continued $6 million or so operating expense for bank mobile in excess of revenues in 2016..

Thank you, both..

We’ll next go to Sameer Gokhale with Janney Montgomery Scott..

Hi. Thank you. Good morning. Most of my questions have been – I just wanted to go back to this Biz2Credit partnership you've announced, it seems like it's interesting, I saw some statistics saying that essentially you expect a process about 33% more applications because of the workflow automation underwriting efficiencies.

And when I read that it almost sound to me like, there was some sort of bottleneck in your existing process, which would be solved by having this platform.

So, is that the right way to think about it or is having the platform just going to open you up to a broader set of customer you couldn't serve before and if you could just remind me again, how big your SBA portfolio is now and how big you expect it to get over the next two or three years that'd be helpful.

So, I think you referenced small business over a couple of times?.

Yes, I think that Biz2Credit is both those things that you mentioned, Sameer. So, it's operating efficiency improvement, but that's not the main driver because we are really making an effort to start competing with some of these alternative lenders who have really captured away from the banks, the small business market.

And I was at Money 20/20 earlier part of this week and you should have heard these alternative lenders and the way they expect their growth rate and showing facts to show that banks are totally ignoring for various reasons, the small business market.

So, Biz2Credit is focused on the Asian market, especially the Indian business people as well as the Hispanic communities that helps us with our CRE lending also. And at the same time on SBA and selective commercial SBA qualified small business administration loan.

So we envision and we are hoping that we would do in excess, well in excess of $100 billion of SBA type of loans next year..

That's interesting, so are there any other based on what you heard at Money 20/20, are there any other alternative lenders, you could envision partnering with to offers solutions, so that you are basically the lender working off of someone else's platform or is this it for now?.

We are always opportunistic, but for right now, as you know we are with Biz2Credit because we simply announced it, there is a lot of work to be done and we hope to be totally operational by the beginning of the next year..

Okay, that's helpful. And then just going back to your discussion on the fraud losses earlier and you've provided some good color on that and clearly the shares took a hit after the initial announcement and then you did reiterate that you didn't expect significant future losses, this was an isolated incident.

And I was just curious to the extent that you already had mentioned that you had reviewed most of your loans in the portfolio for losses just to be absolutely sure. So it seems like at this point you are still very, very comfortable that there is no additional fall out, there's no issues to drop relating to that issue or other fraud in the portfolio.

I mean I think you have a high degree of assurance; thereby I just want to be absolutely clear on that..

You are absolutely correct..

Okay. That's great. That's all I have. Thank you..

Thank you, Sameer. End of Q&A.

And it appears there are no further questions at this time. So I'd like turn it back to our host for any further or closing remarks..

Yeah. Thank you very much for calling in, I wanted to give you one little other news and that is our CRA rating is satisfactory. At the last Analyst Day, we told you that we expect a satisfactory; it just took our regulator about a year to give us an official report. So that would be officially put up by the Federal Reserve on their website.

Well, thank you so much again for and please give us a call anytime if you have any further question. Have a good day..

Thank you for your participation. This does conclude today's call..