Investors Bancorp, Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good morning and welcome to the Investors Bancorp second quarter earnings conference call. All participants will be in listen only mode. [Operator Instructions] Please note this event is being recorded. We will begin this morning's call with the company's standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp Incorporated may make some forward-looking statements with respect to its financial position, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors some of which are beyond Investors Bancorp’s control, are difficult to predict and which can cause actual results to materially differ from those expressed or forecast in these forward-looking statements. In last night's press release, the company included its safe harbor disclosure and refers you to that statement. That document is incorporated into this presentation. For a more complete discussion of the certain risks and uncertainties affecting Investors Bancorp, please see the sections entitled Risk Factors, Management Discussion and Analysis of financial conditions and results of operations set forth in Investors Bancorp’s filings with the SEC. And now I would like to turn the call over to Kevin Cummings, President and CEO of Investors Bancorp.

[Kevin Cummings:]

Good morning and thanks, Brandon. Welcome to the 2017 second quarter Investors Bancorp earnings call. The company and the bank reported earnings of almost $40 million, $39.6 million, or $.14 per share for the quarter ended June 30, compared to $46 million or $.16 per share for the quarter ended March 31, 2017, and $45.1 million or $.15 per share for the quarter ended June 30 last year. It was a challenging quarter for us as we continued to build our infrastructure in the risk management area and remediate our BSA AML processes at the bank. Significant expenses were incurred relating to professional fees and contract employees in the BSA area. A good portion of this expense will be incurred in 2017 but will be reduced in 2018. And as you know, we have been under the [order] [ph] for a year and it is imperative for us to focus on this regulatory issue and resolve it in order to normalize our operating earnings and to return to the historical results we strive to meet. For the second quarter, we estimate the impact of the BSA expenses to be approximately $9.5 million pretax and for the first quarter to be approximately $3.2 million. The impact on net income resulting from these BSA expenses for the second quarter and first quarter of '17 was $5.9 million and $2.2 million respectively. After two strong quarters of loan growth in the fourth quarter of 2016 and the first quarter of 2017, our loan growth slowed a bit on purpose in the second quarter of 2017. Total loan growth for the quarter was $358 million with $333 million in commercial loan growth, spread out amongst the multifamily, commercial and CRE portfolios. Year-over-year in the last 12 months loan growth was $2.2 billion or 12.6%. We continue to be mindful of the market conditions in our region and in particular this economic cycle. We are estimating $700 million to $800 million in growth for the rest of 2017. On the asset quality front we experienced an increase in nonaccrual loans of $90 million for the quarter. This increase relates principally to four loan relationships, one of which we have previously discussed on these earning calls, for $48 million and 10 different properties in the metropolitan area. At June 30, $27 million or four loans are 90 days delinquent with the remaining exposure of $21 million either 30 or 60 days delinquent. We decided to move forward with legal action and hence moving it into nonaccrual the entire relationship against this borrower as a result of his poor payment history. The other three loan relationships include, three multifamily loans to one borrower for $15 million in New York City, one suburban office building where a major tenant is moving out in the first quarter of 2018 for $15 million and a retail center for $14 million. None of these loans are 90 days delinquent at June 30 but we are moving forward and reporting them as nonaccrual due to their [potential] [ph] problems and future cash flow forecast. Overall, our nonaccrual loans are 89 basis points of total loans and our allowance coverage is almost 130%. In the 30 and 60 day category, our accruing past due loans are down from $101 million at March 31 to $33 million at June 30, 2017. We will continue to monitor our credit quality and be proactive in identifying and resolving our problem credits. We believe that these credits are isolated and not a trend in the portfolio. We have invested significant resources in our credit risk management and have recently hired a new Chief Credit Officer, [indiscernible] who has over 35 years experience at a national bank. In addition, we have added additional resources of three new senior credit officers to this team. We are managing our significant growth in this portfolio as commercial loans have grown over $6.8 billion in the last three years. On the deposit front, we are pleased to report that our deposits are up $666 million for the quarter and have outpaced our loan growth by $308 million, reducing our loan to deposit ratio from approximately 127% at March 31 to about 124% at June 30, 2017. Funding cost increased nine basis points in the quarter which resulted in a decrease in our net interest margin from 2.95% in the first quarter to 2.87% in the second quarter. The recent Fed action of increasing rates impacted both our borrowing cost and deposit cost in the second quarter. The net result for the quarter was a slight decrease in net interest income of approximately $63,000. The quarter was a difficult quarter but I think we are in good position. We are addressing our issues and I think we are working hard to address the BSA items. You know these things, the company faces these issues. It's a function of our growth and I think we are well positioned to work our way through them. Now I would like to turn the meeting over to Sean, to give some additional color on our P&L.

[Sean Burke:]

Thank you, Kevin. I would like to briefly review some of our highlights of the quarter. Deposits increased $666 million during the quarter outpacing our loan growth of $358 million and thereby driving down our loan to deposit ratio from 127 to 124 at June 30. Commercial and industrial lending continues to be a bright spot for the bank. Our C&I portfolio totaled $1.5 billion at quarter end, up 7% from last quarter. Net income for the quarter was $39.6 million or $.14 per share. Results were negatively impacted by $9.5 million in BSA related professional fees. Net interest margin declined 8 basis points from the first quarter, primarily driven by increased deposit and borrowing cost coupled with a flattened yield curve. It's important to note three basis points of the margin decline was due to the liquidation of a TruPS security in Q1. Prepayment penalty income totaled $3.1 million for the quarter which was relatively flat versus Q1. Looking out, we forecast our margin will compress 5 to 7 basis points in Q3. Non-interest expense total $106.3 million, an increase of $6.7 million from the first quarter due to professional fees related to BSA remediation efforts. Excluding the impact of BSA related professional fees, non-interest expenses were essentially flat from the first quarter. We expect expenses will remain elevated in Q3 and Q4 as we remediate BSA and transition work performed by higher cost consultants to lower cost full time employees. Our non-performing asset ratio increased to 80 basis points in June from 44 basis points in March. Over half of the increase was due to a well secured relationship. Despite the increase, our asset quality, allowance coverage and capital ratios continue to be strong. We have resumed share buybacks during the quarter and repurchased 1.8 million shares totaling 24.6 million. Now I would like to turn it back over to Kevin for concluding remarks.

[Kevin Cummings:]

Okay. Before we open up to questions, I would like to just comment. We were disappointed as key operating matrices were not as strong as previous quarters. We have had a pretty good run here at the bank, especially the last 8 years and within the company and I want to emphasize that we have a plan to continue to leverage the capital from the second step three years ago. And if we go back actually, to the first step, in the history of this bank, it was in the fourth quarter of 2008. Three years after our IPO in October 2005 that we had the TruPS investment portfolio write-down and experienced a net loss for the quarter and the year. We have faced major headwinds before. We have been through this and we have -- we are a very resilient company and we have persevered and overcome the issues in front of us. Our capital is strong. Our franchise is growing and our brand recognition is the best it's ever been in the market place and continues to expand. The regulatory issues in BSA and a focus on CRE in our region is certainly a headwind. But we are not the first bank to go through this. We are working towards solving these issues but we are also focused on our customers and our employees and the communities that we serve. There is a passion in this organization to continuously improve and fulfill our mission and vision. As I have mentioned on earlier calls, we have leveraged our capital down to 12.6% from close to 20% in 2014. There has been over $8 billion in organic growth since the end of 2013. We have a plan and we have communicated this before, a plan to grow $1.5 billion organically over the next four to five years which will continue to leverage that capital which we raised in the second quarter of 2014. We are focused on resolving our BSA issues and creating long-term value for our shareholders. Our employees, our teams are engaged and committed to our mission and vision. Just last week we had a state of the bank meeting where the executive management presented and communicated to over 250 executives our vision for the future. It was a consistent message of all 11 executives. One of passion, perseverance and a focus on teamwork. Investors Bank is a different bank, one that makes a difference. A company with a great history of serving its customers and communities, and most importantly, you our shareholders. When I look back at some of the other MHT conversions, we have a lot to be proud of. We have transformed the community thrift in a significant regional bank in the most attractive market in the country. Our franchise is growing and our brand is strong. We are not satisfied with this quarter's results but we are focused on getting these regulatory matters behind us, to move on and to create value for our shareholders. It has been our priority. It always was and always will be. I thank you for your support and now I will open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Dave Rochester with Deutsche Bank. Please go ahead.

[Dave Rochester:]

On the expenses, can you just talk about how much more incremental expense you expect to come in to run rate on the BSA from here. And then said the [indiscernible] will be elevated where you think when we go back to that $100 million to $105 million quarterly range you are thinking originally or they are going to be higher from here.

[Domenick Cama:]

Dave, I think that the expenses are going to stay elevated for the next two quarters. So we actually have a range of, we think maybe another 1.5% we could see some additional increases in the third and fourth quarter. So the expenses will stay elevated for the remainder of '17.

[Dave Rochester:]

Okay. Then you mentioned they would come down on '18. Any sense, to make sure what you are looking at for expense growth or one off, or decline in 2018 versus 2017.

[Domenick Cama:]

Not at this point, Dave.

[Dave Rochester:]

Okay. On the buyback. I was just wondering if this is a good level of activity to expect going forward?

[Domenick Cama:]

Yes. I think so. I think that as Sean mentioned, we got back into the market a few months ago and we think this is a good price point for us to be involved.

[Dave Rochester:]

All right. And then just one last one. I know you guys laid out the $35 billion asset plan on the last call and you mentioned that just now. I was just wondering if you have updated your thoughts at all on how you think about M&A from a perspective of a potential seller. Are there any changes there? I think the message last time was that you are open to deals but you think it's more likely that near-term you lever that capital to hit the [indiscernible] weight. Does that still hold?

[Domenick Cama:]

You know, Dave, I think that we will do or we will always do what we believe is right for the shareholders. That is something that we have built the company on and we will continue to look at things that way. So Kevin said last time that we could be a buyer or a seller on any given day and we continue to run the company in that way. Always to continue to increase shareholder value.

[Dave Rochester:]

I know you are under BSA and it prevents the deals, so are you guys at least able to talk to a potential target today to lay groundwork to maybe streamline the deal pipeline as you exit BSA or does that not even make sense at this point.

[Domenick Cama:]

Yes. We are not even considering deals on a purchase perspective at this point because, again, we are focused on resolving the BSA issue. And it doesn’t make any sense for us to talk when we need to get this result.

[Operator:]

Our next question comes from Mark Fitzgibbon with Sandler O’Neill Partners. Please go ahead.

[Mark Fitzgibbon:]

I wonder if this $48 million commercial real estate delinquency you have. Is that your largest CRE loan relationship or do you have some that are larger than that?

[Domenick Cama:]

Yes. We have larger relationships than that but you are not talking about -- it's not one loan. That’s made up of ten loans. Ten individual loans.

[Mark Fitzgibbon:]

What would you say your largest individual loans are? How big?

[Domenick Cama:]

Individual loans?

[Mark Fitzgibbon:]

Yes.

[Domenick Cama:]

Our policy allows for us to be making loans between $30 million to $50 million.

[Kevin Cummings:]

On an individual basis.

[Mark Fitzgibbon:]

And then in terms of largest relationships they would be in the hundreds?

[Domenick Cama:]

Yes.

[Mark Fitzgibbon:]

Secondly and I know you have this 15 month CDE promotional special at 1.60 rate. A, how long have you had that out there and, b, how much have you brought in thus far on it?

[Domenick Cama:]

We introduced the campaign in the first week in July and we have brought in about $300 million to date.

[Mark Fitzgibbon:]

Okay. And then lastly, I wondered if you could just update us on the schedule for new branch openings this year?

[Domenick Cama:]

We have two more scheduled for 2017.

[Operator:]

Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

[Jared Shaw:]

Just on the BSA costs. I know that you have the costs associated with the validation of the work you have done and then the costs of bringing on eventually new employees but in the mean time filling with, or backfilling with consultants. When you look at the costs at your -- you had in second quarter then as the costs for the third and fourth quarter. What's the split between sort of that continuing validation work versus the transition to more permanent costs?

[Domenick Cama:]

Well, Jared, they are actually two pieces that are onetime expenses. One was the validation work and most of that validation work was done in the first and second quarter of '17. The second component, and this is regulatory driven, is an activity called look back. And the look back project is one in which the expenses will be incurred in the third and fourth quarter of 2017. So there are two actual activities. One we paid for in the first two quarters and one will pay for the bulk of it in the next two quarters. And I would say that the look back -- I would say the look back process is a more expensive one than the validation process.

[Jared Shaw:]

Okay. That’s great. Are helpful, thanks. And then following up on Mark's question with the deposits. It looks like when you look at time deposit growth in second quarter was strong and then the $300 million that you have potentially coming on for third quarter, at the same time you had good checking account growth. Can you just give an update on the competitive state of -- the gathering for new deposits and what the pricing differential is sort of going forward for new deposits versus the lagging or the ability to lag higher rates on the exiting book.

[Domenick Cama:]

Jared, you know we ran several campaigns before we introduced the 1.60. And we had campaigns that advertised a 1.25 rate and a 1.30 rate. And it wasn’t until we offered the 1.60 that we started to gain some real traction in the market. So the market, generally the competitive nature of it seems likes it's in that 1.50ish range. So 1.25 and 1.30 was just barely cutting it and it wasn’t until we introduced the 1.60 that we were able to gain some traction and start to garner some deposits. Some new deposits.

[Jared Shaw:]

Okay. And then shifting just to the C&I growth. You continue to see good growth there. What's the update for the long-term goals in terms of, are you still hiring in that area? Are the hires that you put on over the last year starting to get the traction that you are hoping for? And where could you ultimately I think see longer term C&I as a percentage of growth going forward?

[Domenick Cama:]

You know, Jared, we have certainly slowed down our hiring in the C&I space. However, it's not by design. We do believe though that the hires that we have made over the last few years are finally starting to gain some traction and expanding into the markets that we have hired them from. In terms of longer-term growth, two things. One is, obviously, to the extent that we can identify good C&I lenders will continue to higher them. In terms of our longer-term growth, I think we expect that C&I eventually will comprise of somewhere between 12% to 15% of the loan portfolio. That’s really where we would like it to get to. Right now if I included owner occupied loans as part of C&I, it's probably around 10%.

[Operator:]

Our next question comes from Austin Nicholas with Stephens Inc. Please go ahead.

[Austin Nicholas:]

Most of my questions have been answered. But maybe just on the margin, as you mentioned you saw some nice deposit growth and I know you gave some guidance on the margin. But as you look out, is there any changes in how you are viewing the asset sensitive position of the bank and any opportunity to reduce your reliance on FHLB in kind of short term borrowings.

[Domenick Cama:]

At this point the bank is liability sensitive actually and given our loan to deposit ratio where it is, we really don’t foresee having to reduce our reliance on the home loan bank. We think it's a stable source of liquidity for us. We use it to manage interest rate risk and I don’t see us reducing our reliance on it at least over the next six to 12 months.

[Kevin Cummings:]

I would also just add to that Austin that the Federal Home Loan Bank pricing is actually cheaper than some of the specials that we are running. So in some ways, as we have come out these new specials, it's more expensive then borrowing from the Federal Home Loan Bank. But the opportunity is with the customer and somebody that we are able to drive down rate over time. So we could certainly go the Federal Home Loan Bank and save a little bit and maybe improve the margin but we are trying to build the franchise here and build customer value and we feel that paying the rate for the higher priced CD product is the right avenue for us right now.

[Austin Nicholas:]

Understood. So would it be fair to say that paying up a little bit now for maybe lower beta of funding that could position the company -- the funding sources better in future but maybe you could in theory tap FHLB at a lower rate right now?

[Domenick Cama:]

Absolutely correct.

[Kevin Cummings:]

Austin, and as we try to diversify into the commercial business lending segment, that’s the ongoing process there because that’s the focus on the lower cost deposits.

[Austin Nicholas:]

Understood. And then maybe just one on M&A, maybe just on non-bank M&A. Is that something that you would entertain at all or would that be a very low priority and then how does the BSA in formal agreement impact those opportunity, if they exist?

[Domenick Cama:]

You know, Austin, again, at this point our priority is to resolve our BSA issues. And truthfully we don’t think at this point in time that looking at non-bank transaction makes much sense for us. We want to focus on what we need to do and then on top of that we want to make sure that we are always running our business in a way where we know the businesses that we are involved in and have confidence in them. And so at this point, trying to look at non-bank M&A is really off the table.

[Kevin Cummings:]

You know our focus has been on transforming the bank into the regional deposit gatherer too. So the energy is again, on the diversification of revenue stream, added a multifamily into the CRE and the commercial and the business lending, and focusing on deposit gathering. So we don’t want to distract the strategic vision and purpose of what we are trying to accomplish here.

[Operator:]

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

[Collyn Gilbert:]

So just first on the NIM guide, Sean, that’s 5 to 7 basis points down linked quarter, is harsh, aggressive. I guess certainly more than what I was projecting. Is that just a function of the fact that you have now have to boost of those commercial and deposit rates beyond what you were thinking or maybe just kind of put that in perspective as to what you had originally or maybe what you were thinking last quarter in terms of the trajectory of the NIM. And then also, I know you are guiding to third quarter but how do you see that NIM evolving kind of later into the year and into the next year.

[Sean Burke:]

Yes. I left it at as Q3 for now 5 to 7 basis points. I think when we fast forward to Q4, we will see additional margin compression. Maybe a little bit lower than 5 to 7 basis points but that’s what we feel comfortable right now. And what's driving that, number one, we did have a June rate increase and we are building in some cushion to account for that. Maybe we haven't seen all the competitive impact and repricing impact of that right now. Plus we do have the new specials and campaigns going on. And then on top of that you have a little bit of flattening of the yield curve that impacts the loan portfolio as well. So it's a combination of all those factors that is driving the forecast.

[Collyn Gilbert:]

Okay. That’s helpful. And then just back initially, Dom, to your comment on -- or unable or unwilling or whatever the case might be, to give clarity as to what the BSA expense is due in 2018. Why is that? Like what are the variables there that isn't giving you more clarity or color as to where those expenses are going to go?

[Domenick Cama:]

You know, Collyn, when you delve into the process, the BSA process as deeply and as intricately as we have, one of the issues that you face is what you may uncover or you don’t know whether it would be system related or process related. And so while we think that we have a good handle on what the expenses will be for 2017, we are always subject to further discussions with our regulators on additional processes or enhancements that they may want as a result of reviewing the bank's current processes. So you know at this point, we just think it's better to try to project those numbers the closer we get to the end of the year and after having some more discussion with the regulatory agencies and after their review of our processes.

[Collyn Gilbert:]

Okay. That’s helpful. And then just finally on the MTLs that came into the fold this quarter. What do you guys have in terms of reserves for each of those relationships and I guess just expectation for losses or write downs. I presume because we didn’t see a provision jump that you are either anticipating low losses or you already have reserves. If you could just give some color there as to how you are cushioned against loss on those credits.

[Sean Burke:]

Yes. Once they go non-accrual, they are considered impaired and you evaluate them as such so they are no longer putting reserves. You are comparing your loan balance to appraisal values and any difference that results, you are charging off. So in the case of the largest relationship that we talked about for $48 million, that is a well secured one that we feel the underlying collateral, not yield, but we know the underlying collateral is much stronger than our loan balance. So on that one, there is no charge taken. And the other loan that we talked about, there was also no charge taken but there was one relationship in the pool of the three where we took a $4.4 million charge off. And that is the significant piece of our charge-off increase quarter-over-quarter.

[Collyn Gilbert:]

Okay. That’s helpful. And then just any thoughts on timelines or resolution on some of these credits?

[Sean Burke:]

Well, we wish it was sooner but in the case of the largest relationship it's become, we are trying to avoid it but a bit of a legal battle here. And that’s where we are. And I think that one is a bit hard to predict where it's going to go. But you bring up a good point, we don’t want these piling up here. And we are committed to not letting that happen either. And as Kevin mentioned, we believe that these are isolated incidences as opposed to a systemic issue. So we are working hard to resolve them. I can't give you a perfect sense of timing. All I can say is that we are working hard to resolve them as quickly as we can.

[Kevin Cummings:]

Yes. One of the four, we have gone to legal action. We have stopped actually talking with the gentlemen. And the other three, we are working with the borrowers still. So we are not like digging in. We are still communicating. It's good relationships. And we are working our way through them.

[Collyn Gilbert:]

Okay. And then just one final question on those credits. When, I guess, the $48 million one, that relationships, when was that originated at the bank?

[Sean Burke:]

2012.

[Operator:]

Our next question comes from Brody Preston with Piper Jaffray. Please go ahead.

[Brody Preston:]

Just looking at the share repurchases. I know you said that 1.8 would be a pretty good level from here. But with the recently increased dividend and the 1.8 million share repurchase run rate. Could you remind us how much cash you have at the holdco and how much [indiscernible] from a liquidity standpoint you have to continue the share repurchases?

[Sean Burke:]

We have around $200 million at our holding company and that’s a consistent number. That’s something that we target and we would like to maintain that level of liquidity at the holding company. That gives us about two years of dividend paying capacity. So that’s our target. And if you look at our dividend and think about our current repurchase levels, we are running at about 100% of earnings right now or maybe a little above that. So that’s when we gave the guidance in terms of the current level being a level that we are comfortable with, that liquidity and that holding company cash position and earnings factor into that.

[Brody Preston:]

All right. Great. And then, I am sorry if I missed this. But do you guys provide an outlook for loan growth from here?

[Domenick Cama:]

Yes, the loan growth will be about $700 million for the remainder of the year. That’s consistent with what we did this quarter. So about $350 million a quarter is what we are projecting for the remainder of the year.

[Operator:]

Our next call comes from Jake Civiello with RBC Capital Markets. Please go ahead.

[Jake Civiello:]

Is the NIM guidance for the decline in the third quarter of 5 to 7 basis points off the 287 reported number or the number excluding the TruPS liquidation?

[Sean Burke:]

Off of the 287 number. The TruPS liquidation was actually a first quarter item. So the first quarter margin was 295 and included approximately $2 million of income related to that TruPS liquidation which drove the margin up 3 basis points in Q1. But the guidance that we are giving, Jake, 5 to 7 basis points decline is off the 287.

[Jake Civiello:]

Okay. I apologize if I am missing this, but so was the decline in the TruPS, was that the cause of the swing in the held to maturity portfolio yields in the quarter.

[Sean Burke:]

That’s exactly right, Jake. So you could see the security yield in the first quarter look elevated relative to other quarters and that’s exactly what's driving that. And so we are trying to compare quarter-to-quarter , trying to point out our margin came in at 287 and compared to the first quarter, looks like an 8 basis point decline. But three basis points of that decline was driven by this one item in the first quarter. So you are really looking at what I would call core margin compression in that quarter was 5 basis points.

[Jake Civiello:]

Okay. That’s helps.

[Sean Burke:]

And then we are expecting -- Jake, I would say that’s what we are expecting for second quarter. So that’s where we are getting the guidance. What happened in the first quarter, we are expecting to happen or what happened in the second quarter we are expecting will continue into the third quarter.

[Jake Civiello:]

Got it. And then is there any concern that the increase in non-accruals opens the door for additional regulatory scrutiny of any kind that may impair your ability to grow loans at the $700 million rate that Dom referenced for the remainder of the year.

[Domenick Cama:]

I don’t think so, Jake. I think if we were to talk to our regulators, they probably appreciate the approach that we have taken.

[Kevin Cummings:]

I have had a conversation and I think we are making progress in that area with some of the analytics and some of the other things we are doing. Put more firepower in the second line of defense in credit risk management with the additional staff that we have added. So we have examiners on site all the time now and we are in conversations with them throughout that process. And hopefully we are going in the right direction and making progress.

[Jake Civiello:]

Okay. Given that your credit has been pristine for so many years, do you feel that you have the team in place today to handle the [indiscernible] of the workout process for some of these larger credits.

[Kevin Cummings:]

Yes.

[Domenick Cama:]

Yes.

[Jake Civiello:]

Great. And one final one for me. I know your reserve ratio is still above peers. Is there more room to release reserve assuming charge-offs return to a level that’s more in line with what you have seen over the last year or so.

[Sean Burke:]

That’s a hard one to predict, Jake. There is a lot that goes into the allowance process and I can't sit here and say that our reserve, we are going to release reserves and we are get down to peer levels. There is a lot of dynamics that go into that and it's hard to predict. So unfortunately I can't give you any guidance in terms of where that allowance is getting.

[Operator:]

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

[Laurie Hunsicker:]

Just wanted to go back to credit for a moment. You mentioned the $4.4 million of charge-off on one of the commercial real estate loans. Which one was it?

[Sean Burke:]

It was the office building that Kevin talked about that had the tenant who is leaving in the first quarter of '18.

[Laurie Hunsicker:]

Okay. And so the $15 million is net of the $4.4 million that was charged off.

[Sean Burke:]

Correct.

[Laurie Hunsicker:]

Okay. And what is the current LTD on that now?

[Sean Burke:]

It's charged down to below value actually. So it's charged to below whatever the as is value that’s on a appraisal. We are charging it down below that along with selling cost. So we have got it at current value which is right sized. And then maybe a little color on the -- it is current, actually. The relationship is paying. So we think we have been proactive in not only taking the charge but taking it to non-accrual.

[Domenick Cama:]

And the landlord is actively marketing the space that’s going to be vacated in '18.

[Laurie Hunsicker:]

Okay. And then of your $4.7 billion commercial real estate book, how much is office?

[Domenick Cama:]

I don’t have the answer to that, right now, Laurie.

[Kevin Cummings:]

$900 million. About $900 million. And I am looking some of the statistics and as the current LTV, overall weighted average of about 56% and a debt service of 167.

[Laurie Hunsicker:]

167, great. I was just going to ask that. Okay. And then on the retail one that went non-performing. Did that have any of the stores, i.e. Sears, Kmart, any of the stores that were under stress in that or was that just kind of a one off?

[Domenick Cama:]

Yes, it had Sears.

[Sean Burke:]

Kmart.

[Domenick Cama:]

Kmart.

[Laurie Hunsicker:]

Kmart. Okay. And then what of your, again of your $4.7 billion book, how much retail do you have that has exposure to any of the stores that are at risk?

[Sean Burke:]

We actually did an analysis of that, Laurie and looking for troubled retailers that are anchored type tenants and the exposure is actually very minimal. I don’t have the numbers in front of me but I can tell you that it's a small sliver and fraction of our overall retail portfolio.

[Laurie Hunsicker:]

Okay. Your credit has certainly been good. Just going back over to expenses and I know everyone has been asking about this but if we look at your professional fees year-to-date, they are $22 million. How much of that is BSA and then how much of that is validation expense?

[Domenick Cama:]

Well, validation expense, Laurie, falls into BSA. I mean it all rolls into that one number.

[Laurie Hunsicker:]

Right. So of the $22 million, in other words you had $7.5 million in March, $14.5 million in June. How much of that professional fee expense was BSA?

[Domenick Cama:]

Well, in the second quarter the BSA, the consultants related to BSA were about $10 million. Just in the second quarter.

[Laurie Hunsicker:]

Just in the second quarter, okay. And then of the $10 million, how much was validation?

[Domenick Cama:]

Again, validation played a small part, probably about $1.5 million to $2 million.

[Laurie Hunsicker:]

Okay. And then same question of the first quarter if you have it of your $7.5 million professional fees. How much of that was BSA and of that how much was validation.

[Domenick Cama:]

The BSA number for the first quarter I believe was about $3 million.

[Laurie Hunsicker:]

Okay. And was validation at about the same run rate as second quarter?

[Domenick Cama:]

No, no, it's $2 million in total. Validation is $2 million in total.

[Laurie Hunsicker:]

Between both the first and the second quarters?

[Domenick Cama:]

Yes. A big part of the expense is related to the use of consultants that are augmenting current BSA staff in order to ensure that we are clearing of backlogs in terms of alerts and EDD processes. And the normal day to day running of the BSA department. And so what we expect is as we continue through time that we will hire people that will replace the consultants. So just to give you some frame of reference. When I look at what the hourly rate is for the consultants that we use, if I had to annualize their salaries -- if I had to annualize a consultant salary, it would be about $365,000 a year compared to hiring a analyst at say $95,000 a year. So you could see that the quicker we can replace those consultant with full time staff, the quicker we can get that consultant cost down.

[Laurie Hunsicker:]

Got it. And then again, you mentioned the look back project is going to be heavy in the third and fourth quarter. It was more expensive than the validation. So theoretically that line of $14.5 million could run at potentially $15 million-$16 million for the third and fourth quarter. Are we thinking about that the right way?

[Domenick Cama:]

No, I think the way to look at it is that just look at it on a total non-specific expense basis and what we have said is that the expenses will remain elevated. So that’s somewhere between that $106 million to $108 million amount for the third and fourth quarter.

[Laurie Hunsicker:]

Okay. And then I know Dave asked this, but I guess just to ask it a different way. As we roll into '18 and we think about some of this coming off. Is it possible that professional fees could then drop back to a level -- and I realize that has something to do with the hiring of consultants bringing them in or rather hiring in house versus the consultants. But can we see that number running back at a $6 million to $7 million run rate.

[Domenick Cama:]

Well, I think rather than try to isolate what the number is, I think that it's safe to say that the use of consultants will definitely start to subside in '18. In addition, I have said out in the market publically that we know that $10 million of expense is related to the validation effort and the look back effort which are one time in nature. And so we would expect those expenses to go away also. But, again, to try to project what the expenses are in '18, we are hesitant to do that right now because we are still in the depths of trying to manage through and resolve the entire BSA process.

[Laurie Hunsicker:]

Okay. Fair enough. On advertising expense, you had a big jump. You went from $2.1 million to $4.5 million. Can you talk a little bit about where that line is going?

[Domenick Cama:]

It should remain about the same.

[Laurie Hunsicker:]

About $4.5 million per quarter?

[Domenick Cama:]

Yes.

[Laurie Hunsicker:]

Okay. Great. And last question. Tax rate, how should we be thinking about that?

[Sean Burke:]

Around the same level we are right now, 38%.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Cummings for any closing remarks.

[Kevin Cummings:]

Okay. Thank you. I would like to thank you all for participating on the call. We are committed to moving the company forward. We have some headwinds but I think we are not the first bank nor will we be the last bank. We are focused on creating value for you, our shareholders, and we appreciate your interest. Thank you very much and enjoy the rest of your summer and we will be talking to you soon. Have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.