Good morning and welcome to the Second Quarter 2017 Customers Bancorp, Inc. Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Joe Noyons . Please go ahead, sir.

Thank you, Dixie, and good morning everyone. Customers Bancorps' earnings release was issued yesterday evening and is posted on the company's website at www.customersbank.com. Representing the company on the call today are Jay Sidhu, Chairman and Chief Executive Officer; Bob Wahlman, Chief Financial Officer; and Dick Ehst, Chief Operating Officer. Before we begin, we would like to remind you 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 rest of the results are different than currently anticipated. 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 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 Customers Bancorp CEO, Jay Sidhu. Jay, the floor is yours.

Yes. Thank you very much Joe, and good morning ladies and gentlemen, we are delighted to welcome you to the second quarter earnings call. As you know our net income to the common shareholders was $20.1 million during second quarter 2017, then that's up 15% and 15.4% over Q2 2016. Now this $20.1 million number includes $5.2 million loss from discontinued operations that we will talk about later on. So the earnings, we are so pleased to report to you that the earnings were very strong. And for the first six months as a result of this, our net income to common shareholders was $42.2 million, and for the six months earnings per share were 1.29%, also our margin improved during the quarter by 5 basis points, and over the last couple of years we've shown consistently increasing our book value per common share. As well as positive operating leverage, our asset quality improved, so this is a very good quarter for us. To get into the details of the quarter, I'd like to hand it over now to Bob Wahlman, our Chief Financial Officer.

Thank you, Jay, and good morning everyone. As noted by Jay and as described in our second quarter 2017 earnings release the last evening, customers as reporting Q2 2017 net income of $20.1 million or $0.62 per fully diluted share. Net income to common shareholders for Q2 2016 was $17.4 million or $0.59 per common share. So the Q2 2017 net income to common shares -- common shareholders is up 15.4% over 2016, and earnings per common share is up $0.03 or 5.1%, Q2 2017 compared to Q2 2016. Excluding the effect of the BankMobile business that is reported as discontinued operation, customers Q2 2017 net income to common shareholders from continuing operations was $25.3 million, up 28.5% over Q2 2016. Customers Q2 2017 earnings per common share from continuing operations was $0.78 per share, up 16.4% from Q2 2016. The earnings calculation for GAAP in our view is a good measure of the ongoing performance of the business, but it may overstate the performance of the bank and understate the discontinued business, earnings a little bit by the amount that the bank pays BankMobile for deposits of approximately $2.7 million or something short of $0.08 per share. For Q2 2017, customers produced a return on average assets of 93 basis points, a return on common equity of 11.84% and an efficiency ratio from continuing operations, so the banking business efficiency ratio of 40.5%. In the same quarter a year ago, customers generated a return on average assets of 85 basis points, a return on common equity of 13.07% and efficiency ratio from continuing operation for the banking business of 46.5%. In summary, customers Q2 2017 earnings performance is viewed by management as very strong and trending upwards. The second key set of numbers watched by our investors, regulators and…

Thank you very much, Bob. I'd like to go over four things now before we open it up for questions and answers. Number one is where do we stand on our core business. Number two is shared with you the status of the BankMobile divestiture, and number three is review with you our strategy, since as Bob indicated we crossed the $10 billion mark this quarter and like every other institution we are in the process and have completed a strategic options review for ourselves -- over the -- before we made the decision to cross the $10 billion mark, so I'd like to review with you our strategy. And then [indiscernible] make some comments in terms of looking ahead. As far as the core business is concerned, as you noted that our C&I business is our biggest growth business. Our C&I loans increased by $305 million this past year and that's approximately a 25% growth rate, that business is the main focus, because we are a business bank and we have a very, very strong teams that we've recruited over the last several years and we continue to recruit those teams, and our single point of contact model is really working, and we have expanded and now that same model this quarter, starting this quarter into Washington DC and the Chicago market as such. So you should expect the continued strong growth rate in the C&I business without any deterioration of credit quality from those folks who normally stretch to make these kind of loans, so the credit quality risk management will remain top of our minds all the time. In looking back over the last five years, I just looked at what we told the investors, we pulled out our investor deck and the strategic position of the…

Sure, thank you [Operator Instructions]. We'll go to our first question, caller please go ahead.

Yes. It's Joe Gladue from Merion Capital Group. I guess I wanted to talk about the funding side of the balance sheet a little bit, it looks like you had very good growth in noninterest bearing deposits. I guess, just wondering what's driving that, I guess can you continue it. And in relation to the new teams you're bringing on, I guess is there -- what is their focus on deposit gathering or do you expect much in that regard from them?

Our teams Joe that we already have in place and we are adding have two roles -- three roles actually, one is attraction of core deposits, number two is on high quality earning assets, and number three is serving our existing customers in a way that the customers see a huge value, and so its portfolio management as such. So the way the teams are compensated also is aligned with the strategy and we compensate our teams very well for attraction and maintenance of noninterest bearing and other types of DDAs, that is DDA is our definition of a core deposit. So you should expect us to continue to show strong growth in core deposits going forward. You should expect us to continue to show strong growth in C&I lending, it does take the teams sometimes between six to 12 months before they start to show results. However, we have very experienced teams in very attractive market, so that even though Chicago and DC results won't become apparent to you till about this time next year. But we are very confident that in the New England market, New York market and the Pennsylvania market, the deposit growth first, lending growth second philosophy remains. The market is becoming for higher quality loans rather competitive banks are -- starting to do very stupid things, which some of us who have been in this business for a long time remember slowdown clearly, that they always do it. We are seeing the same thing happening right now in terms of terms, as well as pricing of C&I loans. We have told our teams, it is more important to get core deposits and higher quality loans than just to get volume of stupid loans. And let the competitors pick up those stupid loans and they are going to pay for it over the next year or two that is how we see things.

And just longer term, again on the noninterest bearing deposits, that increased noticeably as a percentage of total deposits, but you're still well below sort of industry norms. Do you think you can grow that as a percentage or is that more a function of or its just sort of the business model that you are going to end up with that, remaining 10% or so of total deposits?

I think good quality banks should see between 15% to 20% of their deposits to be in noninterest bearing deposits in different cycles. What you've noticed in this last cycle of zero interest rates is unusual and you're going to see in our opinion a huge exodus from noninterest bearing DDAs into interest bearing DDAs or exiting the banking sector. You are not going to see that at Customers Bancorp. We have been very mindful of the quality of our funding base and we are -- we've actually recruited a team of product managers from a top 50 bank -- top 10 bank actually in the nation, and they are developing the state of the art cash management and technology driven products for us. So you should expect continued strong growth in DDAs, interest bearing and noninterest bearing from us.

And our next question comes from.

Mike Perito of KBW. Couple of questions -- actually a few questions for me. I guess to start on kind of a high level question on the mortgage warehouse business. Jay, do you mind just reminding us kind of how you see the dynamics of that business unfolding as interest rates continue to rise, and I guess just a little background on the question, looking at kind of the loan portfolio excel for sale, I mean it really look like you guys actually kind of core funded with the deposit growth and then some in this quarter, but obviously the warehouse balances as they fluctuate seem to kind of go beyond the deposit funding. So I'm just curious how that dynamic kind of transcend us, rates continue to rise, how you guys plan to fund it, but also how the asset yields go up and just remind us what they are priced according to, please?

Yes, sure. The yield on the mortgage warehouse portfolio today are running over 4%, it's 4.2%, 4.3% plus the profitability of that business is plus [Indiscernible] fees plus you get approximately 10% noninterest bearing deposit compensating balances. So you can figure out that, that business to us is approximately a 2% ROA business. And that is the 2% ROA, even with funding it at with core deposits. So at June 30, our yield was 4.8% with the increase in the prime rate, fed funds rate, so that's how, according to. Is there a different number, Bob?

Yes. It's 4.15, I circled the wrong number, my apology.

Okay. So it's 4.2%. And so going forward what happens with this business since the last couple of days in the quarter, you see a 20% increase in balances from wherever they were in the last 3 to 4 days prior to the end of the quarter that's why our average balances for the second quarter were $10.4 billion, but [indiscernible] were $10.9 billion. Looking ahead, we expect the mortgage business, because we have core customer relationships. Our customers have been doing an average of 70% of their business is purchase activity, we see with higher rates as such, especially if you see a steepness in the curve as such that you will still see us having between $1.75 billion to $2.2 billion over the next four quarters in mortgage warehouse business, because it's a very core business and we just don't see how the balances are going to go below that. You are absolutely right, we are funding short term two week loans with core deposits. If we were match funding it, our margins would actually expand over here, but we are looking at this as a core business rather than just as a true business, which would indicate if you have loans for sale, then it's not necessarily a loans held for portfolio, but it's more of a technicality why we have to classify it as loans held for sale, but it's a core ongoing net interest income portfolio for us in a way. We have strategies of expanding our market share in this business, so that even if you see a very steep curve and for whatever reason you see the long-term rates, and the 10 year going to let's say 3% to 4%, and we've gone back over the years and looked at it and we still feel love this business and feel highly confident that you're going to see us having on an average about $2 billion plus-minus percentage in this portfolio. As we grow the balance sheet, the percentage of these loans as a percentage of the balance sheet is not going to be maintained. We will see C&I business becoming a faster percentage of this portfolio compared to C&I to the mortgage companies. So the C&I should be the fastest growth business for us followed by continued multifamily and then we will look at certain sectors of the consumer portfolio from a diversification of assets as well as net interest income, and so that is the way we are looking at it in terms of our strategy for the next couple of years.

Maybe a follow-up on the loan book for Bob, just the loan yield stepped up a bit sequentially, just curious if that was, may be how much of that was may be new production as it coming on a higher yields or was it pretty much all just from that March rate hike?

Mike in regard to the portfolio in regards to the new volumes, we had total new volume loans coming on was $778 million with an average yield of approximately 4%, and that is, so the new loans are coming on at a little bit higher yield than what they had been previously, but I think mostly it is in terms of the increased margin. We have the significant growth in the warehouse portfolio, which is very strong, yielding in the strong margin portfolio and the growth in that portfolio really hold up that the margins overall in that portfolio.

On the loan held for investment portfolio. Can you just remind us kind of the stats on that in terms of floating [prospects] I mean I guess in terms of stuff that reprices immediately versus stuff that might take 6 to 12 months?

The Warehouse portfolio and there is a disclosures in our Q that go through the pricing, but the warehouse portfolio was 100% reprice immediately with change in -- within the month within the change of interest rates.

And that's predominantly loans held for sale is that -- it's not mortgage banking it's not anything else.

Right, and then, but then they held for investment [loan book]?

Well, the held of investment book, the C&I portfolio is a variable rate, is largely a variable rate portfolio about [2/3] of it is variable rate, but it does change within the -- whether it is 1 month, 3 months, 6 months or 1 year variable rate will vary, and I can't give you that statistics, but I don't think -- it should [indiscernible] down this call, Mike.

And then one last one for me, just wanted to ask on the BankMobile potential sale, I guess in terms of the system conversion in the quarter, I mean was that something done with the help of kind of making the business more saleable, as you guys kind of pursue these two options. And then I guess secondly -- well, I guess, actually let's start [indiscernible] your thoughts around that?

Yes, Mike. Absolutely correct that the systems conversion have to become a higher priority to make the divestiture happen, and so that the front-end system, which would be related to the retention and adoption rates that became a lower priority for us to make this happen because thank mobile divestiture is going to happen and it's going to add. We believe in excess of $100 million to our shareholder value. So with that it became very clear to us that systems conversion had to become a higher priority.

And then Bob, do you may be just walking me through may be some of the moving pieces of how the spin-merger would work exactly for you guys, and I guess what the timeline of that could look like and what needs to be done to successfully kind of get that gain that you guys potentially highlighted in the prepared remark?

In regards to spin-merge -- just to walk through the steps, at a high level, Mike, is that the assets related to the business we first need to be placed into a separate legal entity -- that ownership of that legal entity would be ultimately at the holding company. The holding company would then declare a dividend and would pay or would issue to the existing shareholders and interest in each of the -- an interest based upon prorata ownership of customers' bank, and interest in this new company, which would be a share interest, that would be the spin-off, that step number one and so you have the customer -- existing customer shareholders that would on 100% of the spin-off entity. The second, the next major step since there are several steps to get to that piece, but the next major step within the acquiring entity would then issue their common shares to the customers common shares in which the customers common shares will end up owning more than 50% and that's necessary to qualify for the tax rate treatment would end up owning more than 50% of the new entity of the combined entity, and that is it in a nutshell at a very high level.

And then in terms of -- and then the merge piece after all that's complete…

So when you're issuing the shares they have ownership, so they have -- there's common ownership of the multiple entities and then they're merged together. So that would be the next piece, but getting the ownership and to the acquirers, so you have acquirer and the acquiree under common ownership would be the key step and then after that the merging of the entities would be the next step, but that would be relatively easy once you get there.

Yes, to make things again very-very clear on spin-merge our partner will be flagship, because flagship is the one which we've already shared with the market that is the partner and we're in the process of restructuring that potential deal that's the way we put it out in our 8-K. So as Bob mentioned, we would spin-off the BankMobile business, then the BankMobile business spun out 100% owned by the shareholders of [CUBI] then what enter into a merger agreement with this privately owned bank called flagship. And then the CUBI shareholders will own between 50% to 60% of the combined up and then there would be a sale of deposits related buy from CUBI to this new entity, and when you get all that done, so you have the ownership held by CUBI shareholders in this new BankMobile will be worked well over $100 billion, that's what we are sharing with you.

And then just one quick clarification, I appreciate that one down is very helpful. But when you spin it off as its own entity since it's still within the Holdco CUBI, it will need it's own bank charter, could have been mentioned you're selling it to flagship if we has a bank card or you kind of [cite] that need to have BankMobile acquired some bank charter?

That's correct. BankMobile will not acquire its own bank charter, at this instance, flagships bank charter will be the surviving charter.

[Operator Instructions] We'll go next to…

It's Bill Dezellem with Tieton Capital. The securities on the balance sheet increased by roughly $0.5 billion in the quarter. Would you talk about that change and how you foresee that unfolding in the coming quarters?

Bill, we -- if you look year-over-year, I see a significant increase in the securities and we made the strategic decision when the -- excuse me, when the warehouse business had its seasonal contraction during the first quarter that we replace a lot of that contraction with investment securities. And so there was a significant investment made during the first quarter, which we didn't finish that up until the second quarter. We had been running historically with a low investment portfolio and we also added as part of that strategy we added to the investment portfolio to provide us with additional interest earning liquidity resource.

So on a go forward basis, this is really more the way you want to be structured as opposed to -- to really to fund the warehouse business?

No. This has nothing to do with the funding of the business, this is to manage the overall net interest income so that you minimize the fluctuations and you decrease the volatility. So these are very short-term securities that we've put on, we're not adding on to the interest rate risk, we are funding the mortgage warehouse business with our core deposits and borrowings combined, and you should not see a significant change in our investment portfolio and in our investment strategy going forward.

And we'll go next to…

Frank Schiraldi from Sandler. Just had a couple of quick questions. First, I wanted to ask, I think you might have touched on this, Jay, I apologize I didn't quite catch it, but in terms of BankMobile, the new deposit accounts have been added over time. Is that a percentage of that -- is that outside the distribution channel of a Higher One and if so, what's the percentage, and how do you expect that to change at all, if at all over time?

Frank, we are adding somewhere between 50 to 100 new accounts outside of the student channel every single day. But from the student disbursement channel, we are adding on an average somewhere around 5,000 accounts to 10,000 accounts every week. So, it's immaterial what we are adding through the direct to consumer sector.

I mean do you anticipate that will pick up over time or do you think, I mean Higher One obviously is the bulk of it, and will continue to be, but how do you think about that the other -- outside of that distribution channel that sort of picking up and augmenting growth?

Within the next 3 years, we believe our BankMobile has a potential to look like will be that the current student business will be about 50% of the business or customer acquisition. And the white label banking and perks at work will make up the other 50% of the customer acquisition. And that BankMobile could be the number 1 customer checking account, customer acquirer in United States of America, more than Bank of America's checking account customer acquisition. That is a potential we see in BankMobile.

And then just on expenses, Bob, you guys have talked in the past about expenses for one time and then recurring to go over the $10 billion mark, just wondering if you can give some color on how that is already in the run rate or expectations are going forward?

Frank, in terms of the conversion to and going to the $10 billion mark and those expenses, we have stated in the past that we expect those would be between $2 million and $5 million. We have already begun the process and so you see those expenses -- those expenses coming through during actually the first and the second quarter. So that's embedded in the expense run rate in terms of those conversion expenses. On an ongoing basis, we think that the expenses will be marginal increase in expenses will be $2 million to $3 million on an annualized basis and that's going to be in line with what we're seeing in these transition costs. So I haven't thought about it quite like this the way you're asking the question, but I would say if you're looking at the first and the second quarter that our conversion costs are embedded within that run rate, and I wouldn't expect to see a significant jump when we move over, because now we're incurring some of the transition costs and those will be replaced by ongoing costs later on.

[Operator Instructions] And having no more questions in the queue, I would like to turn it back over to the speakers for any additional or closing remark.

Okay, well, thank you very much, ladies and gentlemen for joining the call and if there are any other questions, please give us a call. Thank you and have a good day.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.