Good day everyone and welcome to the Fourth Quarter 2017 Customers Bancorp Incorporated Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Bob Ramsey, Head of Investor Relations and Strategic Planning for Customers Bancorp. Please go ahead, sir.

Thank you, Dana, and good morning, everyone. Customers Bancorp’s’ fourth quarter earnings release and accompanying slide deck 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; Dick Ehst, Chief Operating Officer; and myself, Bob Ramsey, Director of Investor Relations and Strategic Planning. 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 risk and uncertainties that may cause actual performance results to differ materially, including the risk 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 or by visiting the Investor Relations section of our website. At this time, it’s my pleasure to introduce Customers Bancorp’s CEO, Jay Sidhu. Jay, the floor is yours.

Yes, thank you very much Bob, and good morning, ladies and gentlemen. I am delighted to welcome you to this fourth quarter and 2017 investor call. We are very pleased with the results and I wanted to just share with you that we have set three priorities in 2017 and share with you a little bit on the progress laid on all those priorities. Number one was to set a very strong foundation for our core business bank in 2017, so that we would be executing on our unique strategy, as well as very important for us was achieving our capital targets by December 31, 2017. Our second priority was to have a very clear strategy for creating one of America’s best performing digital bank called BankMobile and give it to our shareholders in a clear path providing very extensive short-term and in our opinion possible long-term value for our shareholders. And a third priority in 2017 was to establish a very clear path going forward for Customers Bank showing the market how it is clearly possible for our shareholder value to approximately double over the next four years or so. So I am pleased now to give you an update on all of these. As you know from our press release regarding the strong foundation on our core business bank in 2017, we reported earnings per share of $2.60 excluding securities gains and losses in 2017. In the fourth quarter, our earnings per share for our core bank were $0.68 per diluted share despite shrinking of our balance sheet by about 10% in the last six months of 2017, so that we could meet our capital targets by December 31, 2017, as well as give ourselves some headroom, so that we can execute on our absolutely without any risk…

Thank you, Jay, and good morning everyone. One strategic objective for – that we had at the end of the fourth quarter 2017, I’d like to spend just a moment on before I look at the operational piece was that, we did target having assets under $10 billion as of December 31. Customers achieved this objective which was a critical objective for us recording assets of $9.8 billion as of December 31, down approximately $700 million from September 30. And this was accomplished without damaging Customers franchise by taking advantage of the seasonally lower mortgage warehouse balances, selling a small portion of lower yielding multifamily and residential mortgage loans which help increase the yields that Jay referred to and the limited amount of those investment securities. As Jay noted, while these lower level of assets help improve Customers capital ratios, so that the capital levels and ratios were at substantively our targeted levels at year end and provided additional benefit of maintaining Customers classification as a small issuer of debit cards pursuant to the Durban Amendment. This classification will allow BankMobile to continue to receive the same interchange fees as long as they are associated with Customers Bank through the planned disposition. So turning now to the operational elements of Customers’ fourth quarter earnings compared to our fourth quarter of 2016. Q4 2017 net interest income was $68.3 million or an increase of $4.2 million or 6.5% from Q4 of 2016 as average earning assets increased about $400 million or 5% despite the engineered decline in the Q4 2017 amounted to $700 million I just talked about. Q4 2017 margin was, net interest margin as Jay noted was 2.79%, up 17 basis points from Q3 2017 and down 5 basis points from a year ago and Jay has already described…

Great, thank you very much, Bob. In terms of our core business, as Bob sort of covered, there are two important points I’d like to emphasize. Number one is, the non-interest bearing deposits grew 28% in 2017 and our C&I loans grew by 19% in 2017 and those are in our opinion very important drivers of value creation besides having strong asset quality which we were able to maintain in 2017, as well as strong capital ratios which I’ve already discussed. At this time, it’s very important for us to discuss with you our views on 2018 as well as long-term shareholder value creation and regarding 2018, I’d like to hand it over to Bob Ramsey to share with you some of our strategic priorities and plans.

Hey, thank you, Jay. So, yes, first I just wanted to quickly review our top three strategic priorities for 2018 and then I’ll talk a little bit about our outlook. The first strategic priority is to maintain strong capital ratios. We were very pleased to end 2017 with a tangible common equity ratio of 7.0% in line with our target and in fact we substantially achieved all of our capital ratio targets at the end of the year. Our expectation for 2018 is to end the year with capital ratios at similar levels with balance sheet growth that is supported by internally generated capital. Although capital ratios will likely dip as we go to the middle part of the year given the typical seasonality of our businesses. Our second strategic priority for 2018 is to grow and successfully divest BankMobile. Despite headwinds from Department of Education Rule changes, BankMobile reported modest year-over-year growth in average deposit balances and disbursement business. And in case anyone missed it, I did want to mention that our investor deck this quarter includes eight quarter income statement for the BankMobile segment with an expanded breakout of fee income and expenses. We continue to make progress on the White Label partnership that we’ve previously disclosed or talked about that business and we believe it will be a real source of growth for BankMobile going forward. And our planned spin-off and merger with Flagship is absolutely on track. Our third strategic priority for 2018 is to grow and improve the profitability of the core community business banking segment, the bank business, the business that we will be left with after the BankMobile spin-off. We are proud of that business’ accomplishments in terms of expense management for 2017. In fact, we actually managed to slightly reduce that segment’s…

Okay, thank you very much, Bob. We remain – as you heard from Bob, very excited about 2018 outlook, but I also wanted to cover some strategic priorities with you which go beyond 2018 and maybe also try to answer some of the questions that we often get asked. First question which we always get asked is talking a little bit more about BankMobile. So, I am – we are very, very confident about Flagship’s ability to raise new equity. Flagship has decided to pursue an IPO rather than a private placement, which we think is a very good move on their part and this will give much broader, more transparent and a process that their investment bankers have assured us we’ll get executed based upon every single thing that they have reviewed so far. So, BankMobile today, as you know has had more time to develop a track record and it has become an absolute dominant in the business of offering banking services to college students in United States. One-third, 33% of every single college bound student in the United States is offered a BankMobile product today, which is absolutely unbelievable opportunity for them to take advantage of this opportunity with millennials. Additionally, BankMobile continues to develop an exciting White Label partnership, which is expected to launch in the first half of 2018. We expect the partner and potential of this partnership to generate strong core deposits which we believe will be viewed very favorably by the market and enhance BankMobile’s shareholder value. I also want to make it very clear that now that we will be able to transfer value of BankMobile in a tax-free spin-off to all our shareholders, there will not be any incentive payouts under the December 2016 cash compensation agreement and Customers Bancorp does…

Yes, thank you, sir. [Operator Instructions] And we’ll go first, please announce your name.

Good morning. It’s Steve Moss.

Hi, Steve, how are you?

Good. With regard to the BankMobile transaction spin-off here, how should we think about the milestones and the progress of the transaction here over the next several months?

Thanks, Steve. Good question. Like we’ve stated before, but let me spend a little bit more time on this to fully answer your question. So, we expect Flagship to file an application with FDIC next week. And so, by the end of this month, the FDIC will have a complete application filed by Flagship for the acquisition of the entire business, as well as the deposits. Even though, technically, the only regulatory approval needed by Flagship is for the deposits, but rightfully so Flagship is taking the right approach and prepare a very extensive strategic plan for FDIC’s benefit and we are very confident that they are doing everything right and that will be done by the end of this month. They did invite – Flagship did invite me at a meeting that they had set up with FDIC and that was a very good meeting to educate and to share with FDIC some of the plans. So that should be in place by the end of this month. Number two is, Customers Bancorp will file with the SEC for the spin-off of the BankMobile Technologies. We intend to do that after our audit is complete. So that means, after we file our 10-K and we expect to file our 10-K by the last week in February. So, probably, in March, early March of 2018, you should expect CUBI to file with the SEC for the spin-off of the BankMobile Technologies. We’ve already set up and moved the assets of BankMobile other than deposits into a subsidiary called BankMobile Technologies and that is the subsidiary which will be spun-off to our shareholders and then there is a separate transaction whereby Flagship will be acquiring the deposits and merging the two to become the new BankMobile. Flagship has also informed us…

In terms of just one follow-up there, maybe you can’t comment on this, but just, what is the timing of the launch of the White Label partnership in terms of public announcements and so forth?

Yes, Steve, we expect it to happen in the first half of 2018, okay.

Okay, that’s helpful. And then with regard to the margin guidance for the Bank, just in terms of how many rate hikes are you including in your assumptions? The timing of those rate hikes, can you just kind of walk through loan yield and fees or interest-bearing deposit cost? I am sorry.

Yes, we’ve assumed two rate hikes in 2018 and they are all factored in the guidance that we provided to you and how Bob Ramsey walked through some of those assumptions, they all incorporate two rate hikes in 2018, one in March and one in the second half of 2018.

Okay. And in terms of the mortgage warehouse business, how should we think about the growth of that business in 2018, perhaps, on an average basis?

I think first quarter will be seasonally low. And as you’ve seen, but I think if you look at our 2017 performance, our expectation is that 2018 will be pretty close to the 2017 average balances during the year. The market is expected to be slightly slower in 2018 compared to 2017. But we are picking up a few more clients. So, our guidance to you would be to use approximately the numbers of 2017 on a quarter-by-quarter basis for 2018.

All right. Thank you very much.

Thanks, Steve.

And we’ll go to our next question. Please go ahead caller.

Good morning guys. Mike Perito, KBW.

Hey, Mike. How are you?

Good, thanks, Jay. Few questions for me, one financial and maybe a couple strategic questions. One, either, Jay or Bob, just curious I was trying to delineate in the press release but obviously there is a few moving parts with the BankMobile deposits still in the numbers. But can you maybe just give us an update over kind of the last six months or so how some of the deposit initiatives you’ve done on the core legacy bank attract and then with both D.C. and Chicago offices pegged to be opened in short order here, how you kind of expect those to trend in the early part of next year?

We are shooting for deposit growth of about $1 billion in 2018 and that will be a combination of core deposits and maybe some wholesale deposits, but majority of it is - our emphasis will be core deposits. This will be coming from our existing customers, as well as new customers that we’ve targeted in all our geographic markets. All our teams, Mike, as you know are compensated, based upon achievement of their deposit goals as well as earning asset goals as well as fee income goals and they do take responsibility for all their expenses and the quality of their assets. So it’s like running their own bank and that is how we are able to attract very high-quality teams. Right now, to give you an example, in New York, December 31, our deposits were $2.1 billion and we don’t have a single office and it works out of – I am sure you may have visited out of the 11th floor or so 101 Park Avenue. And, but our legal office in New York happens to be in Rye Brook. So a team service their clients out of that same Rye Brook office. Similarly, our teams in New England are very focused on deposit generation in 2018. They only hand about $160 million in deposits in 2017 and in Philadelphia we are targeting higher deposit growth and Chicago and Washington teams are going to be focused on both liabilities as well as assets.

And do you guys feel that the – especially the newer offices, I guess, you mentioned specifically in Chicago you felt like you have the team in place, I mean, doest that – are you guys kind of comfortable with the treasury management talent across the franchise at this point or is that an area of emphasis moving forward?

We believe, and Dick, maybe you can comment on that more, but I believe that we already have all the treasury management products and services we’ve been working on that for over a year now to be able to attract business. So, but on that, Dick can comment on that.

Yes, thank you, Jay. We have completed the development of our treasury products effective about 30 days ago. But also, in addition to that, our conversion in – and scheduled for 26th February, we will complete our new product development with significant product enhancements to serve our multifamily customers in the New York market.

Great, thanks. And then, couple of strategic questions for you Jay. I guess, one, I appreciate the color on this 2% checking account in terms of financials behind it. I guess, depending on how it’s received by the markets. I guess, at some point moving forward, given the growth outlook you guys have and the spin-off of BankMobile, you know obviously the interchange piece of it will be a little less attractive. But curious what you guys think you could kind of learn and maybe take from this trial here to try and emphasize gaining new clients going forward as you guys see it?

Yes, I think it’s in our opinion, it’s very critical to have deep relationships with your customers and that is how we built Customers Bancorp. Right now, all our lending relationships we have for banking relationships with them. We don’t have any borrowers with no deposit relationships with us. I just want to make that very clear as a part of our strategy. We are not a wholesale bank. We are a franchise building community bank that happens to be very focused on the business banking segment. In the business banking segment, you have businesses, and you have employees and you have top managements of those businesses. So the products that we develop including the bonus checking and we have in place private banking products that we have developed and in the process of completing some of the developments further will be private banking type services for the managements of all our business clients. And that is a very important part of our strategy to have deeper relationships with all our clients and to provide them that that concierge banking which is high touch supported with high-tech type of banking and that is why we are very confident about the success we will achieve on the deposit side of it to supplement building the asset side of the balance sheet. So we are focusing on a 20% plus minus growth in C&I loans in 2018 and in addition to that, but our growth rate on the deposit side should be greater in the core deposit side should be greater. We recognize today, that we have above average share of some wholesale deposits as well as some broker deposits. And our intention is to gradually – as we generate the deposit growth that we would be reducing other lines on those areas and having more of a core franchise continuing to experiment – continuing to combine digital banking, electronic banking services to our private banking offerings and that is our strategic plan to improve the quality and value of our franchise.

Got it. Helpful, thank you. And then, just last one, appreciate also the update on the BankMobile spend and everything it’s helpful. Just curious, and obviously you guys have been working side-by-side with BankMobile for several years now and there has been a lot of investment on the digital side. I am just curious if there is anything Customers has kind of learned or is going to take from some of those investments to help kind of frame or benefit their kind of technological and digital approach to banking going forward. I am not sure if that question makes total sense. I can clarify it further if you need, but I guess, just kind of here is what if any you guys can say that you’ve learned from the process that could benefit the future Customers Bank outlook?

I think it’s a very good question, Mike that you’ve asked. And that is what have we learnt in terms of approach of community banking to small medium-sized businesses and consumers. Because, traditionally, as you know, the purpose of a bank branch is to attract customers, and then, to use the ATM network in those branches. So that your customers can continue to get money from them from that bank without having to incur charges for ATM withdrawal. I mean, you think about it besides having a billboard, that’s about all the bank branch does. So what have we learned? We’ve learnt that concierge banking which is electronic, digital banking for our business customers with treasury products and delivery by human beings and offering their top management world-class digital banking products is not just liked, but it is loved by business customers also. Business customers think banks are adequated still working in the 19th century. That’s what we hear from our business customers. They cannot stand that they are paying for all these ridiculous branches that only of the smart banks have decided to trim those branches by 10% a year. They can’t wait for those benefits to be transferred over through innovation in the banking business. That’s what we’ve learnt from our business customers and what we’ve learnt from the consumer customers, we can apply that in a private banking approach to our existing customers, because Customer Bancorp’s average customer is not going to be a student who keeps $300, $400 in an account. It’s going to be someone who keeps $10,000 in their account. Who knows, it’s the example I’ve given you, but the product delivery channel means that we can have ATM networks, which is about five times the size of Bank of America’s ATM or Wells Fargo’s ATM network, and give it to them free. And time to waive to offer digitally banking services to all their employees which are better than what even Bank of America can do for them. Now you see the opportunities of a bank like Customers Bancorp and just watch us.

Got it. Thanks, Jay. I appreciate the color on all my questions. Thank you.

And we’ll go to our next question. Please go ahead caller.

It’s Bill Dezellem with Tieton Capital. In Philadelphia…

Hey, Bill.

You mentioned that you are going to be adding a – or you are in late-stage talks with another team, would you please share with us what you currently have in terms of teams in Philly? And how this new team will fit in?

Currently in Philadelphia, we have teams and I’ll let Dick talk more about it, which cover the small business and mainly the consumer banking segment. But we don’t have a team that covers small medium-sized businesses. So, Dick, could you?

Absolutely, Jay. We – our office, our community development office at 1501 North Broad Street has a fully staffed team of small business lenders. We – in small business, we believe there is anything less than $1 million per customer. Last year, we did about $15 million in production. Now that’s small business facility. But as Jay mentioned, where we really need to build out is only the small to medium-size businesses that we can fully serve from a new location that we’ve identified at 211 Square. So we are building C&I teams, middle market teams, lower middle market teams for that office and that’s the negotiation we are going through right now with this one particular team.

We feel Philadelphia has significant opportunity for our unique business model and we want to take advantage of that.

Great. Thank you both.

Thank you.

[Operator Instructions] And we’ll go to our next. Please go ahead caller.

Good morning. Frank Schiraldi from Sandler.

Hello.

Hi. I wanted to ask a few if I could. First on – Bob, I think you mentioned in terms of the BankMobile quarterly contribution. You could – I think the range you gave included slight profitability. So, I think 1Q is the stronger quarter for BankMobile given stronger interchange. But I was just wondering if so the implication that you could reach or BankMobile could reach profitability about the first quarter of 2018 or do you guys think that might be too soon?

No, I mean, I think that is – as you say the normal seasonal pattern for BankMobile and it’s what we saw last year. It is a seasonal business. I think you could expect a similar trend this year.

Okay, so when you say, I mean, slight profitability, there is only really two quarters where you are going to have BankMobile within Customers, is the thinking. So then 1Q would be the quarter where you would have better shot to hitting the slight profitability you mentioned?

Yes, I mean, we haven’t said two quarters. We’ve said mid-2018. So there is a little bit of – I believe why I guess only a side of that, but, yes not – right, slight profitability to start and then you could have losses quarterly thereafter.

Okay. And then, just back to the large White Label relationship that has already been signed. I think, Jay, you mentioned it should be up and running first half of 2018. Is it your guys’ understanding that we should get disclosure of that in the registration statement that Flagship files, I guess, expected in March you said?

Before Flagship cites you, the market will know everything about their White Label partner.

Okay. But – okay, I was just trying to figure out when we might get that disclosure and I thought the registration statement would make sense, but you are not saying – you don’t necessarily think it will be in there?

I think it’s important for us and the White Label partner to have a execution launch strategy and we may or may not put the details in upward strap to CUBI shareholders and Flagship may or may not disclose everything about that in March. But before the launch of the IPO, there is no question about it that CUBI will be making the appropriate disclosures and we believe Flagship will be making the appropriate disclosures in detail about White Label partner.

Okay. And then just finally, with BankMobile moving off balance sheet, I would think that it frees up some time maybe to take stock and a strategy and just curious if there is any new businesses or niches you are sort of looking at, Jay, thinking about that could be interesting for Customers?

Frank, we believe that the best opportunity for us is to continue to have better execution of our strategies. We don’t have a huge track record, but it’s about four to five years,, but it’s long enough that we’ve learned from our mistakes and our successes. And we intend to build upon that. Our model is very clear to us. We are recruiting high-quality teams. We are not interested in taking dilution to our book value by buying banks that do not necessarily have the franchise value for the future. We intend to build franchise value for the future through execution by our teams. We are very focused on innovation and products and strong risk management infrastructure that is very critical to the success of these teams. We have developed – leadership development programs at our company, which is very important to create the leaders for the future, as well as bank managements who can understand and run a bank by themselves. Those are the quality teams that we are recruiting right now, Frank. So, as an example, we are looking at – we look at New England as an independent bank. We look at New York as an independent bank. Within New York, New England, Pennsylvania, we have teams which are run and we have - monthly financial statements, P&L statements by those teams and we measure them as you measure CUBI. We measure them in more detail than that on a monthly basis. So, all we are trying to do, Frank is just do the – be better at blocking and tackling and look at opportunities for enhancement in products and services and we are not going to spend our energy looking at buying banks.

Okay, okay. It doesn’t sound like there is any new businesses just sort of on the commercial sides, you got plenty of opportunity and then growth and that’s going to take you – keep you busy for a while, I guess. Thank you very much.

Yes, Frank and try to build shareholder value which should be a very attractive returns for our shareholders.

And at this time – I am sorry. Go ahead sir.

No I was just going to say, Dana, if there is any other questions for us.

We have no further questions. [Operator Instructions]

Well, ladies and gentlemen, thank you so much for joining our call. Once again, if you have any questions at all, please don’t hesitate to call any of us. My number direct line is 610-301-6476. Thank you very much and have a good day.