Good morning and welcome to the third quarter 2018 Customers Bancorp Incorporated earnings call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Bob Ramsey. Please go ahead, sir.

Thank you and good morning everyone. Customers Bancorp’s third quarter earnings release was issued yesterday evening, as well as an investor presentation. Both are posted on the company’s website at www.customersbank.com. Representing the company on our call today are Jay Sidhu, Chairman and Chief Executive Officer; Bob Wahlman, Chief Financial Officer; Dick Ehst, Chief Operating Officer; Carla Leibold, our Chief Accounting 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 risks and uncertainties that may cause actual performance or results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities law. Please refer to our SEC filings, including our Form 10-K and 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.

Thank you very much, Bob, and good morning ladies and gentlemen. Thanks for calling in of our third quarter earnings call. The corporation reported diluted operating EPS of $0.62, which was 29%, and operating return on average assets of 88 basis points based on an average common equity of about 11%. The community business banking segment continues to perform very well and we reported operating diluted EPS for that segment, which is our core bank, of $0.73, which are up 14% over last year, and operating return on average assets of a little over 1% and return on average common equity of about 13.5%, and efficiency ratio of 50%, which we expect to get down in the low 40s within a 24-month period. From an earning asset point of view, we reported 15% year-over-year growth in C&I lending, which excludes our loans held for sale in the mortgage warehouse category. As you would expect based upon the guidance that we had provided, we are reporting a 7% year-over-year decline in multi-family loans, and that decline will increase over the next couple of quarters. On the liability side, we achieved $1.2 billion, which is 17% quarter-over-quarter deposit growth, and I’ll talk a little bit more about that in a minute, and simultaneously we are totally balanced on an interest rate risk point of view at September 30 since we sold about $500 million of low-yielding securities and repaid a similar amount of borrowings, significantly improving the interest rate risk profile and putting an absolute floor on our margin. Credit quality remains very strong and basically no change in our pristine credit quality. From a deposit point of view, as I mentioned, core deposit growth as part of strategy accelerated immensely in Q3 2018. We did that for three reasons. Number one…

[Operator instructions] Our first question comes from Steve Moss of B. Riley FBR. Please go ahead, sir.

Good morning. I wanted to talk about the 2.75 NIM target here. Just wondering if you assume any additional rate hikes in 2019 in that number.

Yes, we do. We assume three to four rate hikes between now and second half of next year.

Okay, and then in terms of running off the multi-family loans, do you expect to undertake a securitization in the next 12 months?

Steve, I think Dick mentioned on the analyst day that over the next couple of months, we will be looking at some partnership with some funds or working with an investment bank for continuing with our originations and getting into the securitization business, but that would be for the new originations because as you know, the average yield on our existing portfolio will create some losses which are not acceptable to us because our multi-family business is still a profitable business. It’s just that when you assume four or five Fed rate hikes, it will become not profitable, and that’s where we don’t want to be sitting here four quarters from now blaming why our profitability is what it is, because 34% of our balance sheet today is in the multi-family business. So we will be proactively encouraging our customers to find another home and hanging onto our core customers, and that’s why we are sharing with you that we expect our commercial real estate portfolio to be down about 20% or so by the end of next year and then gradually continuing with that, but the securitization opportunity will be for new business.

Okay. I guess my third question here is on the potential for capital deployment and being above your tangible common equity target of 7% at year end. Will you consider doing share repurchases ahead of that?

Our board probably will put on the agenda capital management options for us at our November meeting. Yes, I would expect that to be on the agenda.

All right, thank you very much.

Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star, two. Our next question comes from Michael Perito from KBW. Please go ahead.

Good morning.

Hey Mike, good morning.

Thanks for the strategic rundown, Jay. I just have a couple modeling questions that I wanted to touch base on. One, with the good C&I and consumer growth we saw in the quarter, would you guys say that all else equal from a loss perspective, that this provisioning run rate is a good level as you continue to remix the loan portfolio as we move into next year?

I think, Mike, consumer loans, we are looking at a reserve and provisions based upon historical losses of similar assets that we are putting on the books, and they are ranging between a low of 3% to a high of 8%. It depends on the quality of those. We will do what is appropriate from a reserving point of view and we are well underway in preparation for CECL also, and at the right time we will give the appropriate guidance to the marketplace. But our reserving will be in accordance with the normally accepted regulatory guidelines as well as GAAP.

Okay. Jay, can you remind us, now that you guys will be potentially holding onto BankMobile for the next couple years here, I know there is a bit of seasonality in their business, I think if I remember correctly the third and first quarters typically have the highest deposit balances. But can you just walk us through and remind us about some of the fee expense and deposit seasonality that BankMobile has as we try to think about our models for the next couple years?

Mike, you’re right - from a deposit side of it, it’s the third quarter and the first quarter, and the same thing goes for debit card interchange income, which is from a non-interest income point of view the greatest contributor in that area. The students are hardly around in the summer time, and that’s why when you see a majority of the third quarter and majority of the second quarter, they are not even on campus and that’s why seasonally those happen to be the weaker quarters of non-interest income, as well as net interest income revenue. However, contrary to what we shared with you based upon feedback that we got from many of the investors and analysts, we are seriously looking at continuation of our segment reporting in 2019, and when we share with you our fourth quarter results, we will give you our final decision. It will make it hopefully easier for you to model where Customers Bank business banking segment is going, and as you know, the Customers Bank business segment contains two divisions by us - one is what we call the CB private and commercial banking division, and the second one is our direct digital bank division. The BankMobile segment will have consumer loans as well as deposits as well as non-interest income. In terms of a couple of years for BankMobile, you’re absolutely right. What I would say is we expect it to be no more than three years.

Mike, I would point you too to Slide 16. It’s got, I think, 11 quarters of BankMobile segment results, so that should give you a good feel of the historical seasonality in the disbursement business, which will continue in future periods, and as we add white label, that’s not going to have the same seasonality so that will be a change as we go as well.

And that was in the investor day deck, Bob?

Yes, it is.

All right, perfect. I’ll look at that.

Of the deck we’ve got out yesterday for the third quarter, not the investor day deck but the deck for [indiscernible].

Thank you. Then just lastly, I saw the comment in the earnings release that the tax rate is going to be--you expect it to be around 24% for fourth quarter. Does that persist into next year as well?

It’s very interesting, we are one of the few banks that are investing in research and development, and so the tax rate is going to be now dependent also on our R&D expenses. Our Chief Accounting Officer just this morning was sharing with us that in 2018, tax rates will be impacted because we have quite a bit of investment in research and development in the year 2018, and what you notice impacting our tax rate in the third quarter was a true-up from some of the adjustments, including a little bit of R&D that we had. So we are looking at lowering a little bit our tax rate, but you should assume the guidance that we’ve given to you.

Okay, thank you for taking my questions, guys. Appreciate it.

Thank you. Our next question comes from Russell Gunther of DA Davidson. Please go ahead.

Hey, good morning guys.

Morning, Russ.

I wanted to ask a question on the margin guide, that 2.75. Jay, does that include the benefit you would expect from the new white label partnership and those low to no-cost deposits you highlighted earlier, or would you expect potential upside to that 2.75 as those deposits begin to come in?

Russell, we said 2.75 plus, and we are laser focused on getting to 2.75, but that did assume the white label being launched in the first quarter. If for whatever reason that timing gets affected, then it can affect a little bit, but we are working on in every area of the company. I’ve already shared with you we are not booking any loans below 5.25 as an example, and we are paying off and letting deposits run off. We are not chasing anything like that, and we are developing deeper relationships with our consumer as well as predominantly our business customers, because we are a business bank. But our strategy is very clear - we expect lots of headwinds in the industry from a continuation of a reasonably flat curve, which could invert, in our opinion, in the second half of next year because the Fed is totally focused on fighting inflation and continuing to increase short term rates, and we want to be ahead of the curve. While the industry is going to experience margin compression, we want to be the outlier which is gradually showing margin expansion. So asset liability management is being managed by us actively on a weekly basis and we have very, very focused execution strategies in place over the years. Yesterday management spent all day at an offsite meeting with every leader of the company, and we will be having these kinds of meetings on a regular basis. We are laser focused on getting to the 2.75 margin.

Great, thank you for your thoughts on that, Jay. Last one is on the community business bank expenses. I think they’re about $36 million this quarter. I heard you say you guys are laser focused at keeping that flat, but how should we think about the 36 going forward? Is it safe to annualize that number and hold it flat? Is it safe to annualize that and assume some sort of growth rate? Just appreciate any thoughts you guys could share on that line item, thank you.

Yes Russ, this is Deck Ehst. The opportunities that we’ve got in front of us to digitize this company certainly will have an impact on our opex. We do expect that throughout the entire year, we will not increase our opex beyond what the amount was for 2018, but how we continue to manage, we’ve instituted several cost saving initiatives throughout the company, we’ve dug very deep into the organization to try to find every place where we can save money, and we’ll continue to do that, it’s part of our DNA. One of the things that we--back many years ago, in fact I think four or five years ago, we were operating at an opex of about 213 to 215, and we put a stake in the ground that we were going to get to 165 by 2016 and the street thought we were nuts, and so did the employees. We managed to get that point - in fact, we’re going to finish out this year at about 135. But we will continue to work on that relationship, and I think from your perspective, you should expect that--you can straight line the numbers, but you should expect that we will not increase our opex in 2019 over what we experienced in 2018.

I appreciate the color there. Thank you for taking my questions, guys.

Thank you. Our next question comes from Bill Desellum from Titan Capital. Please go ahead.

Thank you. I have a couple of questions. First of all, relative to your deposit growth, would you talk about how you accomplished the deposit growth that you had here in this quarter? You gave some guidance for the coming year for deposit growth that seemed quite strong, so I suspect whatever you did to grow deposits this quarter, you view as replicable, but would you address that also, please?

We grew deposits in three areas this past quarter. Like I shared, that was in our private banking groups - we have deposit teams in our private banking group which are totally focused on generating deposits. We have what we call hybrid teams in our private banking group which are focused on both gathering deposits as well as earning assets, and then we have of course some teams which are very much focused on the earning asset side. Our comp plans are such that if you run--if every team runs a balanced bank, their incentive compensation is the highest, so we have a laser focus on generating core deposits through our private banking operations and providing them with all the products that are needed, so that they can sell in the marketplace and attract the kind of clients that we want to attract, both on the liability and the asset side. As Dick had shared on the analyst day, we needed to develop a lot of products as well as continue to recruit the teams. We are in active discussions right now on a very attractive deposit team from a very good deposit generator in New York, and we think that those kind of things will continue on top of the normal activities and that’s why we are shooting for approximately $600 million deposit growth through our various teams next year. The second area happens to be our consumer business, and in the consumer business we see that as an opportunity both on the liability and the asset side, so I think with the digitization of the delivery channels, it is in our opinion very appropriate to expect us to continue to focus on the high income, high net worth individuals because we are a private business bank and we are now also creating a private consumer bank. We are starting with the deposits, but we are not going to have just one product. We will be offering through the digital channels consumer checking accounts as well as investment accounts. I think at the analyst day, I shared with you by the end of the year you should expect us probably to get into a partnership with somebody to offer wealth management services also, so when you combine all that, that’s how I gave the guidance that next year you should expect about $600 million deposit growth through digital channels from the consumer sector. That’s really in the core bank, and in the BankMobile it’s very much oriented towards continuation of having--retaining the customers we are attracting in the student business, as well as getting the white label partnerships launched and signing up more white label partners next year. That’s what gives us the confidence level of building low cost, very low cost deposits at the BankMobile.

That’s helpful, Jay. At the analyst meeting, did we hear correctly that you are really hoping that BankMobile will be profitable in all of 2019, both on the student disbursement side and on the white label-slash-T-Mobile side of the business?

We expect the white label side of the business to be profitable for all of 2019. I think we said, and if I wasn’t clear let me make it clear now, we said that we expect the student business to be profitable by end of 2019. When you combine the two, we are hopeful that the student--that the BankMobile may not have any losses, but it all depends upon the timing of the launch of our white label partner as well as our ability to attract new white label partners in accordance with our plan. The target for student banking to stop the bleeding is by end of next year.

That is helpful, so basically a super simplistic way to look at Customers today is that the traditional bank earned $0.73 or so this quarter, and next year you would have that rate of earnings plus the BankMobile loss going away and, if you’re lucky, some level of profit, and the bank itself growing a bit. But even if you did not, that $0.73 is there any reason that one couldn’t annualize that at--what’s that work out to be, something in the $2.90 range?

Bill, we are not giving guidance, earnings guidance. I’ll leave that up to you to determine that. That’s what we had stated on the analyst day, and like I said, student banking will continue to lose money but we expect the losses to stop by end of next year.

Great. Thank you for taking the questions, Jay.

Thank you. We have no additional questions at this time.

Well ladies and gentlemen, once again thank you very much for taking the time. We are going to be out aggressively meeting with the investment community over the next couple of months - KBW and Sandler, and I think also Davidson is taking us out in the month of November, so we look forward to meeting many of you. Thanks so much. Have a good day.

Thank you all for your attention. This concludes today’s conference call. All participants may now disconnect.