Good morning, and welcome to the Third Quarter 2019 Customers Bancorp, Inc. Earnings Call. At this time, I would like to turn the call over to Mr. Bob Ramsey, Head of Investor Relations at Customers Bancorp. Please go ahead, sir.

Thank you, Britney, and good afternoon, everyone. Customers Bancorp's third quarter earnings release was issued yesterday afternoon along with our investor presentation. Both are posted on the Investor Relations page of the company's website at www.customersbank.com. Similar to last quarter, we will be speaking directly to our streamlined investor presentation. So I'd encourage everyone to pull down a copy. Representing the company on the call this morning are Jay Sidhu, Chairman and Chief Executive Officer; Dick Ehst, Chief Operating Officer and President of Bank; Carla Leibold, Chief Financial Officer; Jim Collins, Chief Operating Officer; Jeffrey Skumin, Chief Accounting Officer and myself, Bob Ramsey, Director of Investor Relations and CFO of BankMobile. Before we begin, I'd 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 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 laws. 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. Jay, the floor is yours.

Thank you very much Bob. And the good morning ladies and gentlemen welcome to the third quarter call. We are really pleased with our strong record earnings growth as well as the maintenance of our superior asset quality, strong control in our expenses, the expected and execution of our strategies resulting in the net interest margin expansion even in this tough environment. And our net interest margin extension is ahead of plan and also the reflection of our improved loan mix, our strong core deposit growth as well as disciplined pricing strategy and an absolute focus on efficiency improvement and risk management. Also, we are really pleased to report to you that BankMobile reached profitability one quarter ahead of time. So I'd like to now draw your attention to Slide 4 and share with you some of the specific accomplishments by the team. First, in this difficult rate environment, we expanded our net interest margin by 36 basis points from year ago and 19 basis points from last quarter. This, as I mentioned earlier, is as a result of the planned execution by us towards favorable shifts in our asset mix as well as a continued growth in our lower cost core deposits. Number two, talking about deposits that grew 5% year-over-year and 9% during third quarter 2019, DDA’s grew 25% year-over-year. Number three, our C&I loans increased 26% year-over-year and 6% quarter-over-quarter reflecting our strong franchise in Business Banking. Number three, our expenses expected – are expected to be flat to down in the Q4 and for the first over last year the core bank expenses grew – have grown only about 3% to 4% and have been flat over second quarter 2019. We consider this is what has resulted in strong positive operating leverage and reconsider this to…

Thanks Jay and good morning everyone. I'll start off with an overview of our third quarter 2019 consolidated results shown on Slide 6. On a consolidated basis, our third quarter GAAP net income available to common shareholders was $23.5 million or $0.74 per diluted share. From a segment perspective, the Business Banking segment earned $22.8 million or $0.72 per diluted share. And BankMobile earned $684,000 or $0.02 per diluted share. Included in our third quarter GAAP results are certain notable charges including $2.3 million of securities gain, which included a realized gain of $1 million from the sale of 95 million of corporate bonds and 1.3 million of positive mark-to-market adjustments on equity securities and the interest-only Ginnie Mae securities that we acquired last quarter upon the bankruptcy of our former mortgage warehouse customer, both of which positively impacted our GAAP earnings by about $0.06 cents. And $2 million of legal contingency of accruals related to recent developments in previously disclosed legal matters which negatively impacted our GAAP earnings by about $0.05. Excluding these items, our core earnings for third quarter were $23 million or $0.73 per diluted share. From a segment perspective, the Business Banking segment earned $0.68 of core earnings per diluted share and BankMobile earned $0.05 of core earnings per diluted share. Moving onto Slide 7, our net interest margin expanded 19 basis points to 2.83% in the third quarter up from the 2.64% reported in the second quarter and 36 basis points from the trough of 2.47% that we reported in third quarter 2018. Our interest earning asset yields increased 19 basis points over the prior quarter, while our funding cost increased 4 basis points. Our loan yields increased 17 basis points driven by increased consumer long yields of 6 basis points and higher multifamily loan…

Thank you very much Carla. I'd like to briefly go over five items with you before we open up – open it up for Q&A. Number one, I'd like to discuss with you the status of the strategic priorities that we had articulated to you at our Analyst Day in October of 2018. And then after that Richard will talk a little bit about our capital allocation strategy and then give you some guidance for the future. Number four, would be our views on the banking environment and where do we fit in. And number five would be our views on our regional and national economy. So starting with the strategic priorities, I'd like to draw your attention to Slide 12 of the deck that we provided to you. And we basically stated to you that very clearly articulated to you our strategy for the next two to three years. And number one was, that our core return on average assets should be in the top quartile of our peer group, which we expected at that time to be about one in a quarter or higher in ROA. And we said that we would achieve that in two to three years. At that time, as you know, our margins were very low and our return on assets was about 60 basis points. We are pleased to share with you that the return on assets today are close to 1% and that's up significantly and we are well on our way to achieving at least 1.25% return on assets over the next few years. Second thing we mentioned to you was, the importance of NIM expansion, irrespective of the slope of the curve and irrespective of the overall level of interest rates. And we set a target of 2.75% or greater…

Yes sir, thank you. [Operator Instructions] Our first question comes from Steve Moss with B. Riley FBR.

Good morning.

Hey Steve. Good morning.

I want to start asking on the consumer loan growth here, it was really strong this quarter. I'm wondering, what were the drivers and what were the types of yields you're seeing within that portfolio?

It was – you mean it was strong this year, just wasn't the best quarter for us. But we are seeing, we are not putting on any consumer loans at all which are even close to subprime. Our average FICO score remains in excess of 740. We are originating personal loans, as well as doing student loan refinancing. And on a regular basis, we develop that technology and we are expected loan losses from these categories remain in line with our expectations and the provisioning that we had done. The net yield to us after loan losses and whatnot still is right on target with our expectations. And we will remain very selective in this business and when we have 1 million plus consumers banking with us, as well as our knowledge and expertise in those niches, as well as our White Label partners that we expect to add on and their desire to look at selective consumer lending, we think this is selectively a growth market for us. But we will not have more than somewhere like we indicated to you in October of last year. Right now, as consumer loans are about 6% of our – of our loans of 7%, somewhere in that area. And we think can be given you a guidance that they will not exceed 15% of our loans over the longer period of time. And we remain highly confident now that that's a good allocation of our balance sheet in a selective way at this time.

That's helpful. So I guess just as we think about this $3 target for next year and you're pretty much there on a run rate basis here this quarter. Given the good consumer growth you're seeing, it's probably fair to assume the trend we saw this quarter granted – it's a slow down, it's still a good number, probably continues through 2020.

We're not going to give line by line guidance, but we are very confident about our $3 for next year. And I congratulate you to be one of the few guys who saw that coming. And so we think that we will be selective and like we mentioned that we are going to take this gradually from about 6% of our, 7% of our assets to a maximum of 15% over a period a time in the consumer loans. But our focus remains in core C&I lending. And you can see that 47% of our total loans are commercial loans. When you add the loans to privately held mortgage companies and that's where we continue to see huge opportunities. And in spite of the flat curve to an inverted curve, we're looking at niches, whereby we can actually offer medium-term to fixed rate loans with a higher margin than existed before the decline in the five year T-bill. And so that's where we see our contribution towards our higher margins over the fourth quarter and next year. And we saw good growth and very high quality C&I loans in the third quarter. And we’re actually expecting our fourth quarter to be another very good quarter for C&I lending. And that will contribute towards higher margin for us. And that also comes with DDAs.

Okay. That's helpful. And then on the expense guide, thinking about it flat quarter-over-quarter here. It seems like several of the expense items were one time as in nature, regarding like – for example the crime ring. And just kind of wondering, where are the investments that might push up expenses here until the fourth quarter if you back up that crime rate expense and some of the associated professionals fees? And then on the second thing, any color you could give around the technology cost saves that occurred this quarter?

I think the overall – Carla, you can please add to this. But the overall initiatives that we had and we shared this with you and your colleagues in the investment community in October of last year, an extreme focus by us on productivity improvement and defusing in the digitization efforts, as well as looking at every single expense category. And we clearly shared with you that we will be willing to make investments where we see revenues within the 12 to 18 months period exceed the investments that we are making. So technology improvements have come in with more effective use of technology by us working with our technology partners to make our fixed costs lower and our variable costs tied to continued increases in revenue. That has been a major driver by us in a focus overall. And at the same time looking at every area of operation and seeing how can technology improve us in our customer experience, as well as customer attraction, and as well as our overall cost structure. And that we've also partnered with a very large provider of technology services towards our digitization efforts, we also have then partnered with another technology company which specializes in technology improvements for regional banks and we are executing a lot of things right now, which will result in better customer experience, as well as productivity improvement. At the same time, looking ahead, why are we confident that technology costs and technology improvements will continue? We are very much engaged at the CEO levels with our technology partners to come up with a strategy for the future. And the cloud-based core platforms, you should expect some announcements by some banks and we are going to be one of those banks over the period of time which is going to be looking at cloud-based cores over the next couple of years. But that is existing right now and you are seeing tremendous improvements in technology, you should expect from companies like FIS and whatnot. And we think they are very well positioned and they recognize the changes that are taking place and we are in direct dialogue with them and that is how we are managing our core expenses, as well as our core improvements in service.

Okay. Thank you very much.

Our next question comes from Michael Perito with KBW.

Good morning.

Good morning, Mike.

Sorry about that. So I had a few questions. First I had a kind of a segment reporting question. I was just curious, I know – I believe actually that you guys allocate some of the consumer balances technically onto the BankMobile balance sheet. And I'm just looking at the BankMobile segment reporting and the provision expense has kind of jumped around a little bit, it was lot higher last quarter than this quarter. I'm just curious, how do you guys allocate the consumer loans and the corresponding provision across the two entities in your segment reporting?

So we took the consumer loan additions that were out at this quarter and that was really applied to the Business Banking segment. And so from BankMobile segments consumer loans remains relatively flat. So that provision amount really reflected the amount of loans that had been added from the first quarter of our – in the first half of 2019.

And Mike just add to that, so you're right in the first half the year the consumer loan growth all was in BankMobile, it was only the third quarter, that's the additions happen on the bank side of the house.

God it. And also…

But from a strategy point of view – sorry, Mike. But from a strategy point of view, our goal is that 80% or so of the funding that's coming from BankMobile will be in the consumer loans, rest will be in some kind of a liquidity oriented asset product. And then over a period of time you could see about a 10% or so of the Customers Bank business segment to be in consumer loans, but that's going to be over a period of time, and that's how we see the overall allocation. So you should expect quarter-to-quarter some stuff, but we are disciplined in that and that's why we are doing a customer segmented analysis in line with that.

Got it. That's helpful. Thank you, Jay. And then, so just, as we think about the BankMobile balance sheet, I know there is some modest growth on the disbursement side, but I think that piece of the business is a little bit more predictable, obviously, as T-Mobile continues to grow basically rough numbers, but 80% of that incremental deposit growth you guys would hope over time to be allocated to consumer loans, which will have to be provided for with the other 20%, you'll be kept in fairly short liquidity instruments.

That is correct. Absolutely correct, Mike.

Okay. And then I know you guys are typically limited in what you can comment. But obviously the White Label deposits have continued to ramp up, it did look like, at least on $1 basis though, that was a little slower in the third quarter than in the second quarter. I was just curious if there was any insight you can provide us onto kind of how those – how that program is progressing against your expectations? And if there is still a lot of momentum on the T-Mobile side as you guys see it to kind of continue dropping those balances going slower?

No question about it. Right now, Mike, we are in the investment phase and as you know all we have is one check account, that we are managing for our White Label partner. And we have – there is a roadmap that we've discussed and our White Label partner has discussed with us that they would like to see. And there is a plan that's been put together in accordance with that roadmap. And once the execution starts on along at line, it’s better to have all your product features, as well as your strategy from a product development point of view aligned and before you start any kind of aggressive marketing. And then the plans are that we see our White Label business to be EBITDA positive within the next year to two years. And – but you should continue to have us remain in the investment mode during this time period, because we are not just with one White Label bank. We are in negotiations with several other White Label partners right now.

Okay. And then just lastly, I know there is probably about 1 billion of mortgage warehouse that excuse me, will pretty seasonally come right off and help bring your total asset base down. But can you help probably bridge the gap on kind of how – I believe you guys mentioned in the release or in the deck somewhere that the plan is still to be kind of sub 10 billion at year end. Can you just walk me through kind of how we get there and what if any impacts we can expect in the model to kind of make that happen?

Yes. So what we've said is that continued one off of the multifamily portfolio, so we've reclassified about 500 million of multifamily loans to held for sale. And then we expect at least 300 million or more of just natural runoff combined with what you had said about the natural contraction that happens in our mortgage warehouse business just in the winter months. And then also we're expecting some runoff for sale of some single-family residential mortgages.

And those would be offset with some – they would be offset with some increases in C&I lending and that's why – that's all you get to the 10 billion.

So you guys are 11.7 billion on a period end basis at 3Q, that comes down to 10.7 billion or so just from the mortgage warehouse balances probably normalized into 1.5 billion or 1.2 billion, where they were in the first quarter. And then you have the 500 million of multifamily that you expect to move in the next couple months and then have another 300 million, if I hear you right, that's going to run off in the next couple months and that will pretty much get you there. And then, there might be a couple of other moving pieces, but is that the real way to think about it?

Correct.

Yes.

Okay. Thank you guys. I appreciate the color.

Thank you.

Our next question comes from Russell Gunther with D.A. Davidson.

Hey, good morning guys.

Good morning. How are you?

Doing well. Thank you, Jay. I wanted to follow-up first on Mike’s question about deposit growth within the current T-Mobile White Label partnership. So is this the type of growth rate we should expect going forward throughout 2020 in the fourth quarter and through 2020? Again, just isolating for the T-Mobile. And then a second part of the question would be just the average deposit or deposit size relationship.

Well, we are not going to be happy with this kind of a rate in 2020. That's all I can say to you. And so we are not giving line by line guidance. So that's why our plans are not to see this kind of a growth rate in 2020. So I hope you can read between the lines and come up with what you think might be the case, you know the total market potential and you know the spent of that brand. And we’ve also mentioned to you that we are – it takes about 12 to 24 months to do all the analysis and sign up White Label partner. And so we are in negotiations with few and so by the second half of next year, it takes that long before we would be in a position to tell you, but we see opportunities for – pretty strong growth opportunities for BankMobile.

I appreciate the thoughts there Jay. And are you guys, just a follow-up, are you able to share with the kind of average deposit relationship from the size perspective?

It's – right now it’s over $1,000.

Okay. Thank you. And then I wanted to, if I can just go back to Steve's question on the expenses. You guys gave a lot of good guidance, but I want to make sure I am following here so, are you able to give us a sense from a consolidated basis, what that quarterly non-interest expense number could be heading into the fourth quarter and how we should think about that in 2020 and relative to that $3 earnings target?

Yes. So what we’ve said for the fourth quarter, that we're expecting them to be flat to down from the average or what you've seen from the first nine months of 2019.

Okay. And that's on a consolidated basis. Great, thank you. And then last question for me guys, in the $3 earnings target is there an assumed redemption of some of the preferred in there or would that be upside to that $3 number?

I think what we want to say is that we are looking at the best ways for a proper capital allocation point of view. And the actual strategies for redemption was is reissuing it on the lower rate or all those kinds of options, everything is on the table. We are very focused on maintaining strong capital ratios and Tier 1 ratios and so we have not factored that in as an absolute requirement that we are going to use debt capital or something else to redeem that and that is needed for the $3 number. Yes. We can get the $3 as you – I think Mike mentioned or somebody mentioned earlier that we are pretty much on that run rate guys. And so …

I appreciate the clarification. I appreciate you taking my questions guys. Thanks very much.

Our next question comes from Bill Dezellem with Tieton Capital.

Hi Bill.

Good afternoon, Bill Dezellem, Tieton Capital.

Yes, Britney, we can hardly hear you.

Are you able to hear me now?

Yes. Bill, we can hear you now. Thank you. How are you?

Very well, thank you very much. So I wanted to circle back and continue down the BankMobile conversation. What lead to that business being profitable one quarter earlier than what you had originally discussed.

There are the drivers of profitability. As you know those are the business as well as your margins, your efficiency improvement opportunities and maintaining the overall quality. So in the past as you know from a margin and allocating the liabilities for BankMobile into assets which are appropriately allocated to that business. So we were setting aside a lot of provision expense and not really getting the return. So we had packed that in, we knew it, maybe some other folks on Street and some of the analyst would file a little bit, but we believe they all understood it too and everybody is now seeing the results. Some people were just off by a quarter or two, but overall we are just executing what the street would have expected us to do based upon numbers, so it's a little bit ahead of the quarter. We think it could have even been stronger, but we expensed certain items this past quarter and we are not going to see some of those unusual expenses, but there will be a little bit, perhaps less revenue on our side because of the seasonality in the next quarter. So you shouldn't expect our profits from BankMobile to be up by couple of million dollars, but still it will be stronger hopefully than what you saw in the second quarter and the third quarter, our guidance remains [Audio Gap] lower revenues, slightly lower revenues [Audio Gap].

And Jay, that actually is a good lead into the next question which is, are you anticipating that BankMobile will on a go-forward basis be able to be profitable each and every quarter or will there be some seasonality with some of the lower disbursements quarter that you did not expect them to maintain profitability?

Bill, till we have matured in our other areas or other verticals for BankMobile, the student business will remain to be impacted by seasonality. So our objective is that, we will offset that volatility by the way having a stronger profitability starting to come after a couple of quarters from our White Label partners business. There is another new vertical that to be are developing, which we don't want to talk about today and which is very, very exciting opportunity for us. And so with all that said, we want to gain a product, but next year BankMobile will be profitable for the entire year and that's the most important thing.

Great. Thank you. And then your – on the Customers Bank side, the online app that you have developed, would you discuss the momentum that you are seeing with that and whether it is now holding steady or whether you're seeing some level of acceleration or deceleration from the kind of that first year push?

Bill, it's a very good question. I'm glad you kind of asked it, because a majority of the banks right now are experiencing a margin compression. And they are experiencing the margin compression because they were very asset sensitive and they don't see a growth in their business lines and they don't see growth in deposits and they are – that's why they are trying their best to accelerate the reduction in their rates that they're paying for deposits, but they never increase those deposit rates when the rates were going up. They improved their profitability and got to all sorts of accolades from the investment community for expanding their margin because they were assets sensitive. But that happened because they had loans which are at valuable rate and they were proud of themselves for not having to raise those rates, while now what's happening is that those same loan rates are coming downtown faster and they cannot, because they never raised the rates by much. So they are having a very tough time keeping. So that creates an opportunity for someone who wants to attract customers. And like we shared with you on the last call, when every analyst was asking everybody how quickly are you going to be able to decrease your rates? Because you want to work out what they're in into your strategy, earn expectations from the street and we were the ones who said, hey, we look at this not quarter-by-quarter, but for a year-by-year and we are well positioned to take advantage of this kind of a strategy and you shouldn't expect us to jump in. And because we can see improvement in margin coming from the asset side, as well as little bit coming in from the liability side. So bottom-line is we have a plan and we are going to be executing that plan gradually, but for right now, while we are in the mode of shrinking our balance sheet. We are not executing our strategy on stronger growth and kind of market rate deposits but we are into low cost deposits, but in starting 2020, I think you'll see more clarity about our entire digital strategy for customer acquisition.

Thank you.

Our next question comes from Frank Schiraldi with Sandler O'Neill.

Good morning. I wanted to ask about growth in BankMobile over the next 12 months or so, Jay it sounds like you guys have a lot of opportunities on the White Label side, but given sort of a lag to get these things to market the majority of growth or the driver of growth in deposits next year would be more so the current partnership. And, I am just wondering what you think the, what is the driver to move that growth rate higher? Or is it just sort of the next phase of marketing or just as word of mouth growth, just wanting to get your thoughts there?

I think its product enhancement, features enhancement, followed by marketing.

Okay. And in terms of the $4 million the fraud related loss in the quarter, could you help us think about going forward, is there some level of this sort of fraud related expense that you anticipate continuing just given the very nature of the business and you'll work through that in terms of profitability, you guys were profitable in the quarter even with it or does that just basically in your mind go back, go down towards minimal or just back to zero.

I think if you look back in our financials, we've had about a $1 million to $1.25 million[ph] of these kinds of like downs. And this is not just fraud we call it operating losses, so these are disputes on Regulation E, where a lot of people say, I never charged this and you put whatever reason, you got to follow the regulations and those take advantage of you or whatever. And but we are very committed to following the regulations, as we think the people are very committed, many few, but fortunately there are few very committed to taking advantage of regulations. So that's why $1.5 million to about $2 million in that range you should expect on a quarterly basis going forward.

Got it. Okay. And then just finally, and sorry if I missed it, but just if you could just remind me, what the – you got there quarter early in terms of profitability. So just in terms of the thinking of going-forward the timeline for BankMobile and sort of the end game there as part of customer's balance sheet.

Frank, let me just share with you, just Google, joint venture banks and you will learn a lot. I'm not saying that we exceed with evaluations, but the interest in the marketplace is so high and it would be prudent for us to continue to evaluate options and alternatives and that's exactly what we are doing.

Okay. Just trying to, I guess 2020 could be a year where something could potentially happen before year end. I mean is that fair?

You have a pretty good guess.

All right. Thanks, Jay.

Thank you. Our final question comes from Steve Moss with B. Riley FBR.

I just want to follow-up on interest bearing deposit costs here with the fed cutting, how quickly could those reprice down?

We are very focused Steve on generating low cost deposits and bringing down the cost, so that you should expect our cost of funds to start to show some decreases more, more so starting first quarter, then you'll see them in the fourth quarter and but so no question about it, I think it'll be the longer period of time because we are going to use the shorter-term timeframe to attract more customers and to develop deeper relationships with them and to focus on the asset side of the balance sheet for this quarter and perhaps next quarter to continue to show margin expansion and after that the liability side of the balance sheet also contributing more towards that what you've seen so far.

Okay. Thank you very much. Appreciate that.

Thank you everyone, this concludes today's question-and-answer session.

Well, thank you very much ladies and gentlemen. If you have any other questions please don’t hesitate to call any of us. Have a good day.

Thank you everyone, this concludes today's teleconference, you may now disconnect.