Jay Sidhu - Chairman, Chief Executive Officer Robert Wahlman - Executive Vice President, Chief Financial Officer Luvleen Sidhu - Chief Strategy Officer, BankMobile Joe Noyons - Investor Relations, Three Part Advisors.

Bob Ramsey - FBR Bill Dezellem - Tieton Capital David Roche - [unknown] Matt Shouldice - [unknown] Steve Emerson - Emerson Investment Group Frank Schiraldi - Sandler O’Neill Kyle Peterson - FBR Mike Pareto - KBW.

Good morning and welcome to the Fourth Quarter 2016 Financial Results Earnings Call for Customers Bancorp. Today’s call is being recorded. At this time, I’d like to turn the conference over to Joe Noyons. Please go ahead..

Thank you Dana, and good morning everyone. Customers Bancorp 2016 full year and fourth quarter earnings release was issued earlier this morning, as 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 Luvleen Sidhu, Co-Founder and Chief Strategy Officer of BankMobile.

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 or results to differ materially, including the risks that 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 the 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 Chief Executive Officer, Jay Sidhu. Jay, the floor is yours..

Okay, thank you so much, Joe. Good morning ladies and gentlemen. Thanks so much for taking the time to join us for the 2016 year-end financial results. I’m pleased to share with you that net income to common shareholders for the full year 2016 was $2.31 a share, and that’s $69.2 billion. We took some steps to really--there were some unusual items.

BankMobile has been classified by us as held for sale or as discontinued operations, because within the next 60 days we hope to announce a divestiture of BankMobile.

At the same time, about three and a half years ago we had gotten into a partnership with Religare Enterprises in India, that was more of a correspondent banking type thing to help us benefit our customers.

Religare’s business strategy, they could not execute it, so we decided to exit that strategy at all [indiscernible], and hence there was an OTTI charge so that it gives us the flexibility to exit the Religare investment and move on.

If you take out some of those and the normal employee benefit share-based accounting results for the year 2016, our earnings per share were $2.46; for the fourth quarter, our earnings per share were $0.64.

As you could see from our financial results, we slowed our growth rate in the second half of the year to build a stronger balance sheet [indiscernible] capital base and a much stronger risk management infrastructure, and also we positioned BankMobile into a successful company that can be divested so that both customers as well as BankMobile can grow and thrive without the Durbin amendment restrictions.

So during the year, we built upon and we added to our core business franchise. We added teams in all our various markets. The teams covered commercial loans and deposits in Pennsylvania, New York and New England, and that’s how we were able to achieve strong loan and deposit growth.

The deposit growth continued throughout the year, although our loan growth was concentrated more in the first half of the year. So we’ve strengthened our balance sheet by growing deposits by nearly 21% while growing loans by nearly 14%.

So with that introduction, I’d like to hand it over to Bob Wahlman, our Chief Financial Officer, and after Bob, Luvleen will comment on BankMobile, and then Dick and I will be completing the entire presentation and opening it up for questions and answers from anybody.

Bob?.

Well thank you, Jay. As Jay noted in his comments, Customers accomplished many great things in 2016 that enhanced shareholder value.

We see the benefit of those accomplishments in both the Q4 2016 and full-year 2016 numbers, but because of certain decisions that were made during Q4 2016 that set the stage moving forward into 2017, we have to look a little bit deeper to see around a couple of things.

I believe the best way to see through all the noise in the financial statements and in the earnings release to the substance of what was accomplished in 2016 and Q4 is to walk through a little bit on the three key decisions that are driving the numbers and presentation changes, and then I’ll drill down into the core numbers.

First, as described more completely on Page 9 of the earnings release, Customers has decided that it will exit or reduce the 2013 investment that Customers made in Religare Enterprises Limited common equity.

That investment has been mark-to-market, but that mark-to-market was previously captured in the equity section of the balance sheet as part of OCI, or other comprehensive income.

The decision to exit or reduce means that the loss that has been incurred to date that was captured in OCI on both the value of the security and the foreign exchange currency rate of $7.3 million flows through the income statement during this period, the fourth quarter of 2016 or full year 2016.

As Customers does not have any potential investments at the holding company that would generate offsetting capital gains, Customers is not able to realize any tax benefit related to this loss that would moderate the financial statement effect of the change.

We are considering some strategies regarding how the current investment may be resolved that could lead to recapturing the full economic investment of the original investment, but nothing that can be considered in the accounting for the equity investment at this point in time when the decision was made to exit or reduce that investment.

The second unusual item is Customers decided to early adopt ASU 2016-9, Improvements to Shareholder Share-Based Accounting, in Q4 2016.

The adoption of this standard in Q4 2016 resulted in capturing in the income statement the difference between the market price of the stock awards at the time of the grant and the market price of the stock awards at the time of the vesting in the income statement, specifically, as a reduction of income tax expense as was provided in the literature.

In our particular case, as we have had significant appreciation in shareholder value and we had a significant number of shares vest in Q4 2016, we had the $3.6 million effect in the fourth quarter.

The adoption--and then we also had a full-year benefit from adoption of this standard of $4.2 million, so $600,000 benefit in the prior three quarters of the year.

The third significant matter considered in the financial statements was the classification of BankMobile businesses held for sale, resulting in reclassification of the financial statements into continuing operations for the ongoing bank and for discontinued operations, which is for BankMobile.

The reason this classification was made is because we do--according to the accounting literature, when we have disclosed and have the expectation to be able to divest within one year the sale of a segment, that we would need to account for that as discontinued operations.

This classification difference of continuing and discontinued operations is then driven down into each of the supporting schedules of the financial statements; so for instance, the deposit schedule that you’ll see in our schedules will include only deposits from continuing operations, and they exclude deposits from discontinued operations unless we specifically state otherwise or include them as a separate amount.

This classification of BankMobile business as held for sale in some ways greatly complicates their earnings release discussion, but in some ways it actually helps in that it makes it very clear what the ongoing--or much more clear what the ongoing performance of the bank will be in future periods as we look forward.

It kind of gives us a look, when you look at continuing operations, how the bank will operate and how the bank will perform on a going-forward basis after the divestiture. So these preceding comments I made attempt to help the investors understand these changes so that the numbers can be more easily and more clearly understood.

Let me summarize the overall results as I understand them, and then I’ll drive down into the business drivers. Some of this is repeating Jay’s comments, but maybe with a little bit of a different view, having walked through the different significant items.

The straight GAAP numbers, including all the matters discussed above - that is, the impaired charge and the 2016-9 benefit included in those numbers, Customers reported net income of $69.2 million or $2.31 per share for 2016, and net income of $16.2 million or $0.51 per share in the fourth quarter.

Adjusting these GAAP numbers to exclude both the impairment charge and the 2016-9 benefit, and this is only to help understand and make this comparison of Customers results for the fourth quarter and full year easier to prior periods as those are still GAAP numbers that are include in there, but those earnings excluding those two items were the $72.3 million or $2.46 per share for full-year 2016 and were $19.9 million or $0.64 per share for fourth quarter of 2016.

As I noted before, this is the best comparison I think to what had previously been reported, excluding these two items.

Looking forward to what Customers could be reporting post-BankMobile sale, so taking the earnings numbers just from continuing operations for Customers Bank but also considering the preferred stock dividend, which of course is another GAAP number, earnings were $81.3 million for the year or $2.76 per share for 2016, and were $23.4 million per share--excuse me, $23.4 million or $0.76 per share for Q4 2016.

Of course, this does assume that we can replace the deposits that we will be losing with BankMobile with like-cost deposits. So that gives us all the headline numbers.

Drilling down into the drivers of Customers improving earnings is not as complicated if we look at the continuing bank operations separate from the BankMobile held for sale or discontinued operations results, and we exclude the impairment charge and the ASU 2016-9 benefit.

So taking this approach and walking through the major categories of the income statement, 2016 net interest income from continuing operations was $249 million, an increase of $53 million or 27% from comparable 2015 net interest income.

Average assets for 2016 were $1.8 billion greater than average assets in 2015, and that drives the principal amount of the net interest income growth, which was $53 million; but also, the net interest margin widened by 3 basis points year-over-year, and that was also a notable contributing factor the increased net interest margin.

Average loans grew as total loans for the warehouse portfolio were up $375 million. Multi-family loans were up $212 million, C&I loans increased nearly $250 million, and non owner-occupied loans were up over $225 million.

The basis point widening is largely the result of higher yields received on the mortgage warehouse portfolio, but I would like to note that we did maintain our pricing and underwriting in all the loan portfolios.

Turning just briefly to asset quality, asset quality has been a strength of Customers Bank for several years at this point in time, and asset quality continues to remain exemplary as non-performing loans were only 22 basis points of total loans.

Talking about the provision to loan losses related to asset quality, the 2016 provision for loan losses was only $2.3 million for the year. The 2016 provision reflects a modest $690 million growth in loans held for investments.

Remember, the loans held in the warehouse portfolio are not held for--are held for sale, so they don’t have an allowance for losses because they are mark-to-market each quarter. There was no noticeable deterioration in the portfolio taken as whole - some isolated loans, so not a lot of specific loans were--specific reserves were required.

Customers also recovered over $2 million in previous charge-offs in 2016, further reducing the net provision for loan loss numbers.

In summary, Customers methodology for estimating the provision for loan losses in 2016 was not significantly different from the methodology we had in 2015, but it was the slower loan growth combined with the recoveries and maintaining the quality of the portfolio over time that resulted in the lower provision for loan losses.

Turning to non-interest income from continuing from continuing operations and also excluding the previously described items, specifically the impairment charge, non-interest income increased $2.9 million in 2016 to $30.4 million.

Increases in the gain on sale of SBA loans of $1.7 million and a $1.2 million increase in the mortgage warehouse transaction fees due to the increased volume, because it was a very robust year for mortgage loan originations, were offset--those were the positive ones, and they were offset in part by a decrease of [indiscernible] income in 2015 as we received a one-time benefit in the fourth quarter of last year from our bank-owned life insurance policies.

The rest of the variance is made up of small changes in a number of other income categories. Turning to non-interest expense, non-interest expenses from continuing operations were up $24 million in 2016 over 2015.

Salaries and benefits from increased headcounts, raises and promotions accounted for nearly one-half of the increase, but most of the other expenses continued to increase, reflecting the continuing growing bank.

It is worth noting that the efficiency ratio from continuing operations, where Customers has what we believe is a sustainable advantage relative to most all of our peers, decreased in 2016 from 48% for 2015 to 46.9% at the end of 2016, even though we did have these operating expense increases.

So our asset growth and our revenues that were generated continues to grow faster than our expense growth, more than two times faster than our expense growth. Turning our attention then to discontinued operations, so I’ve talked about continuing operations and focus on discontinued operations briefly, which is BankMobile.

The reported net loss for 2016 for BankMobile on the face of the GAAP income statement is $9 million.

That is a GAAP number, and what it does it is excludes all intra-company transactions, so it excludes the intra-company allocation for interest income that the continuing operation would have paid to a third party for the funding provided by BankMobile discontinued operations.

The segment reporting that we include in this package on Page 22 includes the intra-company allocation for interest income and indicates a loss for the year of $4.8 million, attributable to BankMobile. That is how BankMobile views the management performance, and that number is in line with our beginning of the year projections of the business.

Turning our attention quickly to the fourth quarter and still speaking to continuing operations separately from discontinued operations, and still excluding from the discussion the impairment charge and the ASU 2016-9 benefit which we talked about upfront, net interest income increased $10.7 million.

Virtually all of the increase resulted from Q4 2016 average loan balances running at $1.4 billion higher than Q4 2015 loan balances, although we did enjoy a one basis point increased or widening of NIM Q4 2016 over Q4 2015.

Regarding the provision for loan losses of a net recovery of $300,000, a provision of $600,000 was made in the fourth quarter for the $125 million increase in balances that are subject to loss reserving, and we also had $900,000 of provisions made for credit deterioration in the fourth quarter.

However, these provision amounts were offset by recoveries that totaled $1.8 million, so hence the $300,000 net benefit in the provision for loan and lease loss line. It was because of specific recoveries, cash recoveries that were received. There were again no significant changes in Customers loan loss reserving methodology.

Non-interest income decreased $1.1 million in Q4 2016 compared to Q4 2015.

That decline resulted from the $2.4 million benefit received on our [indiscernible] policies in the fourth quarter of 2015 that we did not receive again in the fourth quarter of 2016, but that reduction in revenue was offset by Q4 2016 increases from mortgage warehouse fees, gains on loans of sales from SBA sales, and various other revenue sources.

In Q4 2016 compared to Q4 2015, non-interest expenses or operating expenses increased $1 million.

The increases of $2.8 million for salaries and benefits and $0.8 million increase for occupancy expenses were offset by decreases in FDIC assessments and other fees, and non-income tax taxes that we have to pay of $1.3 million, and technology costs reduced $1.2 million.

The BankMobile discontinued operating results generated a GAAP loss of $3.5 million. Again, and as I previously noted in describing the year-over-year performance operations, the GAAP results do not include the intra-company payment of the bank to BankMobile for the use--for the borrowing, essentially, of the BankMobile deposits.

The transfer is included in the segment reporting schedule on Page 22, and the BankMobile segment incurred a net loss of approximately $2 million for the quarter if we consider the transfer pricing.

This performance is not what was expected for the quarter and results primarily from the deposits for certain accounts at a previous Higher One bank partner being refunded to the depositors, and those accounts were not available then to generate the fee and usage income that was expected.

So that’s my comments in regards to the earnings numbers for 2016 and for year-ago quarter 2015. At this point in time, I’m going to hand it off to Luvleen Sidhu, BankMobile’s Chief Strategy Officer, who is going to provide some additional insight into the activities of the BankMobile business segment. So Luvleen, you have the microphone..

Thank you, Bob. I would like to spend a few minutes providing you with an update on BankMobile technologies. In this six months following the close of our transaction with Higher One, we were able to open approximately 600,000 new checking accounts.

Additionally, we signed 16 new contracts with colleges and universities, representing approximately 130,000 additional students who will be offered our BankMobile Vibe product.

We continue to focus on marketing strategies to increase brand awareness of our student account, including a nationwide campus ambassador program, branding 200 on-campus ATMs with BankMobile branding, on-campus print advertising as well as social media advertising, to name a few to help us to continue to grow customer acquisition.

Additionally, we have made product enhancements, including offering our customers a Life Success package whereby we provide the resources and tools to help them build skills, get jobs and save money. We want to be more than just a financial services provider to our student customers.

We truly want to provide them with the resources to really succeed in life. As you all know, we are focused on creating customers for life and retaining students post-graduation, which is different from the old Higher One model.

We have seen a lot of positive data to support that we will be successful in doing so, with over 80% of our newest customers saying that they are very likely to somewhat likely to keep their BankMobile accounts after graduation.

Additionally, we have seen our net promoter score, which is an industry-wide way to measure customer satisfaction increase from about 28 to over 50 in a very short period of time. In comparison, most of the large banks we are familiar with have negative net promoter scores to single-digit positive scores.

Again, this underscores that we are truly changing the perception of these students, winning their loyalty, and are confident in our retention capabilities. On a separate note, during the fourth quarter of 2016 we experienced a loss instead of achieving profitability for regulatory reasons.

We were required to close former Higher One accounts that were at WEX, Higher One’s other partner bank. This led to a temporary setback in deposits and fee income. We anticipate that it will take up to a year to fully recover from the ramifications of this regulatory challenge.

That being said, we are hopeful that we will be close to break-even by the end of Q1 2017. As of December 31, deposit levels were at approximately $456 million. December 31 is usually among one of the lowest deposit levels in the year for us. In 2017, we expect deposits to range from $400 million to $1 billion.

In the last six months of 2016, our total non-interest revenues have been a little over $33 million. Since we have no loans in our book, it’s difficult for me to give you a net interest income number, but the numbers presented to you by Customers Bank have simply used transfer pricing.

Our expenses during the same six-month period were higher than anticipated due to the regulatory related costs and duplicate technology platforms. Since we expect to merge the technology platforms by the middle of 2017, these expense levels are expected to remain somewhat elevated until that time.

In terms of team expansion, this past quarter BankMobile recruited Bob Fryc of Managing Director of Consumer Credit. Bob joined us after several years of experience at Fleet Boston, Sovereign, and Santander banks. BankMobile intends to start offering consumer lending products, including credit cards, in the second half of 2017.

In early February, BankMobile Labs, led by Kirk Barrett, our CTO, and Dan Armstrong, our Chief Digital Officer is launching BankMobile 2.0, our in-house developed mobile banking app.

With this new app, we have focused on creating a banking application that transforms banking from something you feel you have to do, to something you feel like you want to do. We have done this by reimagining how you interact with your money on a daily basis using cutting edge UI and design techniques.

We have also added a higher level of personal financial management categorization to help you better check your finances. Additionally, we have simplified our line of credit product to make credit accessible to think file millennials who are underserved currently by traditional banks.

Most importantly, we have ensured that our app has end-to-end security and encryption to protect our customers. In terms of our strategy, we will continue to pursue our direct-to-consumer strategy in the coming months, but we will also continue to develop our B2B2C strategy which focused on acquiring customers through white label banking.

Through this strategy, we help our distribution partners offer a branded banking experience to their customers and/or employees to increase stickiness and engagement while also providing them with data analytics and an additional revenue stream.

We believe our distribution partnerships with approximately 800 colleges and universities has been the most effective way for us to attract customers, and we will continue to identify and execute such partnerships in the future.

Over the next few months, we will be focusing our efforts on divesting BankMobile so both Customers and BankMobile can grow and thrive without Durbin amendment restrictions. We have been able to build BankMobile into one of the fastest growing and most successful digital banks in the country in a relatively short period of time.

We are excited to continue to innovate and push forward to take advantage of significant growth opportunities that continue to lay ahead. I look forward to keeping you updated as we execute on our divestiture plan over the coming months. Now I’d like to hand it over to our CEO. Thank you..

Thanks Luvleen.

As you can see, there’s lots happening at BankMobile, and we really wish at Customers Bancorp that we could keep this within our portfolio because, as Bob Wahlman had shared with you on our analyst day, within the next two to three years, we do expect this company to make about $30 million after taxes, which is just from their execution, and execution strategies in a tough regulatory environment sometimes does get hampered by certain regulatory rules, and that’s essentially what caused a little bit of a setback in the fourth quarter for BankMobile.

But BankMobile remains very, very interesting, exciting. Luvleen was nice to say it’s probably the most successful digital bank in the United States. I can tell you in our opinion, I’ve been invited to speak, and Luvleen and I have been invited to speak throughout the world.

It’s probably one of the most successful digital banks in the world, and where we continually learn. We have been invited to be a part of a group of digital bankers throughout the world, and we are exchanging our thoughts and ideas, and this is going to be a very exciting opportunity.

Unfortunately, we have to divest it because Customers Bank’s principal business is business banking, and business banking’s opportunities are huge for us and hence in the next 12 to 24 months, we do expect to cross the $10 billion mark and we do want to see BankMobile continue to thrive.

So let me give you an update on where we stand with the divestiture. Within the next 60 days, we are very hopeful that we will be able to announce to the street our divestiture, details of our divestiture.

We are in final negotiations with a partner right now, and though no assurances can be made obviously that this will happen, but we are hopeful that it’s going to happen.

As a result of that, the street should expect a pretty significant gain to Customers Bancorp coming from that transaction, essentially further strengthening our capital base and our balance sheet at Customers Bancorp, and at the same time providing a lot of headroom for BankMobile to continue serving consumers and millennials and middle income Americans like it has done so far.

The next item I’d like to share with you a little bit about is capital. As you know, at our June 30 investor call, we set some targets for capital. We told you that we’d like to see our Tier 1 capital ratio to be 9% or higher and our total risk-based capital ratio to be 13% or higher; however, we gave ourselves about 18 months to get there.

I’m pleased to share with you on December 31, we got there this year in 2016, so we are about 12 months ahead of time. At December 31, 2016, Customers preliminary calculation shows Tier 1 leverage ratio of 9.1% and risk-based capital ratio of 12.9%.

As I mentioned you, in addition to that through retained earnings as well as the BankMobile divestiture, we intend to grow our cushions even further than the 9% and 13% sometime in 2017. Next item I’d like to talk about is concentrations.

Commercial real estate concentration has been talked about in the entire industry quite a bit in the last 24 months or so. We provided to you some information in our press release, but I’m going to give you some information as of December--for December 2016 rather than averages for the year 2016.

So our loan concentration at December 2016 in multi-family was down to 340% approximately, and that is down from about 396% at the same time last year. Next item is our cap rates in our portfolio at December 31 were 5.58%, and that has been consistent so we are not taking any undue risk at all. Our debt service coverage ratio at December 31 was 1.63%.

Our loan to value ratio average in our multi-family portfolio was 66.3%.

Our delinquencies were 0.00, our non-performing loans to total loans were 0.00, our average vacancy of our loan portfolio was 3.9%, our average vacancy rent for our rent-controlled portfolio was 2.8%, and our average loan size remained about $4.5 million and only about 25% of the buildings that we have financed have elevators, so you can see we are doing the middle income type of lending.

We’ve done a very, very detailed analysis as would be expected of somebody who has over 300% concentration of risk-based capital in a commercial real estate category, and I just want to assure you that we believe we are really on top of it and we have no restrictions whatsoever on our ability to continue building this business, and we have a three-inch thick analysis that we continue to constantly update and maintain the appropriate risk management infrastructure and information and dealer analytics, and management information systems that the regulators expect, rightfully so, from institutions that have any concentration above 300% in any category.

On top of that, our construction loan portfolio is about $70 million, and that is the most highest risk category, and that is insignificant and the majority of those are all owner-occupied C&I customers and a very little small portfolio of residential construction portfolio.

Next item I’d like to talk a little bit about is asset quality and interest rate risk. As you know, that is a very important issue. It’s not an issue that any investor asks us anytime about, but in our opinion it is probably the most important question that anybody should be asking us all the time.

We believe within the next two to three years, there is a high degree of probability of a recession. We think the economy is going to do well this year and next year, and that’s why when times are good, it is very important to maintain a very strong discipline on credit culture.

So we’ve shared with you that our credit approval process is extremely strong and independent of sales and portfolio management process, and we have been for about five years now doing stress testing at the loan level and stress testing at the portfolio level, the kind of analysis that you normally expect from banks above $10 billion in size.

So we are very confident that there’s no doubt about it, that this is a cyclical business, but we are very confident in sharing with you that you should not expect any significant above-average risks coming out of the portfolio that we have from a credit quality point of view.

From an interest rate risk point of view, our objective is to maintain about neutral position. We are somewhat asset sensitive, that’s why you saw a somewhat small expansion in our margin.

We don’t believe that you ought to see a continued huge expansion in our margin, but at the same time you should not see, if for whatever reason interest rates decline, you should not see a negative impact on our balance sheet and our income statement either. So we intend to remain in a neutral position from an interest rate point of view.

Talking about Religare Enterprises a little bit, it was back in 2013 that we invested $23 million in Religare. At that time, our goal and our objective was that Religare wanted to become a bank for small and medium sized businesses as well as for the high income, high net worth individuals through their asset management division.

We saw that as an opportunity to have a niche business to support small, medium-sized business trading customers between India and the United States, as well as to support banking, unique banking opportunities for the high income, high net worth individuals of Indian origin who reside in the United States.

We were very disappointed that Religare Enterprises was unable to get a banking license. We’ve been in constant discussions with them, and we had shared with you that by December 31 this year, we will make a final decision. So we ended up making the final decision.

We regret that it didn’t work out the way it was supposed to work out, and the right decision for us, our board of directors concluded, was at this time to exit the investment in Religare common stock, and we are exploring ways to do--we are not going to be dribbling our stock out, their volume is very low.

But we are in discussions with a few entities right now to do a bulk sale or some other form of strategy to be executed, and then this gives us an ability to completely get out or dramatically reduce the level of investment that we have in Religare.

Again, we are sorry that this didn’t work out, and we are not thrilled to see a $7 million charge, but it is what it is.

It’s a capital loss for us, and one of the things that we will try to do is when we divest BankMobile, we’ll try to maintain as much of an equity investment as the regulators will permit us to maintain in BankMobile, and hopefully that will see--we will see some gains in our equity investment and that will become--also give us an ability to recover the tax benefits of this loss.

But right now, we have not booked any at all. So as far as 2017, 2018, our concerns, we will continue to manage our balance sheet in 2017. We will continue to build our infrastructure in 2017. We are involved in the [indiscernible] preparation right now. We intend to cross the $10 billion mark within the next 12 to 24 months.

We will be [indiscernible] shared with you in response to an investor question back in December at the FBR conference. So with that, Dick Ehst, our President, who has joined Bob and I here in Wyomissing, as well as Luvleen who is speaking to us from New York City, we will be opening it up for questions. So Dana, please open it up for Q&A..

[Operator instructions] We’ll take our first question..

Hi, this is Bob at FBR. My first question, I know you guys are working on the plan to divest Religare. Any sense of what the timeline looks like? Will that be completed in the next quarter, is it sometime this year? Just trying to get a sense..

We are hopeful, Bob, it’s going to be completed this quarter, but obviously we cannot guarantee you on that. But our objective is to exit this completely as soon as practically possible. .

Okay, great. Shifting gears, I know you all talk about the $4.3 million of interest income that right now is in continuing operations, but you guys sort of think about allocating that to BankMobile.

Is it fair, then, to think that when BankMobile is divested, we should be taking that out of the Customers Bank run rate? Is there some additional expenses that will be at Customers to sort of cover that funding?.

Yes Bob, in regards to that funding, as I noted in my comments, the numbers that I gave from continuing operations would presume that we’re able to replace that funding at a like cost.

We have different strategies in place to develop our deposits, but I would expect--but the BankMobile deposits are largely non-interest bearing, so I would expect that a significant portion of those would be replaced by interest-bearing deposits, so you would see some--some of that, we would have some increase in costs related to that. .

Got it. Okay. Then could you maybe comment on what you’re seeing in terms of deposit pricing in your markets? I know New York Community mentioned they had seen some uptick since the Fed moved rates, and just curious how deposit pricing looks..

Yes Bob, I’ll take that. The interesting this is that we’ve been, as you know in looking at our cost of deposits, because we don’t have any branches, our average branch size is 450--approximately $450 million today, so we have not been exposed to as much pressure as those folks who have been operating their banks at very, very low interest expense.

So we also--since we have no desire, at least in the first six months of this year, to grow our balance sheet in a very rapid fashion, so we are not--we are really simply replacing our borrowings and our other sources of funding with core deposits, so we have not seen and experienced as much upward pressure on deposit cost as you’ve normally maybe seen in other banks.

Yes, some of that, especially the institutional money market deposits, yes, we passed on about 50% of the rate increase onto those customers, but in the consumer business and in the business banking sector, we really have not had a need to pay up at all to retain those deposits and continue to see growth in deposits..

Okay, great. Maybe sort of shifting from deposits to loans, if you could talk about what you’ve seen in terms of loan demand post-election and post-high rates. I guess primarily I’m interested in the New York multi-family business, but maybe also how you’re thinking about the outlook for the mortgage warehouse business..

Bob, let me start with the mortgage warehouse first. Mortgage warehouse business, you should expect in the first quarter to be down about 20%. That’s consistent with what we had shared with the street was our expectation for the first quarter on average.

The refi activity has really slowed down and it’s a pretty dramatic slowdown, in fact more than what we had expected, so we are replacing those earning assets with some investment portfolio as well as multi-family growth, so you ought to see us having about a $300 million to $400 million growth in multi-family portfolio in the first quarter.

We wanted to share that with you that we are very confident on the quality of that portfolio. The pricing that we are seeing is somewhere in the 3.75% to 4% range in that business, and we continue to see that the weakness in multi-family is evident in the high rent, luxury segment.

There is no question about it - we have noticed that there is a 3% to up to a 10% reduction in prices sometimes in that size. We are operating in that low to moderate income multi-family residence, and another 45% approximately of all our properties are completely rent-controlled properties.

The vacancy rates over there are, like I shared with you, less than 3%, and so we see a continued opportunity for us to continue to build that portfolio. As we have done in the past, we will continue to build that.

We expect in the second half of the year, starting with late second quarter, mortgage warehouse business to come back to the levels that you saw in the third and the fourth quarter, and we are managing our balance sheet as such because we expect to close on our BankMobile divestiture sometime in the third quarter, so we will probably in that divestiture move not just to deposits but also some of our loans to the buyer of BankMobile.

That will open up an opportunity on our balance sheet for our core business and still perhaps keep us below $10 billion, unless we see a huge size and have a much stronger balance sheet as we end 2017, so that in 2018 it will become very clear that Customers Bancorp has the capacity, ability and will deliver $3 or more in earnings per share, and hence we see a huge opportunity for continued shareholder value creation in 2017 and ’18..

Okay, great. Maybe last question and I’ll hop off. I know you all mentioned BankMobile is going to start offering credit cards later this year.

Is the idea there to target the same customer base, so it would be sort of a thin credit file millennial existing customer base, or are you looking to do cards on a broader base?.

Luvleen, you want to take that on?.

Sure.

So what we’ve identified from our student base right now is that having access to credit is a top pain point for them, so it’s actually for our thin credit file students that we’re currently banking, and once they graduate, we want to be their credit provider so we’re really going to be focusing on that market for credit cards when we roll out..

Okay, so existing customers or past customers, that’s really who the focus would be..

For now, that’s our priority..

Okay. Very good, thank you for taking the questions..

Thanks Bob..

We’ll take our next question. Please go ahead, caller..

This is Bill Dezellem with Tieton Capital. A couple of questions.

First of all, would you please discuss the Religare divestiture and the impact that that will have on your capital ratios?.

We’ve already given the capital ratios after the divestiture of Religare, so it’s not expected to have anything more of any materiality at all. It’s all behind us, and so it’s there in the financial statements that you’re looking at..

Yes, I think, Bill, if you’re referring to the existing investment, it’s just an investment at this point in time, so to the extent that we receive cash for it, it has not effect on capital.

It would free up cash at the holding company that if we wanted to push down cash into the bank, it would provide some boost to the bank, but nothing happens at the holding company or consolidated capital from [indiscernible] divestiture..

That’s helpful, so the key is that change to cash does not impact the capital ratios, but of course it is cash that one can then move..

Correct..

The Higher One partner accounts, can you talk about that issue that you had? Sorry for not understanding that very well..

Okay, I’ll take that--oh, go ahead, Luvleen. Sorry..

Sure. Please feel free to add. We were asked by the regulators to close the accounts that were at their partner bank, which is about 1 million of the former Higher One accounts were with WEX.

So we were able to retain about 300,000-some of those accounts, so about a third of the deposits as well, but unfortunately it was something that was forced upon us and, in the short period of time that we had, we were able to convey sort of the benefits of maintaining the account, and that’s why we were able to positively retain about 300,000-some of those accounts..

What were the issues, or what was the issue that the regulators were not happy with about how those accounts had been opened in the past?.

one was Customers Bank and one was WEX Bank. WEX Bank, FDIC had classified those deposits at WEX Bank as brokered deposits, which meant that Higher One had the ability to put them at any bank that they wanted to put them on prior to the closing of this deal. So during the closing, Higher One put those deposits to Customers Bank.

The regulator said, oh well, we changed our mind, they are no longer brokered, they are now owned by WEX Bank, out of the blue, contrary to FDIC’s ruling on those for WEX Bank. WEX Bank is an industrial loan company.

They couldn’t even have consumer checking accounts, so this was a disagreement or a dispute, I guess, between--or a difference of opinion between Federal Reserve’s classification and FDIC’s classification.

So to deal with the dispute, the FDIC went along with the Federal Reserve and basically asked WEX Bank to get out of this business, and asked us, who were servicing those deposits for them, to send checks back to those consumers, because WEX didn’t have an ability to maintain those deposits by themselves.

So in the fourth quarter, even though we tried our best to convince the regulators that you are hurting the under-bank, you are hurting the student, that is so contrary to public policy, but the lawyers at the Federal Reserve stuck to just law and said no, you’ve got to let them choose if they want to open a new account with BankMobile, but those who choose not to open a new account with BankMobile by November 1 or so, send them a check.

So hundreds of thousands of students are sitting around with lost checks. I hate to say it, as a member of a regulated entity, but this was an absolute inappropriate decision by the regulators. But it is what it is, and that’s why we had to do what we had to do.

So we lost deposits, we lost some revenues, and we spent well over a million dollars trying to communicate with these customers to let them become aware of it, and then students don’t open mail.

Students don’t open even email! So it was very difficult to communicate with them, and that’s why these checks are lost and the Federal Reserve has resulted in many students losing millions of dollars of money.

Kudos to them!.

Thanks for the extra clarity. I really do appreciate it..

We’ll take our next question. Please go ahead caller. Caller, please check your mute button, we’re unable to hear you..

Hi, David Roche [ph] from [indiscernible].

The $3 to earnings, if we think about the run rate you guys had this quarter of $0.76, does the extra cost of the deposits, replacing the BankMobile deposits, really make that much of a difference in the earnings, that $3 shouldn’t be fairly easily to be obtained?.

I think you’ve got to consider that in our $0.76, yes, there will be a negative impact from BankMobile, plus in the $0.76 there was a benefit from the adoption of our stock-based compensation charges, or income from that.

So that’s why we are confident that we should be able to achieve the $3 per share or more in 2018, but it’s not going to be just a piece of cake.

So we are very fixated on having higher return on assets, stronger balance sheet, higher capital ratios without any equity raises, and get our divestiture done, maintain our credit quality, maintain an interest rate risk profile that’s very neutral, add to our franchise, keep on recruiting teams, add to our expenses where necessary.

So we are very fixated on doing all that and still delivering $3, and if you apply the industry multiple of 15 times earnings, we would love to see a $45 stock price but that is entirely dependent upon the street. We are just fixated on executing our strategy..

Thank you..

We’ll take our next question. Please go ahead, caller..

Good morning, it’s Matt Shouldice [ph] from [indiscernible]. .

Hi Matt..

A couple of quick questions.

So if in the next 60 days you were to announce a transaction for BankMobile, when would you actually anticipate that closes?.

Matt, like I said earlier, we anticipate the closing to take place in the third quarter, because it will need--the acquirer will need regulatory approval for the acquisition of the deposits, and we [indiscernible]. It’s the normal four months, five months, you know..

All right, just double checking. There was a lot said in the opening remarks, so if I missed anything, I apologize. As far as the accounting statement for the 2016-9, the share-based compensation, obviously there was a big impact in 4Q16.

Is this really going to continue to be an ongoing issue where your taxes are going to benefit anytime you have a block of options vest deep in the money, or is this a--or is there a cumulative effect here that has to do with the adoption of the accounting standard?.

I’ll let Bob talk about the numbers, but let me just share with you a little bit about our compensation philosophy, which will indicate to you that yes, you should expect this sort of a thing on an ongoing basis, although the amount can fluctuate somewhat.

Our compensation philosophy is that it’s all performance-based compensation, and so we have performance-based stock plans so that for the top executives, you can elect to defer up to 50% of your bonus, and if you defer it for a five-year period, it’s invested in Customers Bancorp stock and we will double it, so it becomes a very performance-based, long-term incentive plan for you, and that has a five-year cliff vesting.

So you would end up paying taxes, you could end up losing your bonus if the shareholder value is not created, but you could end up building a lot of wealth if your shareholder value is created.

As you know, in the last five years we’ve had 2.5 times the KBW index in terms of the performance for our shareholders at Customers Bancorp versus the KBW index, so this will continue but the amount will change on a year-to-year basis.

Bob, you want to add anything else to that?.

Yes, I’d like to just give him some insight as to where they can find what the potential effect may be, if they want to work that into the models, and that is in the proxies that we have, the proxies obviously that we issue each year, you have included in there all the restricted shares that have been issued, and you also have in there the restricted share price when it was issued, so it’s going to be the difference between that restricted share price and the price when it vests that will be coming through.

So we do have shares that will be vesting during the first quarter of 2017, so you will see some benefit coming there. By the way, it becomes effective for everybody that didn’t early opt. It becomes effective first quarter of 2017.

In addition to that, options are also covered too, but options are a little bit more tricky to predict because it’s not--there’s not a--it doesn’t happen when it’s vested. Options, you’ll have an effect come through when they are exercised.

We haven’t had people exercising any options at this point in time, but we do have a significant number of options out there, so when they are exercised, you’ll see a benefit also come through the income statement..

Okay, thank you. This one may also be really more for Bob, but obviously with the press release, you’ve got 4Q, 3Q with discontinued ops and the accounting behind that, and we’ve got the year-end and the 2015.

But will we get 1Q and 2Q broken out in the same detail at some point?.

I’m sorry - 1Q and 2Q of 2016?.

Yes sir..

Oh, broken out by discontinued operations and continuing operations?.

Right, yes..

The first quarter Q of 2017 will have the first quarter of the prior year included in there on a comparative basis, and the second quarter Q will have the second quarter on a comparative basis. .

Okay, but you don’t intend to put that out early in any format, 8-K or 10-K?.

Not planning to at this point in time. If it seems like it makes sense, that’s something we can take a look at..

Okay, thank you for your time..

We’ll take our next question. Please go ahead caller..

Yes, Steve Emerson, Emerson Investment Group.

Is the selected buyer, apparently you’re in final stroke negotiations of Mobile, over $500 million in size?.

Steve, we cannot comment on M&A activities, please. I hope you understand that..

I fully understand, but I understand on a road show, you did give color that one of the options was a very small bank where management might overlap your bank in the future.

What I’m curious about, is this going to be a cash transaction, or is this going to be more complicated than that, other than 20% retained?.

No Steve, we expect it to be a cash transaction principally, though like I said, we will try out best to maintain an equity position to some level in BankMobile because we see this as a good investment. But we cannot really comment on that at all beyond that..

Okay, thank you very much..

We’ll take our next question. Please go ahead, caller..

Good morning, Frank Schiraldi from Sandler..

Hi Frank..

Just a couple of questions. Just on the WEX accounts, so am I thinking about it right? First, you noted that you’ve been able to, I guess, reacquire basically a third of those.

Are you in process in terms of trying to reacquire a portion of the other two-thirds, or at this point is it less likely and you’re basically just going to have to rebuild through semester by semester?.

I think it’s rebuilding semester by semester. I believe Luvleen said it will take us about a year to recover all that. But no, we are not in the business of soliciting other bank customers, and the regulatory authorities would not let you do that, even though we have their records, since we were the servicer.

We will just follow the appropriate regulations. They were WEX customers and they will remain WEX customers, and with lost checks..

Okay, but there’s no impact to, for example, relationships with those colleges, so that’s how you’ll be able to rebuild it?.

No, no impact at all. In fact, we have expanded--as Luvleen said, we have expanded our college base, and we also are in negotiations with many white label partners to expand similar outside of the college base..

So it sounds like - and I’m asking, because it sounds like you were confident, Jay, that in terms of the previous slide you guys put out, you’re still anticipating that BankMobile standalone would be able to earn around that $30 million in 2018, 2019.

Is that still viable?.

I think it’s more like 2019, and about $15 million to $20 million, in that range after taxes in 2018. .

Got you, okay. Then just a question on loan growth. I think I might have missed the details, but in terms of the mortgage warehouse balances, Jay, did you suggest you’re anticipating that might return to more normalized levels, and did you give that as last year at the end of the year? I just want to make sure I get that..

I said that we expect sometime in second quarter to third quarter, levels to be closer to where they were in the fourth quarter of 2016, but we expect them to be lower than fourth quarter of 2016 in the first couple of months of 2017..

Got you, okay.

So you expect to get back to where you are at the end of the year in the second or third quarter?.

Right..

Then just on C&I growth, is this--as we look out over the next, call it 12 months, is this a reasonable expectation of growth in that item, which I guess includes the owner-occupied CRE?.

Yes. I think, Frank, we are expecting $400 million or so growth in that portfolio in 2017, would be a good number..

Okay, great.

Then just finally, a BankMobile sale, would that be a taxable event that you’d be able to recapture the Religare loss through taxes?.

No. It’s complicated, but no, that will not be--we will not be able to use that to recapture losses on Religare. .

Yes, that will be ordinary income, sort of ordinary corporate income, so hopefully our president and the congress will reduce the taxes by the time we have to book the gain on a BankMobile divestiture.

But the loss on Religare is a capital loss, Frank, and that’s why that can be offset against capital gains in the future, and that’s why I made a comment that if you take a--end up taking somewhat of an equity position as a result of the divestiture price or the acquirer paying us in some of their stock, we might take that and use that hopefully if there are gains to offset against the losses on Religare..

Right, okay. Sorry, just finally Bob, I think you might have mentioned it - I apologize, but in the assets held for sale, I guess that’s Religare and BankMobile essentially.

What is the BankMobile portion held at?.

In the assets held for sale line that we have on there, that is all BankMobile. The Religare is included in the investment line and has been consistently classified as held for sale since it was acquired..

Okay, so the $79 million, that is just BankMobile, that’s the value on the balance sheet of BankMobile?.

That’s correct..

Great, thank you..

We’ll take our next question. Please go ahead, caller..

Hey guys, this is Kyle Peterson from FBR. Thanks for taking the follow-up for Bob. Just wanted to get a quick question on what a good tax rate to use is going forward.

You guys have the early adoption of ASU 2016-9, so just wanted to see--I know that can be a little noisy quarter to quarter, but just wanted to see if you guys could give any color on what you expect..

Yes, the effective tax rate that we’ve been operating on consistently through 2016, I think is where we are still looking forward to 2017. That was 38%, or slightly under 38%..

All right, I guess just in quarters with heavier [indiscernible], you’ll get a little bit of a benefit from that, then? Is that fair?.

Yes, I think that--that’s exclusive of the benefit, so no benefit--that’s the effective tax rate, and obviously that would be offset by the benefit that would be coming through under the new accounting standard. .

Okay, great. That’s all from me. Thanks..

We’ll take our next question. Please go ahead, caller..

Hey, good morning guys. This is Mike Pareto from KBW. .

Hi Mike..

I got on a little late, so I apologize if you guys covered this, but Jay, I did hear some remarks about the crossing $10 billion, and I just wanted to make sure I was kind of taking it away accurately.

So it sounds like, is the plan with some of the assets that could potentially be divested when you close on the BankMobile sale later in the year, that you likely will be under $10 billion for the duration of 2017?.

What I said was it’s possible that that could happen, and so we are not committing to cross the $10 billion mark in 2017.

But we are not committing to it, so our objective is right now to stick to our discipline on credit quality, interest rate risk, get the BankMobile divestiture done, operate with very strong capital levels, increase our capital levels further, not have any equity offerings, be focused on delivering $3 a share or more in 2018, focus on building shareholder value, and if we end up crossing the $10 billion mark in 2017, so be it.

If we end up doing it in 2018--but all I said was that in between 2017 and ’18, during that time period, we do expect to cross the $10 billion mark..

Okay and timing-wise, if you guys were to cross in 2018, you guys wouldn’t actually be subject to DFAST and stuff like that until the summer of 2019, correct?.

That is correct..

Okay. Bob, maybe a question on the margin.

I appreciate all the color - obviously there’s a couple moving parts with the BankMobile divestiture, but is it fair to assume that in the third or fourth quarter that some of the--I guess depending on what your interest rate backdrop assumptions are, but assuming that maybe there’s another hike in the Fed funds midyear, that some of the benefit from that could kind of come away with the loss of the non-interest bearing deposits from the BankMobile sale, and kind of negate each other?.

There’s two moving pieces there, and I’m not sure how they balance out in the equation, Mike. I understand what you’re saying, and yes, some benefit that we would receive could be offset by some of the costs that we would incur to replace the deposits.

How it would balance out--I mean, as noted previously, we have a number of strategies that we would like to execute during the course of the year, some of them which would be able to attract low-cost deposits, and just how it all plays out, how that mix plays out is unknown.

And you just threw another factor in there, which is the interest rate increase and the fact that that would tend to widen our spreads out somewhat, could offset some of that cost too. But I can’t answer your question, Mike, in regards to how that would all work together at this point..

Yes, I’m just kind of curious of the timing of it. I appreciate it, thanks Bob. Then just one last one from me. Now that you guys are re-classing the BankMobile in held for sale and discontinued ops, I mean, it obviously gives a little bit of a cleaner picture of what the legacy Customers community bank fee and expense items are.

I’m just curious if now as we look at it here today, if you guys could maybe just rehash--I know you’ve mentioned it before, but rehash what the potential expense build and fee income impact, just on the Customers Bank side would be from crossing $10 billion..

I think what Bob had stated earlier was that we do not expect a significant impact on us, but it’s still going to be somewhere in the $1 million to $2 million range.

That is what--last time I was in a meeting with the [indiscernible] our advisors to help us do the DFAST analysis had indicated to us that it’s not going to be anything significant, but it still--we’ll end up with somewhat higher FDIC insurance premiums and a few more positions for the DFAST to modeling and those kind of things.

But we have actually--have a very robust risk management system and infrastructure in place so that we are not expecting what you normally would expect the build-up at other institutions. But we still have to do some modeling and those kind of things.

So Bob, do you think of anything else?.

Jay, I think you said it very well. The only thing I would add is that there will be some higher--you know, additional hires, some quants that we’ll probably need to bring on over time, but we don’t expect that to be a significant amount in addition to the implementation costs and the run rate costs, Jay, that you’ve fairly described already. .

So $1 million to $2 million annual expenses at this point is kind of a fair guess of the addition from crossing?.

After implementation. There will be other implementation costs, but that should be the run rate, up to $2 million run rate, after implementation increase to the run rate..

Okay, thanks guys. Appreciate it..

At this time, I’ll turn the call back to our speakers for any additional or closing remarks..

Well, thank you very much, ladies and gentlemen, for joining us today. If there are any other questions, please call Bob Wahlman or myself. Thanks, have a good day..

That does conclude today’s conference. Thank you for your participation. You may now disconnect..