Joe Noyons - IR, Three Part Advisors Jay Sidhu - Chief Executive Officer Bob Wahlman - Chief Financial Officer Dick Ehst - Chief Operating Officer.

Joe Gladue - Merion Capital Group Mike Perito - KBW Bill Dezellem - Tieton Capital Frank Schiraldi - Sandler O’Neill.

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

Thank you, Dixie, and good morning everyone. Customers Bancorps' earnings release was issued yesterday evening and is posted on the company's website at www.customersbank.com. Representing the company on the call today are Jay Sidhu, Chairman and Chief Executive Officer; Bob Wahlman, Chief Financial Officer; and Dick Ehst, Chief Operating Officer.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that cause actual performance results to differ materially, including the rest of the results are different than currently anticipated.

Please note that these forward-looking statements speak only as of the date of this presentation and undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws.

Please refer to our SEC filings including our report on Form 10-K and also the 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bancorp CEO, Jay Sidhu.

Jay, the floor is yours..

Yes. Thank you very much Joe, and good morning ladies and gentlemen, we are delighted to welcome you to the second quarter earnings call. As you know our net income to the common shareholders was $20.1 million during second quarter 2017, then that's up 15% and 15.4% over Q2 2016.

Now this $20.1 million number includes $5.2 million loss from discontinued operations that we will talk about later on. So the earnings, we are so pleased to report to you that the earnings were very strong.

And for the first six months as a result of this, our net income to common shareholders was $42.2 million, and for the six months earnings per share were 1.29%, also our margin improved during the quarter by 5 basis points, and over the last couple of years we've shown consistently increasing our book value per common share.

As well as positive operating leverage, our asset quality improved, so this is a very good quarter for us. To get into the details of the quarter, I'd like to hand it over now to Bob Wahlman, our Chief Financial Officer..

Thank you, Jay, and good morning everyone. As noted by Jay and as described in our second quarter 2017 earnings release the last evening, customers as reporting Q2 2017 net income of $20.1 million or $0.62 per fully diluted share. Net income to common shareholders for Q2 2016 was $17.4 million or $0.59 per common share.

So the Q2 2017 net income to common shares -- common shareholders is up 15.4% over 2016, and earnings per common share is up $0.03 or 5.1%, Q2 2017 compared to Q2 2016.

Excluding the effect of the BankMobile business that is reported as discontinued operation, customers Q2 2017 net income to common shareholders from continuing operations was $25.3 million, up 28.5% over Q2 2016. Customers Q2 2017 earnings per common share from continuing operations was $0.78 per share, up 16.4% from Q2 2016.

The earnings calculation for GAAP in our view is a good measure of the ongoing performance of the business, but it may overstate the performance of the bank and understate the discontinued business, earnings a little bit by the amount that the bank pays BankMobile for deposits of approximately $2.7 million or something short of $0.08 per share.

For Q2 2017, customers produced a return on average assets of 93 basis points, a return on common equity of 11.84% and an efficiency ratio from continuing operations, so the banking business efficiency ratio of 40.5%.

In the same quarter a year ago, customers generated a return on average assets of 85 basis points, a return on common equity of 13.07% and efficiency ratio from continuing operation for the banking business of 46.5%. In summary, customers Q2 2017 earnings performance is viewed by management as very strong and trending upwards.

The second key set of numbers watched by our investors, regulators and we focus on as managers are our capital ratios. As noted in previous calls, during 2016, the full year 2016 customers increased its capital by over $300 million or over 50% by retaining earnings, issuing preferred stock and issuing common stock.

Over the past year that is from June 30, 2016 to June 30, 2017, customers increased its capital by $230 million or 33% to over $910 million. Our preliminary capital ratio estimates as of June 30th were 8.7% for the leverage ratio, 8.27% for the CET1 ratio, 10.94% for Tier 1 risk-based capital and 12.46% for total risk-based capital.

The Q2 2017 capital ratios were on average 22.6% higher than the regulatory capital ratios as of June 30, 2016 and those ratios include the summer seasonal expansion of the mortgage warehouse business, which brings those ratios down by as much as 40 basis points. In summary, Customers’ amount of capital is up by one third over a year ago.

Our capital ratios are up by one fourth and they are very -- and they are approaching industry averages. And yet we still increased earnings per share to common shareholders by $0.03 in 2017 compared to 2016.

As we're not expecting to be as active in the capital markets over the next year, according to our strategy going to bank a bit more modestly, we anticipate even a greater amount of future business growth benefiting the existing shareholders.

Our third set of numbers, customers as watching very carefully, relate to asset quality, especially now that there are early indicators in the industry, the credit quality may have seen its best days in this business cycle.

Customers nonperforming loans as of June 30, 2017 was only $19.1 million or just 21 basis points of total loans outstanding, compared to $14.6 million or 17 basis points of total loans outstanding as of June 30, 2016 and 33 basis points as of Q1 2017.

Our June 30, 2017, nonperforming loans as a percent of loans outstanding of 21 basis points is less than one fourth of our peer group level of nonperforming loans of 90 basis points, and it is only one seventh of the banking industry level of 150 basis points.

Our June 30, 2017, 21 basis points level nonperforming loans is very comparable to the 17 basis points as of June 30, 2016 and 22 basis points in 2016 -- December 31, 2016 indicating stability within that portfolio.

And our charge-offs continued to run at a very low and what we believe is a very low rate totaling just 2 basis points of total loans for the first 6 months of 2017, and it was only 2 basis points for all of 2016.

Customers attributes its loan quality to unwavering dedication to loan underwriting standards adopted at the depth of the 2008 economic downturn. Customers borrowers have consistently demonstrated their sustainable ability to pay in accordance with the contractual terms of the loan.

Customer strategy also incorporates the objective that lower than peer and industry net interest margins, which we do have at about 278 basis points as Jay noted will be more than offset by lower than industry operating costs. Customers efficiency ratio from continuing operations reached an all-time customers low for a quarter of 40.5% for Q2 2017.

This strong efficiency ratio reflects many elements of our nontraditional business strategy especially that our branch lite strategy results in lower branch cost in much of the industry, while still generate significant deposits.

Our operating expenses from continuing operations in Q2 2017, totaled $30.6 million actually down $1.5 million or almost 5% from Q2 2016 operating expenses of $32.1 million, while total losses were up $1.2 billion or 12.4% as of June 30, 2017, compared to June 30, 2016.

Customers, business strategy says will pay a little more for deposits and accept a little less net interest margin than our peers and industries and offset that tighter net interest margin with the lower cost to help us analyze our cost structure relative to peers to see whether we are achieving that strategy, we examine operating expenses as a percent of assets to generate ratio that is somewhat comparable to an interest rate.

For Q2 2017, customers net operating expenses from continuing operations as a percent of assets was only 1.23% and I compare that to our peer group and industry operating cost as a percent of assets of 2.53% and 2.51% respectively.

This relationship indicates the customers cost as a percent of all assets is less than one half of the industry and peer costs for providing banking services.

Customers believe this is a sustainable competitive advantage of our peers and we will continue to develop strategies to further enhance our operating costs and exploit this competitive advantage. I'd like to highlight just a few other things that happened during the second quarter.

First, we completed a senior debt offering for Customers Bank in the amount of $100 million at a rate of 3.95% with all proceeds being contributed down to the bank as capital, double leverage into the bank. Second, total assets reached $10.9 billion as of June 30, 2017, compared to $9.9 billion as of March 31 and $9.4 million as of December 31.

While the asset amount is pushed up a bit by the seasonal high balances in the warehouse lending businesses, we do expect at this point that total assets will exceed the $10 billion for the next DFAST measurement date. Third, the bank -- the BankMobile business segment continues to be held for sale and is reported as discontinued operation.

It generated noninterest income of $11.4 million in Q2, seasonally the second quarter is BankMobiles' most challenging quarter as students are finishing up its school year and not receiving their federal loan disbursements.

Operating expenses for BankMobile were $19.8 million and we reported on our segment reporting a loss of $3.2 million for the business and a loss of $5.2 million on a GAAP business, because the segment -- for the segment reporting they do receive the benefit of the bank borrowing and paying to that business interest for the -- for the use of those deposits.

In summary, Q2 2017 was an outstanding quarter for customers and further demonstrates the sustainability and the advantages of the customer's business model and our strategies despite the challenges that we do have.

I do look forward to the day when the Religare stock is sold, which we do expect it to resolve by the end of this year, and the BankMobile business is sold or otherwise disposed of also hopefully by year-end.

That will leave us with earnings report that is much less complicated and the inherent strength of Customers performance, which we're trying to bring out to you today, but that inherent strength of the customer's performance standing out. Jay that includes my comments, and I'll hand it back to you..

Thank you very much, Bob. I'd like to go over four things now before we open it up for questions and answers. Number one is where do we stand on our core business.

Number two is shared with you the status of the BankMobile divestiture, and number three is review with you our strategy, since as Bob indicated we crossed the $10 billion mark this quarter and like every other institution we are in the process and have completed a strategic options review for ourselves -- over the -- before we made the decision to cross the $10 billion mark, so I'd like to review with you our strategy.

And then [indiscernible] make some comments in terms of looking ahead. As far as the core business is concerned, as you noted that our C&I business is our biggest growth business.

Our C&I loans increased by $305 million this past year and that's approximately a 25% growth rate, that business is the main focus, because we are a business bank and we have a very, very strong teams that we've recruited over the last several years and we continue to recruit those teams, and our single point of contact model is really working, and we have expanded and now that same model this quarter, starting this quarter into Washington DC and the Chicago market as such.

So you should expect the continued strong growth rate in the C&I business without any deterioration of credit quality from those folks who normally stretch to make these kind of loans, so the credit quality risk management will remain top of our minds all the time.

In looking back over the last five years, I just looked at what we told the investors, we pulled out our investor deck and the strategic position of the company is exactly what we shared with you five years ago, and that was that we are going to be focused on strong organic growth, we would be continuing to properly manage the resource allocation from a capital point of view and have a branch lite strategy in attractive markets.

So as a result of that being our number one focus that's where we were now for over the last five years have become a bank in C&I business all the way from Boston to Philadelphia.

And we are pleased to share with you that we have learned from those experiences and we are very confident about the quality of the teams and the opportunities that we see in DC and Chicago in addition to continued growth in New England, New York and the Philadelphia market.

The number 2 strategy that we had shared with you 5 years ago was strong profitability growth and efficient operations, we were operating 5 years ago with an efficiency ratio of about 78% or 80%, today we brought that down to 40%, 5 years ago we were operating with an ROA in the 2.3%, today we are close to a 1% if you take out the discontinued operations from that point of view and all that's been done by us -- by taking the bank, which was below $2 billion in size, 5 plus years ago and today crossed the $10 billion mark.

From a credit quality point of view, again we said 5 years ago to you, that we would never compromise in underwriting standards, we would have a loan portfolio performance that consistently better than industry and the peers and that we would not take interest rate risk in building our company.

So 5 years ago our nonperforming assets were -- nonperforming loans were 75 basis points of our total loans, today they are down 2.2%, 5 years ago the industry was at 3.3%, today that industry has come down to 1.5%, but we have a significant advantage over the rest of the industry.

Our charge-offs for the last 2 years has been practically zero, it's like in the less than 0.05%, so we remain much better than the industry average, and that is a major, major strength of Customers Bancorp, we are not stretching, we'd rather be in the lower margin high quality business than stretch, because of the high overhead ratios to be in the higher margin, higher credit risk businesses.

We also talked about the efficiency ratios 5 years ago, total costs as a percentage of our assets were 2.2%. Today we brought that down to 1.2%, that 2.2% 5 years ago, compared to 2.75% of our peer group and 3% for the industry as such.

Today our peer group is still at 2.5%, they are somewhat improved from the 2.7% where they were at, and nationally all the banks have also improved their efficiency ratio from 3% down to 2.5% at June 30, but we brought ours down from 2.2% 5 years ago down to 1.2% at June 30.

Another measurement we look at is assets per employee and the total revenue per employee, we measure that effectively to talk about the productivity, because banking industry isn't very inefficient industry. And 5 years ago our revenues per employee were $400 million -- $400,000, and that compared with the industry average of about $200,000.

The industry average unfortunately is still about $200,000, while we've taken ours up to $540,000. So the efficiency improvement in productivity is definitely go through, because we believe in having fewer higher quality better paid people then lots of people as such.

So in essence talking about our loan portfolio today 40% of our loan portfolio is what we consider to be C&I loans and they happen to be in manufacturing, service, technology, wholesale, equipment and commercial loans to midsize mortgage companies.

Another 40% of our loan portfolio is in multifamily loans with an average duration of 3.5 years and that happens to be majority of it in New York City and Philadelphia, Baltimore area, and then our commercial nonowner occupied commercial real estate loans are only 14%, and our consumer loans are only 6% of our loan portfolio.

Over the last five years, the shareholders of Customers Bancorp had seen their returns go increased, now their valuation increased by 214% compared to KBW regional bank index over the five years going up by 97%.

So the question that you can see is what our Board of Directors and management as we look at $10 billion mark is can we repeat what we did in the last 5 years or is there a better strategic option for us, and we look at all of those and we continue to look at that and we will do anything and everything that is in the best interest of our shareholders, because we are large shareholders of Customers Bancorp.

So let me now talk a little bit about BankMobile.

BankMobile as you know is reported a $5.4 million GAAP loss, and as Bob mentioned that somewhat related to seasonality, but also we are experiencing lower adoption rates as a result of the Department of Education Rules and all we've done this last quarter and the last couple of months has been systems conversion to get to take it completely off of the old antiquated systems that Higher One had and put them into the cloud-based data center with the business disruption systems in place and converted the entire $1.7 million students on to a brand new system, which was done this year and expensed all those systems conversion costs this past quarter.

Even though the number of new accounts is running around 50% of where they were 45% to 50% of where they were at last year, we believe that over the next two years that's going to change and as we present to our students, the full service bank 85% of all the students surveyed by BankMobile say that they are very likely to keep this bank accounts that they opened up as a student as their account for life, and we are noticing that taking place right now.

Our organic deposit growth which is deposit growth other than student loan disbursement is very strong. So in spite of lower number of accounts our deposit levels are about the same as where they were last year. Even though we have yet to introduce our new app to the students, which will present the total bank to those students.

So looking ahead how do we improve the performance of this business. Besides the student business BankMobile strategy has been to get into the white label banking business and we have signed up account in the nation as our white label partner, we expect to get that announcement out in the marketplace within the first quarter of next year.

We have -- already spend about couple of million dollars into preparation for that and that will add a lot of value to the BankMobile business.

Another business that BankMobile has started is called [Perks at Work], which is banking at work and that is a business which we believe will be much better than any of our competitors that they are doing -- it include student loan refinancing, it includes lending packages through digital means to employees of large and small companies, and of course it includes all the benefits of having BankMobile accounts, which are -- which offer free access to ATMs all over the country and the like as an HR benefit to large employers and we have already put together a team that is starting to market that and we are close to signing up a very large national account in that, plus the direct to consumer, and direct to consumer we are opening up somewhere between 50 to 100 accounts per day of consumer accounts.

So the bottom line we -- the Board of Directors is very focused and within the month of August, we will announce a decision as to the future of BankMobile, it will be -- we are continuing in negotiation with an unsolicited proposal we receive from a top 50 bank in the nation, and that -- we are negotiating it, but we are not relying 100% on that being the way it will get to -- we cannot tell you that whether we will be able to get an effective way to a purchase and assumption agreement on that.

Number two option, as we shared with you is that we believe spin-merge and we are pleased to share with you that the obstacles that we saw in the spin-merge with SEC on the lack of 3 years of audited financial statements, we've been able to overcome that obstacle, so spin-merge has become a real opportunity for us and we believe that even if spin-merge is the option that we execute and announce within the month of August, it will still add and bring in excess of $100 million in value to our shareholders.

So both sale or spin-merge will result in excess, well in excess we believe of $100 million for our shareholders and the spin-merge will be tax free and the sale is going to be taxable. So it is something which the shareholders today have put zero value on, I am sharing with you that you will see its value to be well in excess of $100 million.

We are very focused on building the business and very focused on finding a way to continue building this business and divest this business, so the digital banking continues to be built by BankMobile and BankMobile today is already the number one digital bank in United States of America based upon the checking accounts it has and the total noninterest income revenues it has, and we believe that the future will look very good to whichever option we end up announcing to you and you should expect that to happen for sure based upon where we stand this quarter announcement in detail in line what Bob said, that this will be resolved this year.

Looking ahead, we believe the industries facing challenges from flat yield curve that escapes nobody, but we are very, very focused on the interest rate risk management and asset quality as I've covered with you.

We believe that we have an advantage over the rest of the industry, because of our efficiency ratios being in the low-40s, we believe within the next 12 to 20 months, 24 months we -- our efficiency ratios are going to be in the high-30s, and at the same time we are very focused on improving our funding base and very focused on improving our returns, so the end result is higher shareholder value creation over the next medium-term to long-term.

So with that Dixie, I'd like to ask you to open it up for questions-and-answers..

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

Yes. It's Joe Gladue from Merion Capital Group. I guess I wanted to talk about the funding side of the balance sheet a little bit, it looks like you had very good growth in noninterest bearing deposits. I guess, just wondering what's driving that, I guess can you continue it.

And in relation to the new teams you're bringing on, I guess is there -- what is their focus on deposit gathering or do you expect much in that regard from them?.

Our teams Joe that we already have in place and we are adding have two roles -- three roles actually, one is attraction of core deposits, number two is on high quality earning assets, and number three is serving our existing customers in a way that the customers see a huge value, and so its portfolio management as such.

So the way the teams are compensated also is aligned with the strategy and we compensate our teams very well for attraction and maintenance of noninterest bearing and other types of DDAs, that is DDA is our definition of a core deposit. So you should expect us to continue to show strong growth in core deposits going forward.

You should expect us to continue to show strong growth in C&I lending, it does take the teams sometimes between six to 12 months before they start to show results. However, we have very experienced teams in very attractive market, so that even though Chicago and DC results won't become apparent to you till about this time next year.

But we are very confident that in the New England market, New York market and the Pennsylvania market, the deposit growth first, lending growth second philosophy remains.

The market is becoming for higher quality loans rather competitive banks are -- starting to do very stupid things, which some of us who have been in this business for a long time remember slowdown clearly, that they always do it. We are seeing the same thing happening right now in terms of terms, as well as pricing of C&I loans.

We have told our teams, it is more important to get core deposits and higher quality loans than just to get volume of stupid loans. And let the competitors pick up those stupid loans and they are going to pay for it over the next year or two that is how we see things..

And just longer term, again on the noninterest bearing deposits, that increased noticeably as a percentage of total deposits, but you're still well below sort of industry norms.

Do you think you can grow that as a percentage or is that more a function of or its just sort of the business model that you are going to end up with that, remaining 10% or so of total deposits?.

I think good quality banks should see between 15% to 20% of their deposits to be in noninterest bearing deposits in different cycles. What you've noticed in this last cycle of zero interest rates is unusual and you're going to see in our opinion a huge exodus from noninterest bearing DDAs into interest bearing DDAs or exiting the banking sector.

You are not going to see that at Customers Bancorp. We have been very mindful of the quality of our funding base and we are -- we've actually recruited a team of product managers from a top 50 bank -- top 10 bank actually in the nation, and they are developing the state of the art cash management and technology driven products for us.

So you should expect continued strong growth in DDAs, interest bearing and noninterest bearing from us..

And our next question comes from..

Mike Perito of KBW. Couple of questions -- actually a few questions for me. I guess to start on kind of a high level question on the mortgage warehouse business.

Jay, do you mind just reminding us kind of how you see the dynamics of that business unfolding as interest rates continue to rise, and I guess just a little background on the question, looking at kind of the loan portfolio excel for sale, I mean it really look like you guys actually kind of core funded with the deposit growth and then some in this quarter, but obviously the warehouse balances as they fluctuate seem to kind of go beyond the deposit funding.

So I'm just curious how that dynamic kind of transcend us, rates continue to rise, how you guys plan to fund it, but also how the asset yields go up and just remind us what they are priced according to, please?.

Yes, sure. The yield on the mortgage warehouse portfolio today are running over 4%, it's 4.2%, 4.3% plus the profitability of that business is plus [Indiscernible] fees plus you get approximately 10% noninterest bearing deposit compensating balances. So you can figure out that, that business to us is approximately a 2% ROA business.

And that is the 2% ROA, even with funding it at with core deposits. So at June 30, our yield was 4.8% with the increase in the prime rate, fed funds rate, so that's how, according to.

Is there a different number, Bob?.

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

Okay. So it's 4.2%. And so going forward what happens with this business since the last couple of days in the quarter, you see a 20% increase in balances from wherever they were in the last 3 to 4 days prior to the end of the quarter that's why our average balances for the second quarter were $10.4 billion, but [indiscernible] were $10.9 billion.

Looking ahead, we expect the mortgage business, because we have core customer relationships.

Our customers have been doing an average of 70% of their business is purchase activity, we see with higher rates as such, especially if you see a steepness in the curve as such that you will still see us having between $1.75 billion to $2.2 billion over the next four quarters in mortgage warehouse business, because it's a very core business and we just don't see how the balances are going to go below that.

You are absolutely right, we are funding short term two week loans with core deposits.

If we were match funding it, our margins would actually expand over here, but we are looking at this as a core business rather than just as a true business, which would indicate if you have loans for sale, then it's not necessarily a loans held for portfolio, but it's more of a technicality why we have to classify it as loans held for sale, but it's a core ongoing net interest income portfolio for us in a way.

We have strategies of expanding our market share in this business, so that even if you see a very steep curve and for whatever reason you see the long-term rates, and the 10 year going to let's say 3% to 4%, and we've gone back over the years and looked at it and we still feel love this business and feel highly confident that you're going to see us having on an average about $2 billion plus-minus percentage in this portfolio.

As we grow the balance sheet, the percentage of these loans as a percentage of the balance sheet is not going to be maintained. We will see C&I business becoming a faster percentage of this portfolio compared to C&I to the mortgage companies.

So the C&I should be the fastest growth business for us followed by continued multifamily and then we will look at certain sectors of the consumer portfolio from a diversification of assets as well as net interest income, and so that is the way we are looking at it in terms of our strategy for the next couple of years..

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

Mike in regard to the portfolio in regards to the new volumes, we had total new volume loans coming on was $778 million with an average yield of approximately 4%, and that is, so the new loans are coming on at a little bit higher yield than what they had been previously, but I think mostly it is in terms of the increased margin.

We have the significant growth in the warehouse portfolio, which is very strong, yielding in the strong margin portfolio and the growth in that portfolio really hold up that the margins overall in that portfolio..

On the loan held for investment portfolio.

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

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

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

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

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

And then one last one for me, just wanted to ask on the BankMobile potential sale, I guess in terms of the system conversion in the quarter, I mean was that something done with the help of kind of making the business more saleable, as you guys kind of pursue these two options.

And then I guess secondly -- well, I guess, actually let's start [indiscernible] your thoughts around that?.

Yes, Mike. Absolutely correct that the systems conversion have to become a higher priority to make the divestiture happen, and so that the front-end system, which would be related to the retention and adoption rates that became a lower priority for us to make this happen because thank mobile divestiture is going to happen and it's going to add.

We believe in excess of $100 million to our shareholder value. So with that it became very clear to us that systems conversion had to become a higher priority..

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

In regards to spin-merge -- just to walk through the steps, at a high level, Mike, is that the assets related to the business we first need to be placed into a separate legal entity -- that ownership of that legal entity would be ultimately at the holding company.

The holding company would then declare a dividend and would pay or would issue to the existing shareholders and interest in each of the -- an interest based upon prorata ownership of customers' bank, and interest in this new company, which would be a share interest, that would be the spin-off, that step number one and so you have the customer -- existing customer shareholders that would on 100% of the spin-off entity.

The second, the next major step since there are several steps to get to that piece, but the next major step within the acquiring entity would then issue their common shares to the customers common shares in which the customers common shares will end up owning more than 50% and that's necessary to qualify for the tax rate treatment would end up owning more than 50% of the new entity of the combined entity, and that is it in a nutshell at a very high level..

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

So when you're issuing the shares they have ownership, so they have -- there's common ownership of the multiple entities and then they're merged together.

So that would be the next piece, but getting the ownership and to the acquirers, so you have acquirer and the acquiree under common ownership would be the key step and then after that the merging of the entities would be the next step, but that would be relatively easy once you get there..

Yes, to make things again very-very clear on spin-merge our partner will be flagship, because flagship is the one which we've already shared with the market that is the partner and we're in the process of restructuring that potential deal that's the way we put it out in our 8-K.

So as Bob mentioned, we would spin-off the BankMobile business, then the BankMobile business spun out 100% owned by the shareholders of [CUBI] then what enter into a merger agreement with this privately owned bank called flagship.

And then the CUBI shareholders will own between 50% to 60% of the combined up and then there would be a sale of deposits related buy from CUBI to this new entity, and when you get all that done, so you have the ownership held by CUBI shareholders in this new BankMobile will be worked well over $100 billion, that's what we are sharing with you..

And then just one quick clarification, I appreciate that one down is very helpful.

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

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

[Operator Instructions] We'll go next to….

It's Bill Dezellem with Tieton Capital. The securities on the balance sheet increased by roughly $0.5 billion in the quarter.

Would you talk about that change and how you foresee that unfolding in the coming quarters?.

Bill, we -- if you look year-over-year, I see a significant increase in the securities and we made the strategic decision when the -- excuse me, when the warehouse business had its seasonal contraction during the first quarter that we replace a lot of that contraction with investment securities.

And so there was a significant investment made during the first quarter, which we didn't finish that up until the second quarter. We had been running historically with a low investment portfolio and we also added as part of that strategy we added to the investment portfolio to provide us with additional interest earning liquidity resource..

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

No. This has nothing to do with the funding of the business, this is to manage the overall net interest income so that you minimize the fluctuations and you decrease the volatility.

So these are very short-term securities that we've put on, we're not adding on to the interest rate risk, we are funding the mortgage warehouse business with our core deposits and borrowings combined, and you should not see a significant change in our investment portfolio and in our investment strategy going forward..

And we'll go next to….

Frank Schiraldi from Sandler. Just had a couple of quick questions. First, I wanted to ask, I think you might have touched on this, Jay, I apologize I didn't quite catch it, but in terms of BankMobile, the new deposit accounts have been added over time.

Is that a percentage of that -- is that outside the distribution channel of a Higher One and if so, what's the percentage, and how do you expect that to change at all, if at all over time?.

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

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

Within the next 3 years, we believe our BankMobile has a potential to look like will be that the current student business will be about 50% of the business or customer acquisition. And the white label banking and perks at work will make up the other 50% of the customer acquisition.

And that BankMobile could be the number 1 customer checking account, customer acquirer in United States of America, more than Bank of America's checking account customer acquisition. That is a potential we see in BankMobile..

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

Frank, in terms of the conversion to and going to the $10 billion mark and those expenses, we have stated in the past that we expect those would be between $2 million and $5 million. We have already begun the process and so you see those expenses -- those expenses coming through during actually the first and the second quarter.

So that's embedded in the expense run rate in terms of those conversion expenses. On an ongoing basis, we think that the expenses will be marginal increase in expenses will be $2 million to $3 million on an annualized basis and that's going to be in line with what we're seeing in these transition costs.

So I haven't thought about it quite like this the way you're asking the question, but I would say if you're looking at the first and the second quarter that our conversion costs are embedded within that run rate, and I wouldn't expect to see a significant jump when we move over, because now we're incurring some of the transition costs and those will be replaced by ongoing costs later on..

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

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

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