Customers Bancorp Inc (CUBI) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the 2016 Q2 Customers Bancorp, Inc. earnings call. Today's conference is being recorded. At this time I'd like to turn the call over to Joe Noyons. Please go ahead, sir.

Thank you Renee, and good afternoon, everyone. Welcome to Customers Bancorp's second quarter 2016 earnings conference call. Our earnings release was issued today after the close and is posted on the company's website at www.customersbank.com. Representing the company today are Jay Sidhu, Chairman and Chief Executive Officer; Bob Wahlman, Chief Financial Officer; and Dick Ehst, President and 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 may cause the actual performance and 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 we undertake no obligation to update these forward-looking statements in light of new information or future events except to the extent required by securities laws.

Please refer to our SEC filings including our report on Form 10-K and 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

At this time it is my pleasure to introduce Customers Bancorp Chief Executive Officer, Jay Sidhu. Jay, the floor is yours.

Thank you very much, Joe, and good afternoon, ladies and gentlemen; I too want to welcome you to our second quarter call. As Joe mentioned, joining me over here today is Bob Wahlman, our Chief Financial Officer; Dick Ehst, our President; as well as Luvleen Sidhu from our BankMobile division. Dick will be covering asset quality and risk management while Luvleen will be talking about the BankMobile strategy, and Bob and I will cover information about Customers Bancorp, Inc.

We're really pleased to report record earnings for the second quarter of the first six months of 2016. As you know, Customers single point of contact business model, in our opinion, is delivered through highly experienced professional teams, [a very] originations which are very strong, of very high quality; and these originations in our loan portfolio in our opinion limits our interest rate risk exposures while controlling our operating expenses.

And also we completed in this quarter a strategic acquisition of the disbursements business from Higher One Holding, Inc. on June 15, 2016, and combining this business with our BankMobile division and the platform gives Customers over 2.1 million BankMobile service millennials and middle income Americans as our customers and potential to add as many as 500,000 new BankMobile customers annually. So today we will be discussing with you not just Customers Bancorp's performance, but also give you some highlights of BankMobile that we had covered for those of you who were able to join us for our analyst day.

As you know, from our second quarter earnings point of view we had very strong quarters; second quarter, 2016, diluted earnings per share was up 54% over second quarter of 2015. Our ROA was 84 basis points, and return on common equity was 13%. Our pre-tax, pre-provision ROA and ROE for second quarter 2016 were 1.44% ROA pre-tax and 23.4% pre-tax, pre-provision return on common equity. Our second quarter net income of $17.5 million approximately was about 57% over that of second quarter 2015. Very important for us is the growth of our core deposits, and our non-demand deposits since 2009 have grown by about 71%. And I'm pleased to share with you that between just the end of the year (inaudible) in the first six months of this year, our demand deposits grew by greater than 20%. So we continue to see a very strong improvement in our deposit growth, which is very important for us.

The margin in the second quarter was 2.83% and the second quarter efficiency ratio was 53.4%, and that included all the BankMobile and all the Higher One disbursement business expenses. And without some of these expenses our efficiency ratio was actually about 49%. From a credit quality point of view, which Dick will be going over later on in more detail, we only had 17 basis points non-performing loans at June 30, and our reserves were actually 470% of our loans once we exclude our loans held for sale, which happens to be our fully performing mortgage warehouse loans.

So at this time I'd like to hand it over to Bob Wahlman to go over the financial results in a lot more detail.

Thank you, Jay, and good afternoon, everyone, and thank you for joining our call. As Jay noted in his comments, Customers' management is pleased with the second quarter 2016 operating results, reporting net income of $17.4 million or $0.60 per share for the quarter. That compares with $11 million or $0.41 per share for Q2 2015 in a quarter-over-quarter comparison, an increase in earnings of approximately 50%. The Q2 2015 results did include a one-time $6 million provision for loan losses related to a fraudulent loan identified in the second quarter of last year, which decreased Q2 2015 by over $0.09 a share. The Q2 2016 results includes headwinds of $2.7 million for acquisition-related transaction costs, an effective tax rate true-up for 2016, and a negative run rate for the disbursements business post the June 15, 2015 acquisition -- and I'll cover that in a little bit more detail later.

Customers' increase in earnings quarter-over-quarter is primarily the result of the increase in interest income driven by the growth in the loan balances. Average loan balances increased by approximately $2.1 billion Q2 2016 over Q2 2015 to $8.1 billion. By product, the average balances increased for C&I loans, which includes owner occupied CRE loans but excludes mortgage warehouse loans, so $546 million for the commercial excluding the mortgage warehouse portfolio. Mortgage warehouse loans increased $425 million average balance quarter over quarter, and multi-family loans were up $1.2 billion quarter-over-quarter average balances.

Customers also benefited from an increase in its net interest margin. Regarding the asset yield, the loan portfolio yield was 3.92% and 2 basis points higher for that held for sale investment portfolio in the second quarter of this year as opposed to last year and was 21 basis points higher for the held for sale mortgage loan warehouse portfolio at 3.41% in Q2 2016 compared to Q2 2015. So our yield on our loan assets was actually up year over year. On the funding side, average deposit balances were up $1.5 billion to $5.8 billion, and borrowings were up $0.5 billion to $2.0 billion Q2 2016 over Q2 2015. Average non-interest demand deposits were up $90 million, average money market deposits were up $750 million, and average certificates of deposits were up $600 million.

Regarding yields, we did see increase in deposit costs, which were up 4 basis points overall; and borrowing costs, which were up 8 basis points, for a total mixed increase of a cost of funding of 5 basis points. With an asset yield increase of 15 basis points exceeding the cost of funding increase of 5 basis points, Customers' increased Q2 2016 income is also in part attributable to that increased interest margin. Of the approximately 10 basis point higher net interest margin, approximately 6 basis points is attributable to higher prepayment fees in Q2 2016.

A key component of Customers' overall strategy, and Dick will be talking quite a bit about this later, and a key element of Customers' approach to managing key risk were strong underwriting standards and strong asset quality. Customers continues to maintain that outstanding asset quality. Non-performing loans in total were $14.6 million or just 17 basis points of total loans, compared to 16 basis points of total loans as of last year. Of that June 30, 2016 amount of $14.6 million, $8 million, or so well over half of those loans related to legacy loan portfolios that we acquired in the 2009, 2010, 2011 range and were not subject to the same underwriting standards as our post-2009 self-originated loans. The provision from loan loss expense in Q2 2016 included $2 million in provisions for asset growth, offset in part by $1.2 million due to increased estimates in cash flows to be received related to loan portfolios purchased at a discount, so the old SOP 03-3 loans, and upon reaching agreement with the FDIC to terminate the two assisted transaction agreements and our changes in estimated cash flows as a result.

Customers also purchased the disbursement business of Higher One Holdings Inc., effective at close of business on June 15. With that closing, Customers recognized the revenue and expense of this business the last two weeks of the quarter and one-time costs associated with that acquisition. Specifically, Customers recognized approximately $900,000 of transaction-related costs that is included in the Q2 2016 non-interest expenses, which were generally for legal, accounting, and other professional services. Customers estimates that it will incur additional costs of between $8 million and $12 million over the next years related to the disbursement business acquisition. In addition, Customers recognized revenues of approximately $2.2 million for interchange and other service fees in the last two weeks and had expenses of $3.2 million for the compensation and other operating costs of the disbursement business. As we discussed at our Analyst Day meeting, the acquired disbursement business is a seasonal business, with the first and fourth quarters being the most profitable; and the second quarter, when many students are not in school, that's the most challenging period, and we just completed that second quarter. Customers will disclose this business segment separate from the banking business beginning with the third quarter of 2016 in its Form 10-Q.

Other than the described effect of the disbursements business, little change in net in non-interest income. Regarding non-interest expenses, considering the one-time costs that I just noted here related to the disbursements acquisition, and considering the one-time reduction in franchise taxes in Q2 2015 we talked about a year ago, non-interest expenses from banking increased approximately $5.5 million, Q2 2016 over Q2 2015. Those increased costs relate to a mix of salaries, technology, professional services, occupancy, and other administrative costs and other matters that reflect operating a $9.7 billion bank compared to a smaller bank. It is worth noting that, and Jay had noted this already, absent the effect of the disbursements business acquired in Q2 2016, so just that $2 million related to the disbursements business on the expense side -- excuse me -- $4 million related to the expense side, Customers' efficiency ratio would have been 49.3%.

Unusual item for this time is income taxes for us. So regarding the Q2 2016 income taxes, Customers reported income tax expense of $13 million on $32.4 million of pretax income, an effective tax rate of 40.1%. The higher tax rate results from Customers' growing business presence in the state of New York, and particularly New York City -- much of our multi-family loan is there, much of our deposit generation is in the New York City area. Customers is currently estimating an effective tax rate for 2016 of 38% as opposed to the previously estimated tax rate that was used last year in the first quarter of 35.5%. The Q2 2016 effective tax rate of 40% catches us up for using the lower tax rate in Q1 2016, and that catch-up in the second quarter was approximately $700,000 added to the Q2 2016 income tax expense. Adding up the pluses and minuses of these unusual items, one-time items, operating expenses was up $900,000 for transaction related expenses; taxes were up $700,000; and the disbursements business, operating at a net -- at a pretax loss of $1 million, offset in part by the reduction in the provision expense I talked about of about $800,000 related for improved cash flow expectations on the termination of the FDIC purchase agreements.

So finally, what I want to talk about is capital. In Customers capital increased $81.3 million in the second quarter of 2016 as a result of a non-cumulative perpetual preferred stock raise of $57.5 million and retained earnings of $16.4 million. Since December 31, 2015, Customers has increased its capital $126.7 million as a result of retained earnings and preferred stock raises. Customers' capital levels continue to exceed the regulatory well-capitalized floors in the current Basel III capital requirements for all regulatory capital ratios. Customers recognizes that its capital ratios, while meeting all the regulatory requirements, are stretched and generally below its peers. Customers will continue to evaluate its options relative to its capital levels, capital mix, product mix, market conditions, and other circumstances in deciding in Customers' optimal capital levels and capital instrument mix.

So next I want to turn you over to Dick Ehst, Customers' bank president, and he'll discuss loan concentration matters and further dive into asset quality matters with you. So, Dick?

Thank you very much, Bob. We here at Customers focus on our commercial real estate concentration risks, and as a consequence of that, we of course provide high net worth family loans to their multi-family holdings. Our loans collateralized by multi-family properties were approximately 39.6% of our total loan portfolio. Recognizing the risks that accompany certain elements of commercial real estate lending, we have as part of our core strategy studiously sought to limit its risks. For example, total real estate construction and development exposure, arguably the riskiest of all, CRE, is under $100 million as of June 30. Our current CRE exposures are focused principally on loans to high net worth families, collateralized by multi-family properties that are of modest size and subject to what we believe are conservative underwriting standards. As of June 30, we had no non-performing multi-family loans. We believe we have a strong risk management process to manage the portfolio risks prospectively, and that this portfolio will perform well even under a stressed scenario.

Here are some unique characteristics of Customers' multi-family loan portfolio. First, principally concentrated in New York City and principally to high net worth families. Second is our average loan size is between $5 million and $7 million. Third, the annual debt service coverage ratio is about 140%. Our loan to value is 67% on a median basis. All loans are individually stressed with an increase of 1% and 2% to the cap rate and an increase of 1.5% and 3% in interest rates. All properties are inspected by a senior member of the lending team prior to a loan being granted and thereafter monitored on an annual basis by dedicated portfolio managers. We, to date, have never experienced more than a 30-day delinquency on any of the multi-family loans that we have originated. And finally the credit approval process is bifurcated; hence the credit process is independent of the sales, customer sales, and portfolio management process.

Now insofar as asset quality and interest rate risk is concerned, you know, risk management here again is a critical component of how we create long-term shareholder value. Two of the most important risks of banking to be understood and managed in an uncertain economy are asset quality and interest rate risk. We believe that asset quality risks must be diligently addressed during good economic times with prudent underwriting standards so that when the economy deteriorates, the bank's capital is sufficient to absorb losses without threatening its ability to operate and serve its community and other constituents. We adopted prudent underwriting standards in 2009 when the current management team assumed responsibility for the bank, and we have not compromised those standards in the last six years. Our non-performing loans, as Jay mentioned earlier, as of June 30 were only 17 bps of total loans compared to our peer group non-performing loans of approximately 95 bps of total loans, and the industry average non-performing loans about 160 bps. Our expectation is superior asset quality performance in good times and in difficult years. Also we have no direct exposure to oil and gas or business investments in fracking.

Interest rate risk is another critical element for banks to manage. An unexpected shift in interest rates can have a devastating effect on a bank's profitability for many years to come. Banks can position their assets and liabilities to speculate on future interest rate changes with the hope of gaining earnings by guessing the next movement in interest rates. Our objective is to manage the estimated effect of future interest rate changes up or down to a neutral effect on net interest income. So not to speculate on whether interest rates go up or down. This allows our team members to focus on generating earnings from the business of banking, aggregating deposits and making loans to customers in the communities that we serve.

Now let's get on to specifics. Again, our total multi-family originated loans were $3.303 billion. We have no non-accruals and we have total credit reserves set aside of $12.368 million. As far as our commercial and industrial loans, which again includes owner-occupied commercial real estate, total of $1.082 billion. We have non-accruals, non-performing loans, of $6.605 million, of which $4.4 million is one loan, and that loan will be resolved before year end. Total credit reserves for commercial and industrial loans totaled $10 million, almost $11 million, so the NPLs to total loans for C&I is 0.61%, and yet total reserves to total NPLs of C&I is 166.5%. Commercial real estate non-owner occupied loans total $1.093 billion, of which we set aside total credit reserves of $4.400 million.

Our residential portfolio is rather small at $119.5 million. We have one non-accrual loan of $32,000. We have a total credit reserves set aside for that portfolio $2.240 million. That results in NPLs of total loans of residential of 0.03% and total reserves to total non-performing loans of over 7,000%. As I mentioned earlier, our total construction loans are roughly $99.4 million, of which we have total credit reserves set aside, $1.209 million. So as Jay mentioned earlier, our total reserves to total non-performing loans is 470.3%.

And now I'd like to turn over the call to Luvleen Sidhu, Chief Strategy Officer of BankMobile. Luvleen?

Thank you Mr. Ehst. What I'd like to do is briefly share with you the strategy for BankMobile and what investors should expect from us going forward.

We launched BankMobile in January 2015 with a mission to make banking affordable, effortless, and financially empowering for millennials, middle income Americans and the under banked, to provide them with wow memorable experiences and not just sell them products; and most importantly, to create happy customers for life and do all of this with a strong risk management culture. We launched BankMobile because there was a need in the market that was not being met. Consumer behavior is rapidly changing, with US customers now interacting with their banks more through mobile devices than any other channel. On average customers are visiting bank branches only one to two times a year versus interacting with their bank 20 to 30 times per month on their mobile device.

Americans are also frustrated with banking fees, with 48% of customers saying they switched banks because of fees. With BankMobile we have turned traditional banking on its head to provide customers with what they are looking for -- a digital banking experience focused on simplicity, best in class user experience and customer service, and analytics to proactively provide value additive products and services to our customers.

We believe the traditional customer acquisition model via branches is gradually becoming obsolete. We estimate that approximately one net new checking account is opened per branch per week. This is a very inefficient, costly model, and these inefficient branches are being subsidized by about $32 billion in overdraft fees charged to customers each year by banks across America. That's more than what Americans spend on buying vegetables.

At BankMobile we have eliminated the need for branches and are instead pursuing two strategies. First, direct-to-consumer through our mobile, tablet and on-line app. Second, through distribution partnerships and white label banking, to reach customers which is our B2B2C strategy. Our first distribution partnership is our relationship with approximately 800 colleges and universities throughout the country. In one year BankMobile has evolved from a start-up investment phase to a shareholder return phase. BankMobile today is one of the top digital banks in the country servicing approximately 2 million checking accounts, likely making us one of the top 25 banks in the country based on number of consumer checking accounts.

We also have a customer acquisition strategy in place whereby we are opening approximately 500,000 new checking accounts each year. We also expect to break even or be slightly profitable by year end 2016. Our future growth opportunities are significant as our student account holders graduate, earn income, look for more financial products and become customers for life because of their positive experience with BankMobile. We believe we have created one of the most successful banking models for serving millennials and middle income Americans and look forward to continuing to share updates with you. We also expect to monetize our investment in BankMobile over the next 12 to 24 months, creating significant book value accretion for CUBI shareholders. Please review all of the information we shared with those of you who were able to attend our Analyst Day in June. All of these materials are available on the Customers' bank website.

Now I'd like to hand it over to our CEO.

Thank you very much, Luvleen. Before we open it up for questions and answers let me just go over a few other highlights.

Number one is: what is our model for shareholder value creation? As you all would know, we are an organic revenue growth company that is building a scalable infrastructure. We are shooting for sustainable double-digit earnings per share and, hence, double-digit growth rate in shareholder value. So, as you know, over the last couple of years we've grown our revenues by 45% since 2011 up until today. Over last year we've grown revenues from the first second quarter 2016 to the second quarter 2015 to 2016 by 35%. Our net interest income over last year, as Bob mentioned, has gone up by 36%. Our core net income last year to this year has gone up by 68%. So that's our model.

We combined that model then with a very robust risk management driven business strategy that Dick shared with you about credit risk and interest rate risk. As a result of that we build tangible book value per share. And that, to us, is a very sustainable way to increase shareholder value. We are very disciplined about acquisitions. We believe that if we do any acquisitions, any book value dilution must be overcome within one to two years; otherwise, we're going to stick with our revenue growth through organic growth strategy. Even this acquisition of the disbursement business that we've done, we believe any dilution to our book value through the intangibles of about $5 million to $6 million, I guess, approximately, that we may have created -- we believe that that will be overcome within a one to two-year period, if not less. And last but not least, our model calls for superior execution through a very experienced proven management team, that those of you who attended our Analyst Days have seen the depth of management in our company, and we believe that that's a very important ingredient to success.

Talking about deposits, as I shared with you, our demand deposits over the first six months grew by about 25%. On average PDA growth over the last five years has averaged 47%. Our total deposits per branch today are $378 million. As Dick shared with from you a loan quality point of view, we expect no significant changes at all in our loan quality based upon our assessment today. And we believe our charge-offs will stay in the very low level of less than 5 to 10 basis points on an average, and it was only one basis point this quarter.

From an efficiency point of view, our efficiency ratio as measured by total costs first as a percentage of assets were 1.65%. For Customers bank itself, excluding BankMobile Technologies, we expect this to remain constant. Including BankMobile Technologies our efficiency ratios will go up for the time being, at least for the next 12 to 24 months max that we expect BankMobile still should be a part of our company, and -- but otherwise, we believe that the efficiency ratios that we have already achieved in the high 40s should actually get down to closer to mid-40s within the next two years or so.

Our revenues, our productivity, we measure that as revenue per employee and assets per employee. We are significantly better in the industry. The banking industry is at $199,000 revenue per employee; we are at $369,000. Assets per employee in terms of efficiency, we are at $12 million of assets, and the rest of the industry is at $5.2 million of assets.

Let me comment a little bit on our capital position, also in line with what Bob had shared with you. We recognize the importance of not only being well capitalized in the current environment, but also have capital buffers to absorb any unexpected shocks. We had cautioned everybody that at June 30 our assets were expected because of the mortgage warehouse business to go up by a couple of hundred million dollars over the last two or three days of the quarter, and that's exactly what happened, and that is why our capital ratios look more stressed than even what they are. But we recognize that.

So we want to share with you that we recognize that we would be crossing over the next two years or so the $10 billion mark. And we believe that a bank which is greater than $10 billion must have much higher capital buffers than banks below $10 billion. So we'd like to share with you our capital targets that we will achieve before we cross the $10 billion mark. And we believe we can achieve these ratios predominantly by managing our asset growth over the next 12 to 24 months and then adding retained earnings and maybe supplementing that with opportunistic capital, such as preferred equity like we have raised.

Our equity to asset ratio we believe before we cross the $10 billion mark should be at about 9% level. And that would be up from, at June 30th, of 7% level. We believe our Tier 1 leverage ratio should be also at about 9% level, and that at June 30 was also about 7%. We believe our tangible common equity to tangible assets, which is important, should be at the 7% level before we cross the $10 billion mark, and as you know that was close to -- little over 5.5% at June 30.

We believe our Tier 1 risk based capital ratio should be more like 11%, and that was about 8.5 to 8.8% at June 30. We believe our total risk based capital should be at about 13%, and that ratio was about 10.5%, slightly under 10.5% in our estimate at June 30. And we believe our CET1 ratio should be at 8% or higher, and that was about 6.8% at June 30.

So you should expect us to manage our growth, take our time, build our capital, build a strong foundation, divest ourselves of BankMobile Technologies, let the shareholders of Customers Bancorp, as Luvleen shared with you, enjoy the monetization of our efforts -- let BankMobile flourish, and we will be a very strong company before we pass the $10 billion mark. And we should not be trading at a discount like we are trading today once we show to the marketplace that we are dead serious about having strong capital ratios also.

So as you all know, at middle of July, we were trading at about 10 times 2016 earnings, and we had compounded annual growth rate of 18% increase in shareholder value since December 31, 2009, which was the time that we took over the management of this company. We are only trading at 1.3 times our estimated end of the year tangible book value, which would be -- is expected to be over $20 a share. And we believe that if our peers are trading at 14 times estimated 2016 earnings and 1.7 to 2 times tangible book, our shareholders should deserve the same kind of multiples with the peers at least, even though we believe our balance sheet will be stronger than that of the peers once we've taken this pause and get to be a stronger company and then keep going and cross the $10 billion mark.

So with that, Renee, I'd like to request your help in opening it up for question and answers.

But I'm sorry, before you do that, Bob Wahlman had received a question from one of you, and let us answer that, because we think it is a pretty darn good question. And so that question was: you acquired this business from Higher One and haven't yet had a significant impact on Customers; and without this effect of this acquisition, how would Customers' performance look? So Bob, do you want to help answer that question?

Yes, sure, Jay, I thought it was a good question, too, and we had looked at that. But the disbursements business added approximately a $2 million pre-tax drag on earnings, $900,000 for transaction related expenses and $1.1 million related to the net pre-tax operating results of the disbursements business acquired in the last two weeks. So had that drag not occurred, earnings would have been about $0.04 higher. So instead of $0.60, it would have been $0.64. Return on assets would have been about 89 basis points, and return on equity would have been 13.8%, almost 13.9%; and the efficiency ratio that we had noted earlier would have been about 49.3%. So pretty much -- what's interesting is when we compare that ongoing bank, second quarter ongoing bank to first quarter ongoing bank, which is what this comparison does, when you compare that to what we set as our long term objective, we would have been pretty much on top of our long term objectives for that company.

Thank you, Bob. Renee, could you open it up for Q&A, please?

(Operator Instructions)

Caller, please go ahead.

Hey, good afternoon, it is Bob Ramsey, FBR, here.

I guess we could talk first about loan growth through the back half of the year. I think previously you had guided to 5% to 10% loan growth for all of 2016, and you've exceeded those numbers at this point. Does the portfolio stay flattish from here? Or do you think there will be some contraction in the mortgage warehouse, given the seasonality in that business, or how should we think about it?

I think, Bob, I'll take that, first, and then, please, Bob Wahlman, if you want to add anything to it. We're at almost $9.7 billion now. We're not going to get across the $10 billion mark; earliest would be sometime in second half of 2017. So it will be prudent for us to manage our asset growth through our loan growth in the second half of this year and also in the couple of quarters of next year. So we expect that mortgage warehouse business should remain strong because of the slope of the curve, so you should expect that portfolio at September 30 to be pretty close to where it was at June 30. On an average, it should be pretty close to where it was in the second quarter, maybe even a little bit higher.

Our C&I business, we expect that to be adding to our loan growth; and we expect our multi-family and our commercial real estate portfolios to be flat or even slightly lower over the next two quarters. We are not emphasizing that business as much right now, but we are building our franchise related business as well as improving our interest rate risk for it in this kind of uncertain environment by putting only short-term assets on our balance sheet and getting even medium-term assets -- deemphasizing those on our balance sheet and staying somewhere between $9.7 billion to $9.85 billion over the next four to five quarters.

Okay.

What about -- talk a little bit about multi-family loan sales. Looks like you guys didn't have any this quarter, and just curious why that was the case. Given the amount of growth you had, it would have seemed like an obvious valve to let off some of that excess.

Bob, we manage the balance sheet by looking at the seasonality of our different portfolios, and the market was flooded with sales of multi-family loans due to a competitor's acquisition of another company. So we are also very disciplined whereby, when we saw the flatness of the curve, our multi-family loan portfolio is an extremely valuable portfolio, as Dick shared with you, with nothing at all which is delinquent, and in the 60s loan to value ratio, and with a debt service coverage ratio of 1.5%. So if anything, we will be opportunistic, and if we see opportunities to sell some of the multi-family portfolio in the second half we will take advantage of it, but we are not counting on that in any of our forecasts.

Okay. Great. Last question and I'll hop out, but given the full quarter benefit next quarter from the new student loan disbursement business, any direction you can point us to in terms of fee income and expenses on a consolidated basis?

Bob, as Bob Wahlman mentioned to you, this is a seasonal business, so we will have a very, very slow July and August. We will have somewhat of a decent September, and it will be the fourth quarter that will we start to see our non-interest income revenues really go up. So we expect a small loss net-net from this business in the third quarter.

And you will see this business reach much better levels of performance and more normalized performance. We would rather have you give us a chance to share with you over the next couple of quarters segment reporting, and I think it will become very clear to you what is the power and the normal seasonality over here, you know, rather than us guessing absolutely correctly.

Okay. Great. Thank you.

We'll take our next question. Caller, please go ahead.

Hey, good afternoon, it's Mike Perito, from KBW.

Hi, Mike.

Jay, maybe a quick follow-up to Bob's questions -- so I appreciate the seasonality on the revenue side. But if we think about the expenses with the Higher One acquisition, are they pretty much more evenly spread out over the year? And would this kind of run rating this $3.2 million, I know it was only for a couple of weeks, but is that kind of the right ballpark number to use as we think about the expenses coming on for a full quarter?

Well, let me take that one, Mike, and it's, we're still learning, right? It is still early days. But this, the business expenses break down into two separate components; one is fixed cost component, and the other is a variable cost component. And the variable cost component is probably about two-thirds of the total costs, so what you will see -- probably about half of the total costs. So what you'll see in the quarter or in the third quarter, was -- I think that you'll see the -- let me -- I'm struggling a little bit with the answer here.

No, that's actually already helpful. So, I mean, there is still some seasonality in the expenses.

There will be seasonality in the expenses, because as the --

-- of the variable driven fees.

Yes, there will be variable driven fees.

I think on an annualized -- on an average, on an annualized basis, Mike, you should expect between $4 million to $5 million a month of non-interest income flowing through our income statement. So we are talking about $12 million to $15 million; low would be -- you know, a low month might be closer to -- please don't hold us exact, as Bob said-- we want to be --.

Yes, no, I-

Low would be $12 million, and high will be greater than $15 million.

Yes.

But you say average is $5 million a month, which is $15 million, close $16 million in non-interest income from this business -- I think that would be a fairly good number.

I appreciate that, I just wanted to make sure there was -- you know, seasonality on both sides, I was capturing it accurately.

And Mike, I just want to add one point: one thing that makes this very more difficult to do than you would normally see in an acquisition is because of Department of Education rule changes and the business strategy changes; it's changing so many things. We're still learning.

Right, yes. So the transaction closed on June 15. Looking at the period end balance sheet, how -- are all the -- I think it was the $250 million deposits, those are not -- it doesn't look like those are incorporated on the quarter end balance sheet. Am I missing something there?

Mike, there were -- deposits of this business were held at two banks. One is Customers Bank, which had about $250 million of deposits at June 30th; they were already under the Customers Bank balance sheet.

Yes.

The second set of deposits were held at WEX Bank, and the WEX Bank deposits at June 30 were approximately $300 million. They had a little bit greater share.

What we are doing this quarter is we are continuing to service for WEX Bank those deposit relationships that they've had. We are not going to service those beyond this quarter. We have informed those customers that, and we are giving the choice to those customers to do what they would like to do, whatever is their preference. If their preference is to get a check from us, we will send that check. If their preference is to take the best checking account available in America, we will let them take that preference.

So the other piece of the deposits will still come over. You know, whatever percent retention of that $300 million will hit the balance sheet in the third quarter.

Third into, latest, early fourth quarter.

Okay. Thanks. That is helpful.

Maybe switching over on the question you guys got via e-mail about the legacy bank performance, and I just maybe wanted to zero on the 89 basis-point ROA. As you think forward, there is going to be some capital building, and obviously there is not much more capacity from a balance sheet perspective, just given the smaller percentage of securities you already have. What do you think needs to happen for you to bridge the gap between the current ROA and the 1% that you are shooting for over time?

I think, Mike, our belief is what we had told you -- is that within a two to three-year period we will get there. We have a very high confidence level of getting there. And the way to do that would be -- it will be much more cleaner, it will be noisy for the next three to four quarters because of seasonality of BankMobile Technologies and the one time deal costs that will be flowing through for us -- so, as Bob mentioned, that $8 million to $12 million, all of that will be behind us once we get to end of second quarter next year.

So you will start to see the normalization of our bank. It is possible we could earliest get to that level, you know, once BankMobile Technologies is profitable, which we expect it to be no later than middle of next year. The second thing is once BankMobile Technologies is separated from Customers Bank, as such, and is an independent company, we expect within 12 months after that we would be operating at a 1% ROA.

Yes. Let me ask the question a different way. Just isolating the legacy bank -- so I understand that BankMobile will certainly be a little bit of a drag here for the next 6 to 12 months, but as you look at legacy Customers Bank now to when you spin off BankMobile and expect to be at the 1%, what are some of the things you guys think are key to achieving that.

It is becoming more profitable with each individual customer relationship? Is it more broad-based expense scaling up on your fixed expense infrastructure? Anything else that I maybe didn't mention?

No, I think what I shared with you, which is the scalable infrastructure -- you know, you start to build your organic growth; we already have the expense infrastructure that we have built in also for the $10 billion and higher bank. We have already done the preliminary DFAST analysis. We already gone through the preliminary capital plannings which I shared with you in very much detail. We've done our stress-testing for the DFAST.

We think only crossing the $10 billion for us might cost us only a $1 million to $2 million, maybe max of $3 million, unlike other companies, costing them greater than $10 million. So we have our models, and when we share with you that combination of -- it's positive operating leverage, building your revenues faster than your expenses. Having a scalable infrastructure in place is what's going to do -- what is going to get us to our 1% ROA. There is no magic to it, and we think that will happen within one year after divestiture of BankMobile.

Great, thanks, Jay. I appreciate it.

We'll move to our next question. Caller, please go ahead.

Hello. Frank Schiraldi, Sandler O'Neill. Just a couple of questions. Under the disbursement business, Bob, what is the $8 million to $12 million in additional expenses? Is that part of the payout for Higher One?

No, these are such things as card issuance cards, because we'll need to reissue all of the cards, because -- as the processor bank will be different. And there is over 2 million cards to be issued; it's a lot of cost.

There is the retention bonuses that we have in terms of stabilizing the employee workforce and our team members up with the company. And there is also the transition services agreement, and then there is an assortment of other, what we'll call one-time costs that would come through there.

Okay. So you look at it just as one-timer merger costs, and that will flow through the P&L.

That will flow through the P&L.

Just like it flowed through our P&L this quarter.

Yes. We have no discontinued operations, Frank. So there is no one-time discontinued operations adjustment you oftentimes see in acquisitions. Because we picked out only what we wanted. So these will be costs on a going-forward basis.

Got you. The expense you note for those two weeks related to the disbursement business, that wouldn't include BankMobile expense; that would be separate. Right?

The BankMobile expenses are not included in that number. They are a different number.

Okay. And just finally, just wanted to make sure I understand. As you look at -- think about BankMobile and divesting of that business at some point, would you say your Customers is likely to cross over the $10 billion asset threshold prior to that divestiture?

Frank, we are not dumb. That will cost us $40 million if we do that, and you know that, too. So we are not going to cross the $10 billion mark till BankMobile is divested.

Okay, that didn't make sense to me. Just finally on the TCE ratio, at your Investor Day I think in part of the presentation you talked about a 7-4 TCE ratio, about there, by the end of 2017. Is that still -- I'm assuming that is still a reasonable target you can get to just internally by controlling balance sheet growth?

I think, Frank, as we shared with you, our TCE target is greater than 7%, so that is consistent with that.

Okay. Okay, Thank you.

(Operator Instructions)

Caller, please go ahead.

Thank you.

It is Bill Dezellem at Tieton Capital, couple of questions. First of all, relative to $8 million to $12 million of costs from Higher One, two things, is that going to be spread out somewhat evenly over the next four quarters, or will it be something different, and if so, would you share that with us? And then secondarily are you going to be breaking those numbers out for us, so we'll be able to calibrate them?

I'll answer the second question first. Yes, I think we'll break them out as part of our segment disclosure or discussion in regards to segment disclosure. In regards to the first question, it's going to be as it relates to the TSA expenses, that will be spread out over the full 12 months. Bonuses will probably be mostly rear end loaded, and the card issuing costs will be more up front.

Great. And then I'd like to shift, if we could, to the $1.3 million that you do not feel you're going to owe the FDIC, that reduction. Would you talk through the dynamics of what led to that, please?

So with the FDIC, we have entered an agreement, signed an agreement -- was done after June 30, but we still have the cash flows to estimate, and we know what the cash flow estimate was going to be as of June 30, so we did figure that into the agreement. So we have a $2.2 million accrual at this point in time, and the amount that we agreed to pay the FDIC upon conclusion was $1.4 million, so that is an $800,000 difference there.

The additional $400,000, $500,000 that you're referring to, Bill -- when you said $1.3 million, there is a second component piece of that, and that is some of these loans that we purchased aren't counted forward in accordance with the old accounting standard SOP 03-3, and that's also based on cash flow expectations. And as we go forward there, what we're finding is we have a good estimate, a conservative estimate, and from time to time we do make collections on loans that we were not anticipating, and those cash flows just flow through to the P&L. So there is another $400,000, $500,000 that came through this period in regards to the 03-3 in addition to the FDIC settlement.

Just to make sure I heard that last part correctly. You're collecting more on those loans than you otherwise anticipated, and that is why that additional $400,000 to $500,000.

That is correct.

Great.

We'll take our next question. Caller, please go ahead.

Steve Emerson, Emerson Investment Group. Please give us an update, please, on Reliance India divestment effort. And also if there are any discussions going on with the Philadelphia Fed, which would finally enable you to purchase a bank charter for MobileOne, perhaps some flavor for the status.

Okay. Steve, as far as Religare investment is concerned, I think we had shared with you that we are going to be looking at evaluating till the end of this year, and we're still very confident that either we will be out of it or we will have some kind of BankMobile related partnership, and as a result of it, which we -- we will only do that if we believe it's going to be very beneficial to BankMobile, and that would be more of a BankMobile divestiture.

So that's where we stand on that. And as far as looking at acquiring a banking charter, we're in the process of looking at various options. There is no two ways about it. We are very hopeful by the end of the year it will become -- or into the first quarter, it will become very clear, and we will be able to make announcements.

We just closed this deal. We are not going to give away BankMobile. BankMobile is worth a lot to our shareholders. We are just taking our time to make sure that we show a few quarters of earnings and income and expense relationships, like all the questions that were asked today. We think the valuation is going to be more dependent upon that, and that gives us a little bit more time not to add any more expenses by having another second bank on our balance sheet for too long. We just want to try to time it so that it would be the most efficient execution by us.

Thank you.

At this time there are no further questions. I'd like to turn the conference back to our presenters for any additional or closing remarks.

Well, thank you very much for dialing in and please give us a call if you have any follow-up questions, and have a good evening.

That does conclude today's presentation. We do thank you for your participation.