Customers Bancorp Inc (CUBI) 2016 Q3 法說會逐字稿

Good afternoon, and welcome to the 2016 Q3 Customers Bancorp earnings call. Today's call is being recorded. At this time, I would like to turn the conference over to Joe Noyons, Investor Relations. Please go ahead, sir.

Thank you, Gwen, and good afternoon, everyone. Welcome to Customers Bancorp's third-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 Luvleen Sidhu, Cofounder 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 may cause actual performance 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 these 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 CEO, Jay Sidhu. Jay, the floor is yours.

Thank you, Joe, and good afternoon, ladies and gentlemen. Thank you so much for dialing in. Also joining Bob, Luvleen, and myself over here is Dick Ehst, the President of Customers.

I'm very delighted to report to you that we had another very good quarter. As you know, the third-quarter 2016 earnings per share was up 28% over third quarter 2015; and for the first nine months of 2016, our earnings per share are up 32% over the first nine months of 2015 -- EPS of $0.64 during the quarter. And for the first nine months of 2016, our EPS once again was much higher -- was, like I stated earlier, 32% higher than last year.

From an asset-quality point of view, we are pleased that our nonperforming loans actually improved a tad from -- and are only 16 basis points of total loans at September 30. From a reserves point of view, our reserves are about [288]% of nonperforming loans, again above our peer averages.

Extremely interesting also is our liquidity position improved significantly, our noninterest-bearing-demand deposits were up about 39% over the same period last year and now exceed $1.1 billion of our total deposits. And our total deposits are up about 28% over last year.

From a noninterest-income point of view, as expected -- we had shared this with you -- that with the combination with the disbursement business of Higher One, we today have 30% of our revenues are fee-based revenues, or noninterest-income revenues.

Our shareholder equity increased by $109 million during the quarter. Our tier-one leverage ratio went up by over 100 basis points at September 30 over June 30, 2016. And our book value at September 30 was up to $20.78, and that's a 15.8% increase over the same period of last year.

From a performance point of view, our return on average assets was 89 basis points, 0.89% at September 30. Our return on average common equity was 13.2%, and this compares with ROA of 82 basis points last year at September 30 and ROE of 11.8% last year. Return on average assets pretax [pre-provision] was 1.5%, and return on average common equity pretax pre-provision was 23.5%.

Our efficiency ratio did go up to exactly 61%. We believe that's temporary, and I will later on discuss with you our strategy for BankMobile, which is actually performing very well. So later on, you will hear from our colleague Luvleen who will talk about the BankMobile performance.

Before I hand it over to Bob Wahlman, let me update you about something -- about a risk factor that we disclosed in our 10-Ks and 10-Qs over the last couple of quarters.

As you know, we had entered into a [vendor] relationship with Higher One back in 2013. And very shortly after entering into this relationship, we identified a potential key critical compliance deficiency at Higher One. We demanded that Higher One fix that immediately. However, due to systems changes, it took them about 120 days to remedy the situation.

Principally as a result of our finding, as well as observations by Federal Reserve and FDIC from their examinations at Higher One, as you know, another financial institution and Higher One in the past couple of months were required to pay fines and restitutions and enter into consent orders with their regulators.

We too want to put this issue or this pending risk factor behind us, and we are hopeful that in the very near future, we too will be putting this matter behind us and settling this matter with the regulators.

I just want to share with you that if there are any financial penalties imposed as a part of the settlement, in our opinion they will be insignificant, and they will not have any effect at all on the Company's performance or its financial condition, as we had set up a reserve for potential regulatory issues back about two or three quarters ago.

So with that, let me hand it over to Bob to really go over the financial details at September 30 with you.

Thank you, Jay, and good evening, everyone, and thank you for joining us.

As Jay noted in his comments, Customers is pleased with the third-quarter 2016 operating results, reporting net income available to common shareholders of $18.6 million, or $0.64 per share fully diluted. That is compared to net income available to common shareholders of $14.3 million, or $0.50 per share for the third quarter of 2015 a year ago.

This is a Q3 2016 over Q3 2015 increase in earnings per share of 28%. Q3 2016 includes a full quarter of results from the June 15, 2016, disbursements business acquisition, something I will spend a few moments on later in this presentation and Luvleen will also talk about.

Customers' increase in earnings is primarily the result of an increase in net-interest income, which grew by $14.6 million, or 29%, quarter this year over a year-ago quarter. The increase in net-interest income was driven by a $1.9-billion increase in average loan balances, specifically -- commercial loan average balances increased $517 million; mortgage warehouse loan balances increased $458 million; and multifamily loans average balance increased $928 million in Q3 2016 over Q3 of 2015.

Customers also benefitted from an increase in net-interest margin, which at 2.83% for Q3 2016 was 4 basis points higher than last year's net-interest margin for the third quarter of 2.79% and was flat on a quarter-over-quarter basis.

The 13-basis-point higher average yields in the loan portfolio -- increase in average yield of the loan portfolio exceed the 11-basis-point increase in the cost of funding those assets from the third quarter of last year. And I would also note that last quarter reported total assets of $9.7 million and reporting total assets of $9.6 million this quarter; and so the loan portfolios were largely flat on a quarter-over-quarter basis.

Regarding funding the balance sheet -- Q3 2016 average deposit balances of $7 billion were up $1.4 billion over Q3 2015 average deposit balances. Looking into the mix of deposits, average demand deposits increased $254 million. Money market average balances increased $607 million. And CDs increased $518 million quarter 2016 over quarter 2015.

And as Jay noted, and I'll just repeat it because it's worth noting, that the demand deposit balances ended at over $1 billion at September 30, 2016, a new high for Customers Bank.

Prepayment fees, also a component of our net-interest margin -- prepayment fees for Q3 2016 totaled $1.6 million, compared to prepayment fees of $1.3 million in Q3 2015. So the increase in prepayment fees of $300,000 had a negligible, approximately 1-basis-point effect on net-interest margin.

Turning to noninterest income and noninterest expense, both increased significantly in Q3 2016 compared to 2015 because of the June 15, 2016, acquisition of the disbursement business, which we talked about considerably on last quarter's call.

Noninterest income as a result of -- noninterest income increased $21.4 million to $27.5 million in Q3 2016 compared to a year ago. Of the $21.4-million increase, $16.4 million is attributable to interchange, card revenue, deposit, wire transfer, and university-fee revenues associated with the BankMobile business segment.

The remaining $5-million increase in revenues relates to customer back-to-back swap income of approximately $1.5 million and a $2-million cash recovery of a previous charge-off.

Noninterest expenses increased $25.9 million to $56.2 million for Q3 2016. Of the $25.9-million increase, $17.5 million is related to the BankMobile expenses -- or increases in the BankMobile business and the disbursements business.

Of the remaining $7.4-million increase in expenses, which was only a 24% increase in expenses, $3.9 million relates to a one-time expense for technology-related services; and the residual $3.5-million increase results from higher headcount and other operating expenses associated with running a bank that's $2 billion larger than what it was a year ago.

As Jay noted, the Customers efficiency ratio was [appointed] at 61%. Removing the BankMobile-related increases or expenses and noninterest revenues and expenses, the efficiency ratio would have been approximately 50% for the third quarter, so a useful number if you're tracking Customers' efficiency ratio this period compared to prior periods.

Regarding income taxes, Customers is estimating its income taxes using an effective tax rate of 38% in 2016 compared to 35.5% in 2015. The increased effective tax rate results from increased assets attributable to the New York area, particularly to the New York City metro area, much of which is associated with the increase in our multifamily portfolio over the past year.

In addition in Q3 in taxes, Customers recorded an $800,000 true-up, or increase in the tax expense, related to filing of the returns and the annual accrual to the actual tax provision true-up that we have every year in about the third quarter; and there was an increase this year, as we filed our tax returns and paid $800,000 more than what had been estimated last year. In 2015, Customers reported a benefit for the tax provision to actual true-up.

Turning our attention to asset quality, an area we often emphasize -- because of the quality of our loan portfolio, it is a distinguishing characteristic of our bank. We have worked to create a bank that we believe will be profitable in good times and bad economic times.

Key to that performance in bad economic times as a sustainable bank is strong asset quality. Consistent with our goals in this area, we are reporting nonperforming loans of only 16 basis points of total loans. This ratio of nonperforming loans generally has been sustained over the past 12 months -- or improved over the past 12 months, as the ratio was reported as 27 basis points at September 30 of 2015.

I think it's important to note that as of September 30, 2016, there are no NPLs in our multifamily, nonowner-occupied, or construction-loan commercial real estate portfolios, nor do we have any notable migration of loans originated since 2009 to nonperforming status during the quarter.

The combination of the steady outstanding asset quality combined with little growth or change in the mix of loans in our portfolio resulted in our provision expense in Q3 2016 of just $88,000.

Regarding Customers' capital ratios, where we've had considerable interest in recent quarters -- during the quarter, Customers increased total capital by $109 million, largely due to net income of $18.6 million, a non-cumulative perpetual preferred stock raise of $85 million, and approximately $5 million raised through our announced ATM offering.

Combined with our maintaining our total asset size at around $9.6 billion, we obtained increases in all our regulatory capital ratios. For all the risk-based (inaudible), the increase was over 100 basis points, with risk-based capital up to 11.8%; and the leverage ratio was increased at 8.2%.

Turning our attention to the performance of our two segments, community business banking and BankMobile, we did say that we would be providing segment disclosures for this quarter, subsequent to the disbursement business; and so we'll turn our attention to that.

For Q3 2016, we calculate the community business banking, which is our historical core banking franchise, as generating net income to common shareholders of $19.8 million. And the BankMobile segment is generating only a $1.2-million loss.

Our methodology for calculating income and assigning costs, described a bit more completely in our investor-presentation materials, assigns expenses based upon where we believe those expenses would be incurred post the planned divestiture of BankMobile.

In addition, BankMobile receives a credit for the deposits it generates that are used to fund the community banking business earning assets. The yield used in our calculations is the current market yield paid for [borrowed] liabilities of a [life] duration of those liabilities.

If BankMobile for a standalone entity, it would arguably increase its revenues by buying securities or making loans, both of which would generate net-interest income in excess of that the segment currently receives for the originated deposits.

Other notable accomplishments for the BankMobile business is the origination of over 200,000 new checking accounts; the migration of over 300,000 checking accounts from the second bank that participated with Customers and Higher One in the program; and the addition of colleges and universities to the serviced educational institution that will provide access to over 130,000 additional students for the 2017 academic year.

With that, I'll conclude my comments, and I'll turn this over to Luvleen, who is BankMobile's Chief Strategy Officer, and is going to provide additional insight into the activities of this business segment. Luvleen?

Thank you, Bob. I would like to spend a few minutes providing you with an update on BankMobile technologies.

Today, BankMobile has become one of the top digital banks in the country, with approximately 1.75 million checking accounts. Since the closing of the Higher One deal in mid June, we have already opened approximately 200,000 new checking accounts and attracted approximately 300,000 additional accounts from a former Higher One partner bank. So overall, we have attracted approximately 500,000 new checking accounts since our acquisition.

Additionally, our integration with the Higher One disbursement system has been flawless and is now behind us. As of September 30, our BankMobile-related non-interest-bearing deposits have exceeded $600 million.

We continue to implement strategies to increase the number of student checking accounts we open through our relationships with approximately 800 colleges and universities around the country. This entails continuing to grow the number of colleges we service through our disbursement business and also improving the BankMobile Vibe checking account offering, to increase the rate of adoption during the refund-selection process.

In terms of growing the number of colleges we serve, since the announcement of the Higher One acquisition we have added 22 schools to our client list, giving us access to 201,000 more students, which is four times more than what Higher One sold the previous year.

We are also implementing various marketing strategies to increase account activity of our current student customer base and retention after graduation of these students through partnerships and product and feature enhancements.

Additionally, BankMobile Labs, which is 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 in December 2016. This app uses proprietary, cutting-edge technology, and in our opinion will be the best mobile banking app in the market.

We will continue to pursue our direct-to-consumer strategy in the coming months but will also continue to develop our B2B2C strategy, which focuses on acquiring customers through distribution partnerships and white-label banking.

We believe our partnership 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.

We often are asked the question, how is our business model different from traditional banks? I would like to briefly walk you through four of our main focus areas -- customer acquisition, customer engagement, customer development, and customer retention -- and outline for you how our business model is different from the traditional bank business model.

Starting with customer acquisition, the branch network has primarily been the customer-acquisition vehicle for traditional banks. Research shows that approximately only one net new checking account is opened per branch per week, and costs per acquisition on average is greater than $500 per customer. In our model, through distribution partnerships and white-label banking, our marginal acquisition cost is approximately zero to negligible.

When looking at customer engagement, the traditional bank model focuses on engaging with customers through various channels, including branches, phone, mobile, and online. We, on the other hand, provide a mobile-first experience that focuses on engaging with the customer by using data analytics, gamification, and providing tools like our credit builder, which we are rolling out with BankMobile 2.0.

Customer development, which to us means empowering the customer with financial knowledge and advice -- the traditional banks really only reserve this for their high-net-worth clients. We at BankMobile provide financial coaching and personal bankers for all of our direct deposit, or what we call VIP customers.

We also have a strong focus on financial education, delivered through weekly podcasts, educational blogs, our nationwide campus investor program, and our online financial curriculum that comes with the certification.

Lastly, customer retention for traditional banks has focused on bundled pricing and incentivized cost selling by bank employees. While at BankMobile, we are much more focused on offering best-in-class financial products through fintech partnerships, creating an Amazon-like experience for financial services that is memorable and helpful to our customers.

Although we have managed to become one of the fastest-growing and largest mobile [first banks] in the country in a short period of time, our future growth opportunities remain significant. I look forward to keeping you updated as we continue to build this successful venture.

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

Okay. Thanks so much, Luvleen. I really wish we could be retaining BankMobile forever. That's how pleased we are and we have been with BankMobile. But as you know, Customers Bancorp is about a $9.6-billion, $9.7-billion asset bank holding company. We are well aware of the Durbin Amendment, and that's why we have to divest it. So let me update you on where we stand with our divestiture plans for BankMobile.

Back in June on our analyst day, we had shared with you that we were looking at the most probable option being that we would acquire a bank, we would then become a two-bank holding company for a while; and for a couple of quarters, we would actually move BankMobile into a separate bank within Customers Bancorp. And then we would probably do an IPO. We have now concluded that that would take 18 months or more and Customers Bancorp should not wait for 18 months without having all strategic options open to it.

So we have decided that we are going to be selling BankMobile to another bank, and it would make -- we can execute that over the next few months. And in this fashion, Customers Bancorp's shareholders should be handsomely rewarded for being the venture capital behind BankMobile so far, for really helping BankMobile grow from an idea phase to an awesome company that is the number-one digital bank, not only in the United States but in our opinion, probably the world, when you look at the customer acquisition, customer retention, the revenue model, and the growth opportunities to continue with it.

So we'll keep you informed, but please stay tuned. We are very optimistic about the value creation coming out of BankMobile for Customers Bancorp shareholders. And we are so delighted with the management team that has joined us from Higher One and the management team that we had over here and the new additions to the management team that we've brought on since this Higher One disbursement joined with BankMobile to become the BankMobile technology that Luvleen just talked about. And we will do everything possible for Customers Bancorp to retain as much of an ownership as the regulators will permit us to retain in the divested BankMobile technologies business.

Now let me talk a little bit about our strategy at Customers Bancorp going forward. So as Bob mentioned about capital -- capital is very important, and we recognize that being greater than a $10-billion company requires higher capital ratios.

So as we had shared with you, we've set targets of 9% tier one and targets of about 13% risk-based capital, and to be totally compliant with DFAST requirements, even though they are not applicable to us at all right now. But sooner or later, they will become applicable to us.

So by managing our growth, continuing to improve our profitability, divesting ourselves of BankMobile technologies, we believe our capital ratios in the near future will be, in fact, above, if not within, a strong peer-group average. And we will (inaudible) position Customers Bancorp very well to look at every strategic option at this time, including organically crossing the $10-billion mark.

From an interest [rate risk] position, we are very well positioned. We understand and recognize that there's a high degree of probability of a 25-basis-point increase in the short-term rates and the probability or the possibility of a continued flat curve.

I want to mention to you again, a flat curve should not hurt Customers Bancorp at all. Our strategy is not to take bets on interest rates. Our strategy is to be in the kinds of businesses which are low risk and kinds of businesses that help us maintain an interest-rate-risk position that should not hurt our profitability, and to be in the kinds of businesses that even in difficult times we can maintain our profitability. So we are well positioned for [a fed] increase and (inaudible) improvement in the slope of the curve.

As I mentioned briefly about getting ready for the $10-billion mark crossing -- so we have internally completed and started a process and have already completed a preliminary DFAST analysis for us. And we have -- we're going through all the steps. In fact, today at our board meeting, we had advisors, consultants sharing with us everything. And we feel very comfortable and very good about the way we are prepared for crossing the $10-billion mark, because we think our shareholders will be rewarded handsomely once we execute our strategy to be bigger than a $10-billion bank and looking at every single strategic option to make that happen, and not be in a position where the only option appears to be selling the Company.

So we are well positioned for that. And we believe that there is a high degree of probability that at some time in 2017, in one form or another, that we would be crossing the $10-billion mark.

As far as some comments on the concentration issues -- I just want to share with you that at September 30, our multifamily loans were only 345%, and that's down from well over 400% of our risk-based capital. And we had completed a very, very thorough risk assessment of all our concentrations, including the multifamily portfolio, and once again wanted to share with you that our average loan size remains to be between $5 million to $7 million.

Our annual debt-service coverage ratio remains about 1.4%. Our average yield in our portfolio is about 3.8%. Our median loan-to-value ratio is about 70%. Our geographic concentration remains in the New York City area. [In our] segment of the New York City area, multifamily remains very strong. All properties are inspected prior to the loan being granted and monitored thereafter on an annual basis by dedicated portfolio managers, and Customers to date has never experienced anything more than a 30-day delinquency on any of our multifamily loans that we have originated. And the credit-approval process and the credit-review process remains independent of the customer-sales and portfolio-management process.

We have a very good relationship with our clients, who are high-net-worth families principally. We are not engaged in doing financing for REITs or financing for large private equity funds or any other leveraged type of financing. This is fundamental financing for the high-net-worth segments. So we are very comfortable with that.

As far as C&I business is concerned, the economies in our local markets between Boston and Philadelphia are doing reasonably well, and our pipeline looks good, and we continue to see -- you should expect us to continue to see to build that business.

As far as our banking -- the mortgage companies are concerned, or what people call the mortgage warehouse business -- as you know, they are nothing different than secured commercial lines of credit to companies which happen to be in the mortgage-lending business. So they are C&I loans to us.

But they do come with some volatility. We are expecting that on an average, our mortgage warehouse business will be down about $100 million to $200 million on an average compared to where it was in the third quarter. But you will see a corresponding increase in our other loan portfolios during the fourth quarter, while we try to maintain our average size of the balance sheet somewhere between $9.6 billion to $9.9 billion during the fourth quarter, because we are very focused on improving our capital ratios and staying below $10 billion till the divestiture of BankMobile is completed. And then we will look at every strategic option once again to cross the $10-billion mark.

So with that, you all know about our valuation. I'm not pleased to share with you that we are only trading at 10 times earnings and about 120% of book value, but this too will change.

So with that, Gwen, let's open it up for questions and answers.

(Operator instructions) Bob Ramsey, FBR Capital Markets.

Good afternoon, Jay. I wanted to be sure I heard you right. Did I hear you say that the plan is to execute a sale of BankMobile in the next few months?

That is correct.

Okay.

And that would be, Bob, because that will be quicker, and it opens up strategic options for us to do whatever is necessary to continue building Customers Bancorp.

Sure. Do you know at this point if the plan is to sell to an existing bank that has some other bank strategy, or would the plan be to sell this into maybe a small bank that would be some sort of reverse merger that would really sort of be BankMobile predominantly post transaction?

The most important thing for us, Bob, is that we really love this business and we think it's a strong business and a very high-growth business. And we have a tremendous amount of respect and admiration for the management team of BankMobile that is running this business.

And the kind of clients and the partnerships that Luvleen talked about and the kind of colleges and universities that Andrew Crawford, who runs that business for us, and Casey McGuane, who run that student business for us -- they have built a pipeline, and it's very good.

So our partner who we would negotiate to sell this to, we want to be positive that they are committed to building this business and growing this business. That will be the main driver for us. And we will look at all the partners all the way from potential small banks or to somebody larger, whichever makes the most amount of sense.

Okay, great. And if you're talking the next few months, I'm assuming you've already started that process of having discussions, putting out indications, feelers, etc?

That's correct.

Okay, great. Shifting from BankMobile to [provision] was obviously really low this quarter. I guess that reflects the fact you don't put a lot of loans on the books you don't need [to build the] reserves. Is it fair to assume provision will stay low until you guys are able to reignite the growth at Customers Bank?

That's correct, and let's hope it's not too many quarters away -- it's only a few months away. But like I gave you the guidance, we expect to be between $9.6 billion to $9.8 billion or $9.9 billion at December 31.

Okay. And I know in -- I think it was a press release that mentioned that there was a $2.2-million recovery of a previously reported loss that [ran to] fee income. Was this that fraud issue that -- I can't remember now if it was a year ago or when exactly it happened -- but was this a recovery of that, or is this something different?

No, this was a recovery of a fraud issue during (inaudible) mortgage. We really don't want to talk about customer-specific information, but it was something that we had written down earlier, and we expected it to recover. We had told the street we expected it to recover, and we recovered it.

Okay, so this was the mortgage warehouse thing from sometime back?

I don't think we can comment on that at all. I'll leave it up to you to (inaudible) figure it out.

Okay, got it. And I know you also noted that there was $3.9 million of one-time expense related to technology-related services. What does that pertain to?

We have -- we've based it upon the merging of the two businesses. There was some issues that came up and based upon the size of the assets and those kind of things. We wanted to take a very conservative view, and so we've set up a reserve so that -- we are trying to [dissolve] it, but it was prudent and conservative because we were having a very strong quarter that we set up a reserve against that potential liability.

Okay, great. And then last question, and I'll give someone else a turn -- but just in terms of capital, I see you guys did trickle a little bit of stock out there with the ATM, just kind of curious about your appetite to continue to build the common equity at Customers Bank through the ATM.

As you know, we decided to go ahead and build our tier-one equity through an $85-million [preferred] offering. So we basically [stopped] the ATM offering during that time period. And then we are going to be very disciplined about the price levels that we'll be issuing our common equity at. And so we will continue to keep it open, and we will continue to do everything possible to try to get to our equity [to asset] ratios, as well as our tier-one, as well as our risk-based capital ratio that I've outlined to you, which are about 9% and [13%]. And we'll look for the best way to do that without diluting our book value and (inaudible) existing shareholder value.

Okay. And sorry, just along the line with the preferred that you guys have issued -- should we expect a little bit of increase in the preferred dividend expense next quarter? I can't remember if you had a full load of that expense this quarter or whether some of that actually comes in next quarter.

Some of that will come in next quarter, Bob. This issue was in August, and so we only had a little bit more than a month, a month and a half.

Okay. Do you have -- what would be a good number to use for preferred dividend expense next quarter?

Well --

A 6% coupon --

Yes, a 6% coupon, $85 million issued.

All right. I'll do the math. Thank you.

Thanks, Bob.

Mike Perito, KBW.

Good afternoon. Jay, I just wanted to clarify -- I think I might be mixing and confusing two different things. So you had mentioned that there was the regulatory-focused issue at the legacy Higher One. That's separate -- the tech expense, the reserved -- are those two items linked, or are those two separate items?

No, they are not at all linked.

Okay.

Not at all.

So there was a reserve that you guys have for the regulatory issue that you guys set a few quarters back, and then this is something separate?

Yes. This is -- yes, the tech issue is a potential dispute with a technology partner, as I said. And that regulatory reserve was set up by us in the early part of 2016, I think in the first quarter or second quarter. And we're the ones who identified the problem at Higher One. We're the ones who solved it. And that's why we wanted to make sure that it is still resolved because it's a pending risk issue, and we are hopeful that this quarter we will try to put that behind us.

Okay, that makes sense. Thank you, sir. Maybe switching to the BankMobile sale and $10-billion crossing issue, a couple separate questions -- first, as you have started to look to find the partner, has that pending regulatory issue and the desire on your end to keep ownership, has that limited the scope of people considered, or what's the reception been so far to -- as you guys are starting to look for the right partner there?

Not at all. No, in fact, whatsoever, of any of the regulatory issues -- none. In fact, you can see -- Luvleen reported to you, we are building the business, we are growing the business. And we are very confident that it's going to create significant shareholder value for Customers Bancorp.

Okay. And then secondly, you mentioned that the Board is considering all its options to crossing $10 billion. It sounds like we might just be a quarter or two away from when you guys are going to start thinking about that issue. Obviously, you'll have some flexibility to extend a little if you need it, but can you offer some expanded thoughts about what you're considering? I mean, it would seem like the organic growth rates you were putting up prior to approaching $10 billion would be enough to surpass on an organic standpoint. Is there a thought process on the Board to maybe trying to acquire something that would help diversify the business a little bit or just -- any thoughts there would be helpful.

I think -- all I can say is that we'll look at every single strategic option. We are in a very strong position. We can do it organically. We can acquire someone. We can merge with someone. We'll look at every single option because we know it's going to cost us a few million bucks to cross $10 billion. And we don't want our shareholders to have to pay for that. So we will look at every single way, which is the best way for us to cross that $10-billion mark. And you are right, organically we could do it, too.

Okay. One last question from me for Luvleen, on the BankMobile side. It looks like (inaudible) released the deposits related to BankMobile are a little over $0.5 billion today, servicing a bit more than that. A two part question -- one, is there more opportunity to bring other service deposits that aren't on balance sheet over, over the next quarter, or so. And then two -- it sounds like you're adding [more wholesale] relationships, in terms of new universities. How do you expect that to translate into deposit growth over the near term here?

Sure. So I think that to answer the second question first -- we're really focused on expanding the number of students that we have access to. And the reason why that's helpful to us is, the more [eyes] sort of making that refund selection process, the larger number of accounts you can possibly open. So it's really important for us less so to have the number of schools and more so the number of students that those schools represent. So we're broadening our student base with the hope of our adoption rate going up over time and our absolute number of accounts opening over time also going up.

I would suggest handing it over to our CEO for the first question.

I think in terms of deposit balances -- this is a cyclical business. And no question about it -- like Luvleen said, if you get 100,000 more checking accounts, (inaudible) 250 -- you can always do your math [what will it do].

The interesting, most important thing, is our strategy for retaining the customers. And in retaining the customers, we believe that we will see about 500,000 students graduate by this time next year. We have very aggressive plans that -- what that will do is end up having a pretty significant increase in deposits, as well as pretty significant increase in noninterest income revenue. There is no question about it.

I'm not at liberty to talk about future goals, but I think Bob Wahlman on June 17th shared with you a three-year, down-the-road plan. All we can say to you is, we are more confident today about achieving the 2019-type numbers that Bob put up over there than what we were on June 17th -- we are more confident today [that that will happen].

Okay. That's actually very helpful. Thanks a lot for taking my questions. Appreciate it.

Sure.

Joe Gladue, Merion Capital Group.

Hi, good afternoon. I guess I'll stick on the topic of BankMobile. Just wondering -- in addition to the student disbursement deposits, how much success, or what the strategy is for trying to get [non-refund delayed] deposits and how that's going.

I think, Joe -- like I just stated earlier, it's -- the customer-acquisition strategy is to get the students. Customer-retention strategy is to give them awesome experience in services, and that's what Luvleen talked about before, so that they retain with you, and they stay with you, and at the same time enter into partnerships with -- using this model with other types of businesses. Please look at our investor deck. We've updated the investor deck on the BankMobile side of it, based upon that strategy of potentially -- if you can do this with 800 campuses around the United States, you can do it with lots of other business partners. And that is where the customer-acquisition strategy, other than students, will come in.

The problem in the banking industry today is that you're only opening up about 1 net new checking account per week per branch. That's in the entire United States. There are 94,000 branches. So all we are doing is opening up all over the US 94,000 checking accounts per week, period. Our goal, as we see it in the next three years, is to be opening up a million checking accounts a year. BankMobile is going to position itself to open a million net new checking accounts per year, and retaining them.

All right. On the loan side, as you're trying to, I guess, for the time being stay under the $10-billion mark, just wondering if staying in place without growing the loan portfolio -- does that give you some opportunity to be (inaudible) we expect some higher-yielding loans to be put on, as opposed to if you were just (inaudible) freely opening up the spigot?

We are always trying to get the best quality loans and manage our risk, as Bob also indicated to you. And sure, if we can get high credit quality and high rates simultaneously -- we don't find that too often. And so I don't think you should expect us to get into any new lines of businesses chasing yields. We are not going to do that.

We will stick to our knitting. We know -- we will stay with what we know well, and we are a business bank, and that's why we will continue doing what we've done and what you've seen from us. And [sure,] with short-term rates going up, we believe that once next-year's rates -- if the Fed continues with its strategy and -- taking [a pausing] on the [growth's] point of view in the second half of 2016, like we had indicated to you in the beginning of the year. Don't expect a lot of growth from us in the second half of 2016. That is exactly what's going on.

But when you see that happening, our earnings will continue to do well because we are not going to have the provision expense and other things coming through, and other issues impacting it. So that's exactly what you're seeing.

So once the rates go up, we are going to be in a position to just continue growing in our low-risk business. And that's what we intend to do.

Thank you.

Will Dezellem, Tieton Capital Management.

Thank you. A couple of additional questions relative to BankMobile. As you see it today, when would you believe that your revenues would exceed expenses so that business would turn profitable?

I think on an average, I think we've indicated to you that you should expect this business getting closer to break-even, if not breaking even, by the end of the year.

We think (inaudible) still be there. We are obviously spending money on technology and development. So our objective is not to make this marginally profitable in the short run but to have a strategy that this becomes a very meaningful company with a very meaningful valuation. That is our priority, and to continue to build upon the management talent and the team that has -- and give them an opportunity to grow this business.

So if -- in the worst-case scenario, I think you're going to see on an annual basis the kind of loss that we saw in the third quarter because we decided to spend some money. In the best-case scenario, you'll see a small profit coming from this in the next two or three quarters. But (inaudible) the plan that we shared on the investor day, that is still a focus for BankMobile management.

And is there some seasonality that will benefit the fourth quarter but negatively impact it in the third quarter? Is that thinking about it correctly also?

No, it's kind of the other way around. The fourth quarter is not going to be as great as the first quarter will be. And the third quarter was -- only one month was good, but July and August were not (inaudible) best months are September and October. And then December is slow, and then January, February, March are going to be good. That's why the first quarter is the best quarter.

And just to add, Bill, the second quarter is the one that's most challenging.

That's helpful, thank you. And then the 21, I believe, schools that you all added, how is that you did that so quickly, given that, presumably, Higher One was probably also looking to add schools? So congratulations, but how did you do it?

Well, as Luvleen shared, I think it's a focus on adding the schools with quality of students coming from there. And Andrew Crawford who runs that business for us and his team have done a very good job. And when Higher One was in all sorts of [state] wondering what is the strategy, there wasn't that clarity of the Department of Education rules, and there wasn't a bank behind it.

So when you have a bank behind it and you have clarity of the rules and the you have a dynamite management team, then you have very good product offerings. That's why we are getting it, and in fact, we hope to continue with that growth. And our goal is that within the next 12 months, or so, that hopefully we can add colleges with another 500,000 students coming into us.

And I think a lot of schools -- just to add to that -- a lot of schools were hesitant, given the reputational risk with Higher One and a really fee-based banking account that they were offering. And so being able to really alleviate a lot of those fears by really having the best student account out there that we are now offering really helped schools get excited and want to come on board with us.

And would it be a fair expectation or thought on our side that this is just the beginning of getting the wheels turning, and so this -- there's then momentum behind this, or were there a number of schools and you ultimately had a dam build up and you opened the floodgates on, and so it's more than rather than momentum building?

I definitely think there's momentum building. And I'm not sure in the slide deck if it shows the market share and how this market really looks, but about 5% to 6% of the market is really owned by prepaid providers. And we're the one bank account that's really owning 25% of the market today, the student market.

And so with the CFPB coming out and really sharing their thoughts on prepaid and really there being an uprising in terms of what people feel about that product, there's a whole new slew of schools that really probably are looking to shift from some of those competitors to our offering.

Great, thank you. And then one additional question relative to the transition to $10 billion. Do we understand correctly that the magic date is December 31 so that if you cross $10 billion in January or February that really that, then, will trigger December 31 of 2017 when you have to worry about it? Is that correct, or -- fill me in on the details if you would, please.

I think on the Durbin Amendment, you are correct, that that is [closing] -- the Durbin Amendment impacts interchange income on debit cards. So that will kick in the year that we cross $10 billion. It'll be after December 31 that the interchange income gets impacted, which means BankMobile will get impacted if they are still on our balance sheet.

But the DFAST requirements with the stress testing and whatnot is all based upon the full quarter average. And then you have approximately another 12 to 18 months, depending upon where it is, before the stress testing and the other requirements of $10 billion or greater institutions kick in.

So we are a couple of years, two or three years -- that's why I said even if it crossed the $10-billion mark sometime next year, the DFAST rules and other requirements will not kick in for us, other than the Durbin Amendment, till sometime in 2018 or even beyond 2018.

Thank you all for your insights.

Frank Schiraldi, Sandler O'Neill.

Good afternoon, guys. I just want to start with -- I'm trying to think through the buyer of -- who the buyer would be. Is it reasonable to expect that one of the parameters would be a bank well under the $10-billion mark, otherwise they face the same sort of interchange -- loss of interchange revenue?

Frank, I'll leave it up to you to determine who the potential buyer is. We're not going to talk about that.

Okay, but I just assumed -- like when you put out the -- at the analyst day, you talked about BankMobile being able to earn $1 share I think in 2018, 2019. I'm assuming that was based on interchange of a bank under $10 billion.

That is correct.

Okay. Then secondly --.

Frank, there's some balance-sheet numbers that were included in the presentation on June 17. So that will give you some insights in terms of what we were thinking. But it's hard to put ourselves in the shoes of who the potential acquirer might be and what their strategies might be.

Okay. And then the other question on BankMobile I had is -- the 200,000 new checking accounts that were noted, is that partially from the Higher One distribution channel, or what sort of percentage of those, if any, are coming from the Higher One distribution channel?

They were mostly from the Higher One distribution channel.

Okay. And then just on capital -- Jay, you guys mentioned your risk-based capital ratio targets. I'm wondering if you have a target in mind for the TCE ratio, as well.

I think I gave you the target for tier-one capital, and we don't have a specific target for the TCE right now, but you can always figure out that this quarter alone, by managing our growth, we added about 50 basis points, 40 basis points or something like that, to our TCE. And if our earnings are going to be in the $18-million to $20-million range even in the next two or three quarters alone on an average, you're talking about a pretty significant increase in our TCE ratio by managing our growth.

Okay. I guess -- well, you still have the ATM outstanding, so that would be another potential increase to TCE. And then just my last question was on guidance. Just wondering if you plan to give EPS guidance for 2017, and if so, when you'd expect to do that.

Frank, in the last two years, we've given guidance. And every single quarter, we have beaten the street estimates consistently. And so we've decided on a policy not to give guidance, just to focus on performance. So we are not going to give guidance beyond 2016, that you already have.

We are confirming our guidance that we've given to you for 2016 because -- you know, so we will do that. But we think it's prudent to just focus on the performance of the Company, and the shareholders will get rewarded based upon the performance and not have folks all over the place based upon the guidance, trying to justify why the stock price is where it is.

Okay, thank you.

And there are no other questions at this time. I'd like to turn the conference back to our speakers for any closing remarks.

Okay. Well, thank you very much, everybody. And if you have any questions, please give us a call. And we look forward to a good fourth quarter also. Thank you. Have a good evening.

Thank you. Everyone, that does conclude today's conference. We thank you for your participation.