Customers Bancorp Inc (CUBI) 2016 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter 2016 financial results earnings call for Customers Bancorp.

Today's call is being recorded.

At this time, I would like to turn the conference over to Joe Noyons. Please go ahead, sir.

Thank you, Dana and good morning everyone. Customers Bancorp 2016 full-year and fourth-quarter earnings release was issued earlier this morning and is posted on the Company's website at www.customersbank.com. Representing the Company on the call today are Jay Sidhu, Chairman and Chief Executive Officer, Bob Wahlman, Chief Financial Officer, Dick Ehst, Chief Operating Officer, and Luvleen Sidhu, Co-Founder and Chief Strategy Officer of BankMobile.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that cause the 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 applicable securities laws.

Please refer to the SEC filings including our report on Form 10-K and also the 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC 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 so much Joe. Good morning ladies and gentlemen. Thanks so much for taking the time to join us for the 2016 year-end financial results. I'm pleased to share with you that net income to common shareholders for the full year 2016 was $2.31 a share and that is $69.2 billion. We took some steps to really there were some unusual items.

BankMobile has been classified by us as held for sale or as discontinued operations because within the next 60 days we hope to announce a divestiture of BankMobile. At the same time about three and half years ago we had gotten into a partnership with Religare Enterprises in India where there was more of a corresponding banking type thing to help us benefit our customers. Religare's business strategy, they could not execute, it so we decided to exit that strategy entirely. Hence there was an OCI charge so that it will give us the flexibility to exit the Religare investment and move on.

If you take out some of those and the normal employee benefit share-based accounting results for the year 2016 our earnings per share were $2.46 for the first quarter Our earnings per share were $0.64. As you could see from our financial results we slowed our growth rate in the second half for the year. To build a stronger balance sheet, to build a stronger capital base and a much stronger risk management infrastructure. And also we positioned BankMobile into a successful company that can be divested so that both customers as well as BankMobile can grow and thrive without the Durbin Amendment to restrictions. During the year we built upon and we added to our core business franchise. We added teams in all of our various markets.

The teams covered commercial loans and deposits in Pennsylvania, New York, and New England. That is how we were able to achieve strong loan and deposit growth. The deposit growth continued throughout the year. Although our loan growth was concentrated more in the first half of the year. We strengthen our balance sheet by growing deposits by nearly 21%, while growing loans by nearly 14%.

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

Thank you Jay. As Jay noted in his comments, Customers accomplished many great things in 2016 that enhanced shareholder value. We see the benefit of those accomplishments in both the Q4 2016 and full year 2016 numbers. But because of certain decisions that were made during Q4 2016 that set the stage moving forward into 2017, you have to look a little bit deeper to see around a couple of things.

I believe the best way to see through all of the noise in these financial statements and in the earnings release to the substance of what was accomplished in 2016 and Q4, is to walk through a little bit on the three key decisions that are driving the numbers and presentation changes and I then I will drill down onto the core numbers. First as described more completely on page 9 of the earnings release, Customers had decided that it will exit or reduce the 2013 investment that Customers made in Religare Enterprises Limited Common Equity.

That investment has been mark to market, but that mark to market was previously captured in the equity section of the balance sheet as part of OCI, or other comprehensive income. The decision to exit or reduce means that the loss that has been occurred to date that was captured in OCI on both the value of the security and the foreign exchange currency rate of $7.3 million flows through the income statement during this period, the fourth quarter of 2016 or full year of 2016.

And as Customer does not have any potential investments at the holding company that would generate offsetting capital gain, Customers is not able to realize any tax benefit related to this loss that would moderate the financial statement effect of the change. We are considering some strategies regarding how the current investment may be resolved that could lead to recapturing the full economic investment of the original investment, but nothing that can be considered in the accounting for the equity investment at this point in time when the decision was made to exit or reduce that investment.

The second unusual item is Customers decided to early adopt ASU 2016-9, improvements to shareholder share-based accounting in Q4 2016. The adoption of this standard in Q4 2016 resulted in capturing in the income statement the difference between the market price of the stock awards at the time of a grant and the market price of the stock awards at the time of the vesting and the income statements. Specifically as a reduction of income tax expense as was provided in the literature.

In our particular case, as we have had significant appreciation and shareholder value and we had a significant number of shares vest in Q4 2016 we had $3.6 million effect in the fourth quarter. The adoption -- and then we also had a full year benefit from adoption of this standard of $4.2 million, so $600,000 benefit in the prior three quarters of the year.

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

The reason this classification was made is because, according to the accounting literature, we have disclosed and have the expectation to be able to divest with a one-year, the sale of the segment that we would need to account for that as discontinued operations. This classification difference of continuing and discontinued operations is then driven down into each of the supporting schedules of the financial statements.

For instance the deposit schedule that you will see in the book in our schedules will include only deposits from continuing operations and exclude deposits from discontinued operations unless we specifically state otherwise or include them as a separate amount. This classification of BankMobile business as held for sale in some ways greatly complicates the earnings release discussion, but in some ways it actually helps in that it makes it much more clear what the ongoing performance of the bank will be in future periods as we look forward.

It kind of gives us a look when you look at continued operations how the bank will operate and how the bank will perform on a going forward basis after the divestiture. These preceding comments that I made an attempt to help the investors understand these changes so that the numbers can be more easily and more clearly understood. So let me summarize the overall results as I understand them and I will drive down into the business drivers. Some of this is repeating what Jay's comments, but maybe with a little bit of a different view after we walk through the significant items.

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

Adjusting these GAAP numbers to exclude both the impairment charge and the 2016-9 benefit and this is only to help understand and make this comparison of Customers results for the fourth quarter and full year easier to prior periods because those are still GAAP numbers that are included in their. Those earnings excluding those two items were the $72.3 million, or $2.46 per share for full year 2016 and were $19.9 million, or $0.64 per share for fourth quarter of 2016. As I noted before this is the best comparison, I think, to what had previously been reported excluded these two items.

Looking forward to what Customers could be reporting, post BankMobile sale, so taking the earnings number from continuing operations for Customers bank, but also considering the preferred stock dividend, which is another GAAP number. Earnings were $81.3 million for the year or $2.76 per share for 2016 and were $23.4 million per share excuse me $24.3 million or $0.76 per share for Q4 in 2016. Of course, this does assume that we can replace the deposits that we will be losing with BankMobile with like cost deposits.

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

Taking this approach and walking through the major categories of the income statement, 2016 net interest income from continuing operations was $249 million, an increase of $53 million, or 27% from comparable 2015 net interest income. Average assets for 2016 were $1.8 billion greater than average assets in 2015. That drives the principal amount of the net interest income growth, which was $53 million. But also the net interest margin widens by 3 basis points year-over-year and that was also a notable contributing factor to the increase net interest margin.

Average loans grew as total loans for the warehouse portfolio were up $375 million. Multifamily loans were up $212 million, C&I loans increased nearly $250 million and non- owner occupied loans were up over $225 million. The basis point widening is largely the result of higher yields received on the mortgage warehouse portfolio. I would like to note that we did maintain our pricing and underwriting in all the loan portfolios.

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

Talking about the provision for loan losses related to asset quality, the 2016 provision for loan losses is only $2.3 million for the year. The 2016 provision reflects a modest $690 million growth in loans held for investments. Remember the loans held in the warehouse portfolio are held for sale, so they don't have an allowance on the lease losses, because they are mark to market each quarter.

There was no noticeable deterioration of the portfolio taken as a whole. Some isolated loans, so not a lot of specific loans were specific reserves required. Customers also recovered over $2 million in previous charge off's in 2016 further, reducing the net provision for loan loss numbers. In summary, Customers methodology for the estimating the provision for loan losses in 2016 was not significantly different from the methodology that we had in 2015, but it was the slower loan growth combined with the recoveries and maintaining the quality of the portfolio over time that resulted in a lower provision for loan losses.

Turning to noninterest income, from continuing operations, and also excluding the previously described items specifically the impairment charge, non-interest income then increased $2.9 million in 2016 to $30.4 million. Increases in the gain on sale of SBA loans of $1.7 million and a $1.2 million increase in the mortgage warehouse transaction fees due to the increased volume because it was a very robust year for mortgage loan originations, were offset.

Those were the positive ones and they were offset in part by a decrease of BOLI income in 2015 as we received a one-time benefit in the fourth quarter of last year from our bank-owned life insurance policies. The rest of the variances is made up of small changes in a number of other income categories.

Turning to non-interest expense. Non-interest expenses from continuing operations were up $24 million 2016 over 2015. Salaries and benefits from increased headcounts, raises and promotions accounted for nearly one-half of the increase, but most of the other expenses continue to increase reflecting the continuing growing bank.

It is worth noting that the efficiency ratio from continuing operations where Customers has what we believe is a sustainable advantage relative to most all of our peers, decreased in 2016 from 48% for 2015 to 46.9% at the end of 2016, even though we did have these operating expense increases. Our asset growth and our revenues that were generated continues to grow faster than what are expense growth -- more than two times faster than our expense growth.

Turning our attention then to discontinued operations, so I was talking about discontinued operations and focus on discontinued operations briefly, which is BankMobile, the reported net loss for 2016 for BankMobile on the face of the GAAP income statement is $9 million. That is a GAAP number and what it does is it excludes all intercompany transactions. It excludes the intercompany allocation for interest income that the continuing operation would have paid to a third party for the funding provided by BankMobile at discontinued operations.

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

Turning our attention quickly to the fourth quarter and still speaking to continuing operations separately from discontinued operations, and still excluding from the discussion the impairment charge and the ASU 2016-9 benefit which we talked about upfront, net interest income increased $10.7 million. Virtually all the increase resulted from Q4 2016 average loan balances running at $1.4 billion higher than Q4 of 2015 loan balances. Although we did enjoy a 1 basis point increase or widening of NIM in Q4 2016 over Q4 2015.

Regarding the provision for loan losses of a net recovery of $300,000, a provision of $600,000 was made in the fourth quarter for the $125 million increase in balances that are subject to loss reserving and we also had $900,000 of provisions made for credit deterioration in the fourth quarter. However, these provision amounts were offset by recoveries that totaled $1.8 million.

Hence the $300,000 net benefit in the provision for loan on lease loss line. It was because of specific recoveries, cash recoveries, that were received. There were again no significant changes in Customers loan loss reserving methodology.

Noninterest income decreased $1.1 million in Q4 2016 compared to Q4 2015. That decline resulted from the $2.4 million benefit received on our BOLI policies in the fourth quarter of 2015 that we did not receive again in the fourth quarter of 2015.

But that reduction in revenue was offset by Q4 2016 increases for mortgage warehouse fees, gains on loans on sales from SBA sales and various other revenue sources. In Q4 of 2016 compared to Q4 of 2015, noninterest expenses or operating expenses increased $1 million. The increases of $2.8 million for salaries and benefits and $0.8 million increase for occupancy expenses were offset by decreases in FDIC assessments and other fees, and non-income tax taxes that we have to pay of $1.3 million and technology costs reduced $1.2 million.

The BankMobile discontinued operating results generated a GAAP loss of $3.5 million. Again, as I previously noted in describing the year-over-year performance operation, the GAAP results do not include the intercompany payment of the bank to BankMobile for the use or for the further borrowing, essentially, of the BankMobile deposits. The transfer is included in the segment reporting schedule on page 22. The BankMobile segment incurred a net loss of approximately $2 million for the quarter if we consider the transfer pricing. This performance is not what was expected for the quarter.

And results primarily from the deposits for certain accounts at a previous Higher One Bank partner being refunded to the depositors and those accounts were not available then to generate the fee and usage income that was expected. That is my comments in regards to the earnings numbers for 2016 and for quarter over year ago quarter 2016. At this point in time I'm going to hand it off to Luvleen Sidhu, BankMobile's Chief Strategy Officer, who is going to provide some additional insight into the activities of the BankMobile business segment. Luvleen you have the microphone.

Thank you Bob. I would like to spend a few minutes providing you with an update on BankMobile technologies. In the six months following the close of our transaction with Higher One, we were able to open approximately 600,000 new checking accounts. Additionally we signed 16 new contracts with colleges and universities, representing approximately 130,000 additional students who will be offered our BankMobile Vibe product.

We continue to focus on marketing strategies to increase brand awareness of our students accounts including a nationwide campus ambassador program branding 200 on-campus ATMs with BankMobile branding, on-campus print advertising, as well social media advertising to name a few, to help us to continue to grow customer acquisition. Additionally we have made product enhancements including offering our customers a life success package whereby we provide the resources and the tools to help them build skills, get jobs and save money.

We want to be more than just a financial services provider to our student customers. We truly want to provide them with the resources to really succeed in life. As you all know we are focused on creating customers for life and retaining students post graduation, which is different from the old Higher One model.

We have seen a lot of positive data to support that we will be successful in doing so. With over 80% of our newest customers saying that they are very likely to somewhat likely to keep their BankMobile account after graduation. Additionally we have seen our net promoter score, which is an industrywide way to measure customer satisfaction, increased from about 28 to over 50 in a very short period of time.

In comparison most of the large banks we are familiar with have negative net promoter scores to single digit positive scores. Again, this underscores that we are truly changing the perception of the students winning their loyalty and are confident in our retention capabilities.

On a separate note during the fourth quarter of 2016 we experienced a loss instead of achieving profitability for regulatory reasons. We were required to close former Higher One accounts that were at WEX, Higher One's other partners bank. This led to a temporary setback in deposits and fee income. We anticipate that it will take up to a year to fully recover from the ramifications of this regulatory challenge.

That being said we are hopeful that we will be close to break even by the end of Q1 2017. As of December 31, deposit levels were at approximately $456 million. December 31 is usually among one of the lowest deposit levels in the year for us. In 2017 we expect deposits to range from $400 million to $1 billion. In the last six months of 2016 our total non-interest revenues have been a little over $33 million.

Since we have no loans in our book it is difficult for me to give you a net interest income number. But the numbers presented to you by Customers Bank have simply used transfer pricing. Our expenses during the same six month period were higher than anticipated due to the regulatory related costs and duplicate technology platforms. Since we expect to merge the technology platforms by the middle of 2017 these expense levels are expected to remain somewhat elevated until that time.

In terms of team expansion, this past quarter BankMobile recruited Rob Frick as Managing Director of Consumer Credit. Bob joined us after several years of experience at Fleet Boston, Sovereign and Santander Banks.

BankMobile intends to start offering consumer lending products including credit cards in the second half of 2017. In early February, BankMobile Labs led by Kirk Barrett our CTO and Dan Armstrong our Chief Digital Officer, is launching BankMobile 2.0, our in-house developed mobile banking app.

With this new app we have focused on creating a banking application that transforms banking from something you feel you have to do, to something you feel like you want to do. We have done this by reimagining how you interact with your money on a daily basis using cutting edge UI and design techniques. We have also added a higher level of personal financial management categorization to help you better track your finances.

Additionally, we have simplified our line of credit product to make credit accessible to thin file millennials who are underserved currently by traditional banks. And most importantly we have ensure that our app has end-to-end security and encryption to protect our customers. In terms of our strategy we will continue to pursue our direct to consumer strategy in the coming months. We will also continue to develop our B2B2C strategy, which focuses on acquiring customers through white label banking.

Through this strategy we help our distribution partners offer a branded banking experience to their customers and/or employees to increase stickiness and engagement, while also providing them with data analytics and an additional revenue stream. We believe our distribution partnerships with approximately 800 colleges and universities has been the most effective way for us to attract customers and we will continue to identify and execute such partnerships in the future. Over the next few months we will be focusing our efforts on divesting BankMobile so both customers and BankMobile can grow and thrive without Durbin Amendment restrictions.

We have been able to build BankMobile into one of the fastest-growing and most successful digital banks in the country in a relatively short period of time. We are excited to continue to innovate and push forward to take advantage of significant growth opportunities that continue to lay ahead.

I look forward to keeping you updated as we execute on our divestiture plan over the coming months. Now I would like to handed over to our CEO. Thank you.

Thanks, Luvleen.

As you can see there's a lot happening at BankMobile and we really wish at Customers Bancorp that we could keep this within out portfolio, because as Bob Wahlman had shared with you at our analyst day within the next 2 to 3 years we do expect this company to make about $30 billion after taxes. Which is just from the execution and execution strategies in our tough regulatory environment sometimes does get hampered by certain regulatory rules, and that is essentially what caused a little bit of a setback in the fourth quarter for BankMobile. But BankMobile remains a very, very interesting and exciting. Luvleen was nice to say it's probably the most successful digital bank in the United States.

I can tell you in our opinion we have been invited to speak, Luvleen and I have been invited to speak throughout the world. It's probably one of the most successful digital banks in the world.

We continue to learn. We have been invited to be a part of a group of digital bankers throughout the world. We are exchanging our thoughts and ideas. This is going to be a very exciting opportunity. Unfortunately we have to divest it because Customers Bank principle is business banking. Business banking's opportunities are huge for us and hence in the next 12 months to 24 months we do expect to cross the $10 billion mark. We do want to see BankMobile continue to thrive.

Let me give you an update on where we stand with the divestiture. Within the next 60 days we are very hopeful that we will be able to announce to the Street our divestiture, details of our divestiture. We are in final negotiations with a partner right now and though no assurances can be made, obviously, this will happen, but we are hopeful that it's going to happen.

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

The next item I would like to share with you a little bit about is capital. As you know at our June 30 investor call we set some targets for capital. We told you we like to see our tier 1 capital ratio to be 9% or higher. Our total risk-based capital ratio to be 13% or higher.

However, we gave ourselves about 18 months to get there. I am pleased to share with you at December 31 we got there, this year in 2016. We are about 12 months ahead of plan.

At December 31, 2016 Customers preliminary calculation shows tier 1 leverage ratio of 9.1% and risk-based capital ratio of 12.9%. As I mentioned to in addition to that through retained earnings as well as the BankMobile divestiture that we intend to grow our cushions even further than the 9% of the 13% in sometime in 2017.

The next item I would like to talk about is concentrations. Commercial real estate concentrations has been talked about in the entire industry quite a bit in the last 24 months or so. We provided to you some information in our press release, but I'm going to give you some information as of -- for December 2016 rather than averages for the year 2016. Our loan concentration at December 2016 in multifamily was down to 340% approximately and that is down from about 396% at the same time last year.

The next item is our cap rates in our portfolio at December 31 were 5.58% and that has been consistent. We are not taking any undue risk at all. Our debt service coverage ratio as at December 31 was 1.63%. Our loan to value ratio average in our multifamily portfolio was 66.3%. Our delinquencies were.00%, our non-performing loans to total loans were.00%, our average vacancy of our loan portfolio was 3.9%, our average vacancy rent for our rent control portfolio was to 2.8% and our average loan size remained about $4.5 million and only about 25% of the buildings that we have financed have elevators.

You can see we are doing the middle income type of lending. We've done a very, very detailed analysis as would be expected of somebody who has over 300% concentration of risk-based capital in a commercial real estate category. And I just want to assure you that we believe we are really on top of it. We have no restrictions whatsoever on our ability to continue building this business and we have three in spec analysis that we continue to constantly update and maintain the appropriate risk management infrastructure and information and year end analytics and management information systems that the regulators expect.

Rightfully so from institutions that have any concentrations above 300% in any category. On top of that our construction loan portfolio is about $70 million. That is the most highest risk category and that is significant majority of those are all owner occupied C&I customers on a very little small portfolio residential construction portfolio. The next item I would like to talk about his asset quality and interest rate risk.

As you know that is a very important issue. It is not an issue that any investor asks us anytime about, but in our opinion it is probably the most important question that anybody should be asking us all of the time. We believe within the next two to three years there is a high degree of probability of a recession. We think the economy is going to do well this year and next year. That is why when times are good it is very important to maintain a very strong discipline on credit culture.

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

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

From an interest rate risk point of view our objective is to maintain above neutral position. We are somewhat asset sensitive. That is why you saw a somewhat small expansion in our margin. We do not believe that you ought to see a continued huge expansion in our margin.

At the same time you should not see if for whatever reason interest rates decline, you should not see a negative impact on our balance sheet or income statement either. We intend to remain in a neutral position from an interest rate point of view.

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

We saw that as an opportunity to have a niche business to support small medium-size business trading customers between India and United States, as well as to support banking, unique banking opportunities for the high income, high net worth individuals of Indian origin who reside in the United States. We were very disappointed that Religare Enterprises was unable to get a banking license. We have been in constant discussions with them and we had shared with you by December 31 of this year we will make a final decision.

We ended up making that final decision. We regret that it did not work out the way it was supposed to work out. The right decision for us, our Board of Directors concluded, was at this time to exit it's invested in Religare common stock. We are exploring ways to do we are not going to be dribbling our stock out. The volume is very low. But we are in discussions with a few entities right now to do a bulk sale or some other form of strategy to be executed.

This gives us an ability to completely get out or dramatically reduce the level of investment that we have in Religare. Again we are sorry that this did not work out. We are not thrilled to see a $7 billion charge, but it is what it is. It is a capital loss for us. One of the things that we will try to do is when we divest to BankMobile we will try to remain as much of an equity investment as regulators will permit us to maintain in BankMobile.

Hopefully we will see some gains in our equity investment and that will become -- also give us an ability to recover the tax benefits of this loss. Right now we have not booked any at all. As far as 2017, 2018, are concerned, we will continue to manage our balance sheet in 2017. We will continue to build our infrastructure in 2017, we are involved in the [Defrast] preparation right now.

We intend to cross the $10 billion mark within the next 12 months to 24 months. We will be very prudent. We are not involved in growth for the sake of growth. Today we are confirming to you our goal of making $3 in earnings per earnings share in 2018.

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

(Operator Instructions)

And we will take our first question.

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

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

Okay, great. Shifting gears I know you all talked about the $4.3 million of interest income that right now is in continuing operations but you guys think about allocating that to BankMobile, is it fair then to think when BankMobile is divested we should be taking that out of Customers Bank run rate? Is there some additional expenses that will be at Customers to cover that funding?

Bob, in regards to that funding, as I noted in my comments that the numbers that I gave from continuing operations would presume that we are able to replace that funding at like costs. We have different strategies in place to develop our deposits. I would expect the BankMobile deposits are largely non interest-bearing. I would expect that a significant portion of those will be replaced by interest-bearing deposits. And so you would see some of that we would have some increasing costs related to that.

Okay. Could you may be comment on what you're seeing in terms of deposit pricing in your markets? I know New York Community mentioned they had seen some up-tick since the Fed moved rates and just curious how deposit pricing looks.

Yes Bob I will take that. The interesting this is that as you know we have been looking at our cost to deposits because we do not have any branches. Our average branch size is approximately $450 million today. So we have not been exposed to as much pressure as those folks who have been operating their banks and very, very low interest expense. So also since we have no desire at least in the first six months of this year to grow our balance sheet in a very rapid fashion.

We are simply replacing our borrowings and our other sources of funding with core deposits. We have not seen and experienced as much of a pressure on deposits costs as you may normally maybe see in other banks. Yes, some of that especially the institutional money market deposits, yes we passed on about 50% of the rate increase onto those customers. In the consumer business and in the business banking sector we really have not had a need to pay up at all to retain those deposits and continue to see growth in deposits.

Okay great. May be shifting from deposits alone, if you could talk about what you seen in terms of loan demand post-election and post-higher rates. I guess primarily I'm interested in the New York multi family business, but may be also how you are thinking about the outlook for the mortgage warehouse business?

Let me start with the mortgage warehouse first. Mortgage warehouse business you should expect in the first quarter to be down about 20%. That's consistent with what we had shared with the Street was our expectation for the first quarter on an average. The refi activity has really slowed down. It's pretty dramatic slowdown.

In fact more than what we had expected. We are replacing those earning assets with some investment portfolio, as well as multifamily growth. You ought to see us having about a $300 million to $400 million growth in multifamily portfolio in the first quarter. We wanted to share that with you that we are very confident of the quality of that portfolio. The pricing that we are seeing is somewhere in the 3.75% to 4% range in that business.

We continue to see that the weakness in multifamily is evident in the high rent luxury segment. There is no question about it. We have noticed that there is a 3% up to a 10% reduction in prices sometimes in that size. We are operating in that low to moderate income multifamily residence. And another 45% approximately of all our properties are completely rent control properties.

Vacancy rates over there are like I shared with you less than 3%. We see a continued opportunity for us to continue to build that portfolio, and as we have done in the past we will continue to build that. We expect in the second half of the year, starting with late second quarter, mortgage warehouse business to come back to the levels that you saw in the third and fourth quarter. And we are managing our balance sheet as such because we expect to close on or BankMobile divestiture sometime in the third quarter.

We will probably bring that divestiture not to just deposits but also some of our loans to the buyer of BankMobile that will open up an opportunity on our balance sheet for our core business and still perhaps keep us below $10 billion. Unless we see a huge size and have a much stronger balance sheet as we head into 2017.

So than in 2018 it will become very clear that Customers Bancorp has the precocity, ability and will deliver $3 or more in earnings per share. Hence we see a huge opportunity for continued shareholder value creation in 2017 and 2018.

Okay great. Last question, I know you all mention BankMobile is going to start offering credit cards later this year. Is the idea there to target the same customer base, sort of a thin credit file millennial existing customer base? Or are you looking to do cards on a broader base?

Luvleen do you want to take that on?

What we have identified from our student base right now is that having access to credit is a top paying point for them. It's actually for thin credit file students that we are currently banking and once they graduate we want to be their credit provider. We are really going to be focusing on that market for credit cards. When we roll out.

Okay. Existing customers or past customers is who the focus would be?

For now that is our priority.

Very good. Thank you for taking the questions.

Thanks Bob.

We will take our next question. Please go ahead caller.

Bill Dezellem with Tieton Capital. First of all would you please discuss the Religare divestiture and the impact that will have on your capital ratios?

We've already given you the capital ratios after the divestiture of Religare. We are not expected to have anything more of any materiality at all. It is all behind us. It is there in the financial statements that you are looking at.

I think Bill you are referring to the existing investment. It is just an investment at this point in time so to the extent that we receive cash for it, it has no effect on capital. It would free up cash at the holding company that if we wanted to push down cash into the bank it would provide some boost to the bank. Nothing happens at the holding company or consolidated capital from disco divestiture.

That's helpful. So the key is that change to cash do not impact the capital ratios but of course it is cash that one can then move.

Correct.

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

Please feel free to add. We were asked by the regulators to close the accounts that were at the partner bank which is about 1 million of the former Higher One accounts were with WEX. We were able to obtain about some 300,000 of those accounts. About one-third of the deposits as well.

Unfortunately it was something that was forced upon us and in a short period of time that we had, we were able to convey sort of the benefits of maintaining the account. That is why we were able to positively retain about some 300,000 of those accounts.

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

Let me take that on. Higher One had two partner banks. What was Customers Bank and one was WEX Bank. WEX Bank FDIC had classified those deposits at WEX Bank as broker deposits. Which meant that Higher One had the ability to put them at any bank that they wanted to put them on prior to the closing of this deal.

During the closing of Higher One put those deposits to Customers Bank. The regulator said, oh well we changed our mind, they are no longer brokered they are now owned by WEX Bank. Out of the blue. Contrary to FDIC's ruling on those for WEX Bank. WEX Bank is an industrial loan company, they couldn't even have consumer checking accounts.

This was a disagreement or a dispute between or a difference of opinion between Federal Reserve's classification and FDICs classification. The deal with the dispute, FDIC went along with the Federal Reserve and basically asked WEX Bank to get out of this business, and asked us who was servicing those deposits for them to send checks back to those consumers. Because WEX didn't have an ability to maintain those deposits by themselves.

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

Hundreds of thousands of students are sitting around with lost checks. I hate to say it as a member of a regulated entity, but this was an absolute inappropriate decision by the regulators. It is what it is, that's why we had to do what we had to do. We lost deposits. We lost on revenues and we spent well over $1 million trying to communicate with these customers to let them become aware of it.

And then students don't open mail, students don't open even email. It was very difficult to even communicate with them. That's why these checks are lost and the Federal Reserve has resulted in many students losing millions of dollars of money. Kudos to them.

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

We will take our next question. Please go ahead caller.

[David Roche, Cordohan]. The $3 to earnings if we think about the run rate you guys had this quarter of $0.76, does the extra cost of the deposits replacing the bank one mobile deposits really make that much of a difference in the earnings that $3 should be fairly easily obtained?

I think you have to consider in our $0.76, yes there will be a negative impact from BankMobile. Plus in the $0.76 there was a benefit from the adoption of our stock-based compensation charges or income from that. That is why we are confident that we should be able to achieve the $3 per share or more in 2018. It will not be just a piece of cake. We are very fixated on having higher return on assets, stronger balance sheets, higher capital ratios without any equity raises.

And get our divestiture done. Maintain our quality, maintain an interest rate risk profile that's very neutral. Add to our franchise, keep on recruiting teams, add to our expenses where necessary. We are very fixated on doing all of that and still delivering $3. And if you apply the industry multiple of 15 times earnings we would love to see a $45 stock price, but that is entirely dependent upon the Street. We are just fixated on executing our strategy.

Thank you.

We will take our next question. Please go ahead caller.

Good morning this is [Matt Scholtwase from Meti]. A couple of quick questions, if in the next 60 days you were to announce a transaction for BankMobile, when would you actually anticipate that closes?

Matt, like I said earlier we anticipate the closing to take place in the third quarter because it will need, the acquirer will need regulatory approval for the acquisition of this deposit. The normal four months, five months.

Okay. Just double checking. There was a lot said in the opening remarks so if I missed anything I apologize. As far as the accounting statement for the 2016-9 the share base compensation. Obviously there was a big impact in 4Q 2016, is this going to continue to be an ongoing issue where your taxes are going to benefit anytime you have a block of options vest deep in the money? Or is there a cumulative effect here that has to do with the adoption of the accounting standard.

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

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

You could end up paying taxes, you could end up losing your bonus if the shareholder value is not created, but you could end up building a lot of wealth if your shareholder value is created. As you know in the last five years we have had two and half times the KBW index in terms of the performance for our shareholders at Customers Bancorp versus the KBW index. This will continue, but the amount will change on a year-to-year basis. Bob do you want to add anything else to that?

Yes, I would like to just give him insight as to where they can find what the potential affect may be if they want to work that into the models. And that is in the proxies that we have, the proxies obviously that we issue each year, you have included and there all the restricted shares that have been issued. And you also have in there the restricted share price of when it was issued.

It will be the difference between that restricted share price and the price when it vests that will be coming through. We do have shares that will be vesting during the first quarter of 2017 and you will see some benefit coming there. By the way it becomes effective for everybody that didn't early opt, it becomes effective the first quarter of 2017. In addition to that options are also covered too.

But options are more tricky to predict because there is not it doesn't happen when it's vested. Options will have an effect come through when they are exercised. We haven't had people exercising options at this point in time. We do have a significant number of options out there. So when they are exercised you will see a benefit also come through the income statement.

Thank you. This one may also be related more for Bob, but obviously with the press release you got 4Q, 3Q, with discontinued ops in the accounting behind that and we got the year end and 2015, but will we get 1Q and 2Q broken out in the same detail at some point?

I'm sorry 1Q and 2Q of 2016?

Yes sir.

Broken out by discontinued operations and continuing operations?

Yes.

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

Okay. You don't intend to put that out early in any Form 8-K or 10-K?

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

Okay. Thank you for your time.

We will take our next question. Please go ahead caller.

Steve Emerson, Emerson Investment Group.

Hello Steve.

Is the selected buyer, apparently you're in final stroke negotiations of mobile, over $500 million in size?

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

I fully understand. But I understand a road show you did give color that one of the options was a very small bank where management might overlap your bank in the future. What I am curious about is this going to be a cash transaction or is this going to be more complicated than that other than the 20% retained.

No, Steve. It is expected to be a cash transaction principally. Although like I said we will try our best to maintain equity position to some level in BankMobile. Because we see this as a good investment, but we cannot really comment on that at all beyond that.

Okay. Thank you very much.

We will take our next question. Please go ahead caller.

Good morning. Frank Schiraldi from Sandler. Just on the WEX account am I thinking about it right? Well, first you noted that you have been able to reacquire basically one-third of those. Are you and process in terms of trying to reacquire a portion of the other two-thirds or at this point is it less likely and you're basically going to have to rebuild through semester by semester?

I think it's rebuilding semester by semester. I believe Luvleen said it will take us about a year to recover all of that. No, we are not in the business of soliciting other bank customers. The regulatory authorities would not make you do that even though we have their records. Since we were the servicer and we will follow the appropriate regulations and they were WEX customers they will remain WEX customers with lost checks.

Okay. But there's no impact, for example, relationships with those colleges so that's how you will be able to rebuild it?

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

It sounds like it sounded like you were confident Jay in terms of the previous slide that you put out you're still anticipating that BankMobile standalone will be able to earn around that $30 million in 2018, 2019. It that still viable?

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

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

I said we expect some time in the second quarter to the third quarter levels to be closer to where they were in the fourth quarter of 2016. But we expect them to be lower than fourth quarter of 2016 and the first couple of months of 2017.

So you expect to get back to where you were at the end of the year in the second or third quarter? Just on C&I growth, as we look out over the next call it 12 months, is this a reasonable expectation of growth in that item, which includes the owner occupied CRE?

Yes.

Okay.

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

Great. Finally, BankMobile sale, would that be a taxable event that you would be able to recapture the Religare loss through taxes?

No it's complicated. No, we will not be able to use that to recapture losses on Religare.

That will be ordinary income, ordinary corporate income. Hopefully our President and the Congress will reduce the taxes by the time we have to book the gain on the BankMobile divestiture. But the loss on Religare is a capital loss Frank. That is why that can be offset against capital gains in the future. That's why I made a comment that if we end up taking some part of an equity position as a result of the divestiture price, or the acquirer paying us in some of their stock we might take that and use that hopefully to offset against the losses on Religare.

Finally, Bob, I think you might've mentioned, I apologize, but in the assets held for sale, I guess that is Religare and BankMobile essentially, what is the BankMobile portion held at?

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

The $79 million that is just BankMobile, the value on the balance sheet as BankMobile?

Yes.

Great, thank you.

We will take our next question. Please go ahead.

Hello guys this is Kyle Peterson, FBR, thanks for taking the follow-up for Bob. Just wanted to get a quick question on what a good tax rate to use is going forward? I know you guys had the early adoption of ASU 2016-9, just wanted to see, I know that can be noisy quarter to quarter. I wanted to see if you could give any color on what you can expect?

The effective tax rate we have been operating on consistently on through 2016, I think, is where we are still looking forward in 2017. That was 38%, or slightly under 38%.

I guess just end quarter has heavier option a little bit of a benefit from that then is that fair?

I think that it is exclusive of the benefit. That is the effective tax rate. Obviously that would be offset by the benefit that would be coming through under the new accounting standard.

Okay great. That's all for me. Thanks.

And we will take our next question. Please go ahead caller.

Good morning guys. This is Mike Perito from KBW. I got on a little late so I apologize if you guys covered this. Jay I did hear remarks about the crossing $10 billion. I wanted to make sure I was taking it away accurately. It sounds like is the plan was some of the assets that could potentially be divested when you close on the BankMobile sale later in the year that you likely will be under $10 billion for the duration of 2017?

What I said was it's possible that could happen. We are not committing to cross the $10 billion mark in 2017. We are not committing to it, so our objective, is right now, to stick to our discipline on credit quality interest rate risk, get the BankMobile divestiture done.

Operate with very strong capital levels, increase our capital levels further, not have any equity offerings, be focused on delivering $3 a share or more in 2018, focus on building shareholder value. If we end up crossing the $10 billion mark in 2017 so be it. And if we end up doing it in 2018. But what I said was and between 2017 and 2018, during that time period we do expect to cross the $10 billion mark.

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

That is correct.

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

There is two moving pieces there and I am not sure how they balance out in the equation, Mike. I understand what you are saying. Some benefit that we were receive could be offset by some of the cost that we would incur to replace the deposits. I hope it would balance out. As noted previously we have the number of strategies that we would like to execute during the course of the year.

Some of them which would be to attract low-cost deposits and just how it all plays out and how that mix plays out is unknown. You just do another factor in there, which is the interest rate increase and the fact that would tend to widen our spreads out somewhat could offset some of that cost too. I can't answer your question, Mike in regards of how that would all work together at this point in time.

Yes, I'm just curious of the timing. I appreciate it. Thanks Bob.

Just one last one for me, now that you guys are reclassing the BankMobile and the held for sale and the discontinued ops it obviously gives a little bit of a cleaner picture of what the legacy Customers Community Bank fee and expense items are. I am just curious if now as we look at a here today, if you guys could maybe rehash you mentioned it before, but rehash with the potential expense bill and fee income impact just on the Customers Banks would be from crossing $10 billion?

I think Bob, I think what Bob had stated earlier was that we do not expect a significant impact on us, but it is still going to be somewhere in the $1 million to $2 million range. Last time I was in the meeting with Deloitte advisers to help us do the DFAS analysis had indicated to us that it is not going to be anything significant, but it will still end up with somewhat higher FDIC insurance premiums and a few more positions for the DFAS modeling and those kinds of things.

We have actually have a very robust risk management system infrastructure in place, so that we are not expecting what you would normally expect the buildup that other institutions. We still have to do some modeling. And those kinds of things. So Bob, can you think of anything else?

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

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

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

Thanks guys I appreciate it.

And at this time I will turn the call back over to our speakers for any additional or closing remarks.

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

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