Customers Bancorp Inc

NYSE:CUBI

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, and welcome to the Third Quarter 2019 Customers Bancorp, Inc. Earnings Call. At this time, I would like to turn the call over to Mr. Bob Ramsey, Head of Investor Relations at Customers Bancorp. Please go ahead, sir.

[Bob Ramsey, Director-Investor Relations]

Thank you, Britney, and good afternoon, everyone. Customers Bancorp's third quarter earnings release was issued yesterday afternoon along with our investor presentation. Both are posted on the Investor Relations page of the company's website at www.customersbank.com. Similar to last quarter, we will be speaking directly to our streamlined investor presentation. So I'd encourage everyone to pull down a copy.

Representing the company on the call this morning are Jay Sidhu, Chairman and Chief Executive Officer; Dick Ehst, Chief Operating Officer and President of Bank; Carla Leibold, Chief Financial Officer; Jim Collins, Chief Operating Officer; Jeffrey Skumin, Chief Accounting Officer and myself, Bob Ramsey, Director of Investor Relations and CFO of BankMobile.

Before we begin, I'd 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 from what is 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 our SEC filings, including our Form 10-K and 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it's my pleasure to introduce Customers Bancorp's CEO, Jay Sidhu. Jay, the floor is yours.

[Jay Sidhu, Chairman and Chief Executive Officer]

Thank you very much Bob. And the good morning ladies and gentlemen welcome to the third quarter call. We are really pleased with our strong record earnings growth as well as the maintenance of our superior asset quality, strong control in our expenses, the expected and execution of our strategies resulting in the net interest margin expansion even in this tough environment. And our net interest margin extension is ahead of plan and also the reflection of our improved loan mix, our strong core deposit growth as well as disciplined pricing strategy and an absolute focus on efficiency improvement and risk management.

Also, we are really pleased to report to you that BankMobile reached profitability one quarter ahead of time. So I'd like to now draw your attention to Slide 4 and share with you some of the specific accomplishments by the team.

First, in this difficult rate environment, we expanded our net interest margin by 36 basis points from year ago and 19 basis points from last quarter. This, as I mentioned earlier, is as a result of the planned execution by us towards favorable shifts in our asset mix as well as a continued growth in our lower cost core deposits.

Number two, talking about deposits that grew 5% year-over-year and 9% during third quarter 2019, DDA’s grew 25% year-over-year. Number three, our C&I loans increased 26% year-over-year and 6% quarter-over-quarter reflecting our strong franchise in Business Banking. Number three, our expenses expected – are expected to be flat to down in the Q4 and for the first over last year the core bank expenses grew – have grown only about 3% to 4% and have been flat over second quarter 2019.

We consider this is what has resulted in strong positive operating leverage and reconsider this to be a very key accomplishment in this kind of a period when we are trying to significantly improve our profitability. Number four, as I mentioned earlier, BankMobile achieved profitability in this quarter, a quarter earlier than we indicated and is well positioned for continued profitability in the fourth quarter of this year as well as into 2020. The profitability was a reflection of the improvement in our student business metrics, while we remained in the investment mode in our White Label business.

And number five, that as a result, as reported to you, our core earnings have achieved record results. This improvement in EPS as well as our core ROA and ROE reflected the execution of these strategies and all other strategies that we discussed with you on our Analyst Day about a year ago and I will talk about that a little bit later on.

And last but not the least is, we wish to once again stress to you that we are on track to achieve our forward guidance that we had given to you. So core 2019 earnings excluding any notable charges are expected to exceed $2 20 this year and we believe that we are – we should report earnings per share, core earnings per share of at least $3 in 2020. So now I'd like to hand it over to Carla to go over some other highlights of the year. Carla?

[Carla Leibold]

Thanks Jay and good morning everyone. I'll start off with an overview of our third quarter 2019 consolidated results shown on Slide 6. On a consolidated basis, our third quarter GAAP net income available to common shareholders was $23.5 million or $0.74 per diluted share. From a segment perspective, the Business Banking segment earned $22.8 million or $0.72 per diluted share. And BankMobile earned $684,000 or $0.02 per diluted share.

Included in our third quarter GAAP results are certain notable charges including $2.3 million of securities gain, which included a realized gain of $1 million from the sale of 95 million of corporate bonds and 1.3 million of positive mark-to-market adjustments on equity securities and the interest-only Ginnie Mae securities that we acquired last quarter upon the bankruptcy of our former mortgage warehouse customer, both of which positively impacted our GAAP earnings by about $0.06 cents.

And $2 million of legal contingency of accruals related to recent developments in previously disclosed legal matters which negatively impacted our GAAP earnings by about $0.05. Excluding these items, our core earnings for third quarter were $23 million or $0.73 per diluted share. From a segment perspective, the Business Banking segment earned $0.68 of core earnings per diluted share and BankMobile earned $0.05 of core earnings per diluted share.

Moving onto Slide 7, our net interest margin expanded 19 basis points to 2.83% in the third quarter up from the 2.64% reported in the second quarter and 36 basis points from the trough of 2.47% that we reported in third quarter 2018. Our interest earning asset yields increased 19 basis points over the prior quarter, while our funding cost increased 4 basis points.

Our loan yields increased 17 basis points driven by increased consumer long yields of 6 basis points and higher multifamily loan yields of 7 basis points partially offset by an 18 basis point decline in commercial mortgage warehouse yields due mainly to – 4due to declining markets interest rates during the quarter.

Moving on to deposits on Slide 8, we're excited about the growth that we saw in the third quarter. Total deposits were up $412 million or 5% over the year ago period. With this growth coming almost entirely from growth in lower costs, core demand deposits which grew 25% year-over-year. We also had strong loan growth in the third quarter as shown on Slide 9. Our loan mix continued to improve year-over-year as C&I loans increased $470 million or 26%, as planned multifamily loans decreased $705 million or 20% year-over-year and we replaced by about an equal amount of consumer loan.

Mortgage warehouse balances were up $975 million or 62% year-over-year, given lower market interest rates and increase levels of refinancing activities. The higher than expected seasonal increase in mortgage warehouse balances contributed to total assets of $11.7 billion at September 30, 2019. We are still planning to end the year with total assets less than $10 billion and have reclassified about $500 million of multifamily loans to held for sale at September 30, 2019 and expect additional runoff of the multifamily portfolio of $300 million or more in the fourth quarter 2019.

The natural contraction in mortgage warehouse balances in the fourth quarter combined with some residential mortgage runoff for sale are expected to bring our total assets below $10 billion.

Moving on to operating costs and efficiency on Slide 10, our non-interest expenses remained flat over the second quarter. For the Business Banking segment, operating expenses as a percentage of average – average assets remain stable at about 1.5%, which is significantly lower than our peers and the industry overall.

Turning to credit quality on Slide 11, our portfolio continues to perform well at September 30, nonperforming loans to total loans were only 17 basis points and on a year-to-date basis net charge-offs to average loans were only 5 basis points.

And lastly, before I turn it back over to Jay, I'd like to talk a little bit about our Cecil implementation efforts. We've made tremendous progress over the past year or so and our confidence that we'll be ready for adoption on January 1, 2020 upon adoption of Cecil, we plan on taking advantage of the three year phase in from a regulatory capital perspective. Our current estimate is that the day one impact will not be material to our regulatory capital ratios, while we still have some work to do and the actual impact will depend on loan portfolio balances, economic conditions and forecasted economic conditions on January 1, 2020

We don't anticipate that Cecil adoption will materially impact our valuation of the best uses for our excess capital, which as we have discussed may include calling our preferred equity as it becomes callable starting in 2020 nor will it materially impact our projected core earnings per share of at least $3 for 2020. And with that I'll turn it back to you. Jay.

[Jay Sidhu, Chairman and Chief Executive Officer]

Thank you very much Carla. I'd like to briefly go over five items with you before we open up – open it up for Q&A. Number one, I'd like to discuss with you the status of the strategic priorities that we had articulated to you at our Analyst Day in October of 2018. And then after that Richard will talk a little bit about our capital allocation strategy and then give you some guidance for the future. Number four, would be our views on the banking environment and where do we fit in. And number five would be our views on our regional and national economy.

So starting with the strategic priorities, I'd like to draw your attention to Slide 12 of the deck that we provided to you. And we basically stated to you that very clearly articulated to you our strategy for the next two to three years.

And number one was, that our core return on average assets should be in the top quartile of our peer group, which we expected at that time to be about one in a quarter or higher in ROA. And we said that we would achieve that in two to three years. At that time, as you know, our margins were very low and our return on assets was about 60 basis points. We are pleased to share with you that the return on assets today are close to 1% and that's up significantly and we are well on our way to achieving at least 1.25% return on assets over the next few years.

Second thing we mentioned to you was, the importance of NIM expansion, irrespective of the slope of the curve and irrespective of the overall level of interest rates. And we set a target of 2.75% or greater by fourth quarter 2019. As you know, we are ahead of that and we expect in fact that our NIM should be even greater than the 2.83% that we reported to you as of September 30, 2019.

And this is result of effectively restructuring our balance sheet and that is as planned showing the continued results and we are very pleased with the 36 basis points NIM expansion in just one year at a time, when the interest rate went up, they came down the slope of the curve was normal and now it's inverted to flat.

Number three that we shared with you in October of last year was that, we are very focused on, on taking advantage of the digital opportunities in the consumer banking business. And as a result, BankMobile will continue to grow and as it matures, it'll achieve profitability by year end 2019. And we can assure you that it's not just in Q3, but BankMobile will be profitable in Q4 and in 2020. And this is in spite of the fact that on the White Label business side, we continue to be in the investment phase and we continue to spend a lot of money both in the capital improvements, in the technology improvements and overall execution of our strategy to look at several White Label partners to be added and the BankMobile business verticals to be added in very exciting ways to show some considerable growth in the business over the next few quarters.

Next, we shared with you last year was our extreme focus on expense controls and that we will spend money where we get the revenues. Positive operating leverage is more important to us than simply do what many of the other banks are doing, which is just cutting expenses. So we expect very modest growth in the 2% to 3% range at Customers Bank this year, but in the second of the year, it should be flat expenses. So our expenses in third quarter were unchanged over second quarter at Customers Bank and we think you should expect that to remain flat in the fourth quarter.

In the BankMobile area, we continue to spend money and we were – had some unusual expenses in the third quarter, which were as a result of some rev related fraudulent activities that we have put our arms around it and you shouldn't expect that again. And – but those are the kinds of things that happen when you are a pioneer in this kind of a business. So expense control remains the top focus for us.

Next, we shared with you our extreme focus on growth in core deposits, as well as good quality, high yielding loans. So DDA has grew 25% year-over-year and at the same time customers reduced by about $700 million, the lower yielding multifamily loans from the balance sheet and replaced them with higher quality C&I loans and consumer loans. So today, we still have allocated about 500 millions of our multifamily loans. And in addition to that, we expect to continue to accelerate our runoffs of our lower yielding loans from our balance sheet. But that does require us to have higher provisions and that is why you saw the higher provisions in the third quarter and that is something which in spite of achieving higher provisions, we still were able to meet or exceed our earnings per share growth targets, as well as our ROA and ROE targets.

Next, we shared with you last year on our analyst day was a strong credit quality and a superior risk management culture. I'm pleased to share with you that our credit quality remains very strong and our reserves to NPLs at September 30th were 290% and from interest rate risk management point of view, the bank is relatively neutral to interest rate changes. And that is why it helped us and we were not overly asset sensitive at all and took advantage of the interest rate declines, as well as we are well positioned in this kind of a yield curve that exists today.

And as Carla shared with you from our capital allocation point of view, we believe that we should be able to analyze and execute in the best way over the next two years our strategy towards redeeming our preferred stock once it becomes callable. And at the same time look at continuing to report to you double-digit return on common equity that we believe is an absolute requirement from the Street and at the same time show report to you higher return on assets and strong credit quality, as well as the maintenance of our discipline on interest rate risk management.

Next, in terms of guidance for the future, just like to share with you that last year we said we would like to achieve $3 in earnings per share in 2020. We are totally committed to that and we have – we can share with you with confidence that you should expect our core earnings to be $3 or more in 2020. From asset size point of view, we will continue to look at and continue to evaluate the best way for us to position our assets and liability structure. We are much more interested and focused on having a strong balance sheet and remaining very focused on Business Banking at Customers Bank and remaining very focused on profitable expansion of BankMobile.

We also shared with you that we wanted to achieve – going ahead, we wanted to achieve a 125 or higher ROA and we wanted to achieve $4 in earnings per share within a three to four year period, while close to a year is almost behind us. So some of you might say, are you going to make it now two to three years starting next year? And that would be a correct assumption on your part, that we are assuring for $4 a share in earnings over the next two to three years starting next year.

Now on our views on the changing banking environment because it is changing very rapidly. And we are very focused on dealing with it, understanding it and also having a strategy that creates relevancy, that resulting in superior shareholder value creation over the next few years. Today, if you think about it other than 0.01% of the banks which happens to be the top six to 10 banks in the country, you are seeing 3% to 4% average growth in deposits. You're seeing 2% to 5% growth in loans. You're seeing continued growth in loans, which are more still real estate oriented. You are not seeing core C&I growth in majority of the banks other than those who are niche players.

So what does this mean? We think in the Business Banking arena, there is going to be a huge opportunity for people with High Touch, as well as High Tech strategies, as well as to be focused on niches rather than being all things to all people. That is exactly what Customers Bank is doing. And then do it in a way that it's private banking for privately held businesses and then it is certain national niches. The niches that we have in place today are the mortgage so-called banking, the privately held mortgage companies and that we grew from – were from zero and today it is about 2.5 billion in size and we recognized that there is volatility in the market in that. So we have gotten into one or two other niches, which I'll talk about later on.

And the other national niche that we have identified is in certain types of equipment leasing business, we call it the structured finance, commercial finance business. And we are executing that besides the leasing, there are other areas of specialty finance. And that is where we are seeing a huge opportunities to compete with quality players who are also going in those – and in those niches. That is how we are achieving the 20% plus consistent growth rate in C&I loans and also maintaining superior credit quality, as well as doing it without adding on expenses of traditional bank branches or focused on what's the square footage of branches and how many mirrors or glasses that you got to put in those branches.

So we have all our – many of our competitors are focused on those kinds of things, we are very focused on the changing environment in taking [Audio Gap]. On the consumer banking side within the last three to four years, you've seen 55% to 60% of all the consumer lending now being handled by marketplace lenders. At the same time, you've seen the market share of mortgage lending in the consumer banking sector, the consolidated among the top 0.1% of the banks in the country. And at the same time, you've seen the huge expansion of the so-called the high rates, the Marcus type of banks. And joining the other digital banks, which are taking advantage of market rates at a time when majority of the banks in the country are hoping that the customers would never ever look at the rates that they're paying on deposits for them.

We don't think hope as a strategy. And we think you've got to take advantage in this environment to be able to have an effective strategy which lets you pay market rates, but do it in a way that you still have a positive operating leverage. So that's why in the consumer banking area, we are doing it two ways. We're doing it through BankMobile to attract the core customers checking account business and the related business.

So we are developing technology today, which will make us a marketplace lender. In addition to a deposit generator to BankMobile and niches, not to the market like traditional marketplace lenders are doing it. And at the same time, we have started a digital bank within Customers Bank, which is competing with some of the other digital banks and going after the high net worth of market.

So we feel that the pace of change is just going to accelerate and we feel that we are very confident that we are well positioned today, but we have to remain adaptable and we got to – we have to remain relevant in this environment. And that's why we have articulated inside the company what we call vision 2025 and we are going through a very significant effort that we had shared with you about a year – nine months ago, an effort called digitization of the bank.

And I'm pleased to share with you that that's making very significant progress. If you are wondering how are we achieving improved operating efficiency and positive operating leverage. Well, it’s effective use of technology and it’s execution of the strategy and it's the continued digitalization of the bank, both from a productivity improvement, as well as from customer service, as well as from engagement with customers and attraction of the customers.

And lastly, in terms of our views on the regional and the national economy, we think it's prudent to remain cautious. We don't see signs which indicate to us that we are going to be in any kind of a severe slowdown leave alone a recession over the next 12 months. We had a risk summit yesterday at our company and before that we were – through the Federal Reserve Bank of Philadelphia also heard their views on the economy and also had a chance to speak with President Harker, who sits on the Board of Governors about his views on the economy.

And so we are in agreement with overall consensus that this is a time when we don't expect a recession, but we are working and running the bank as if there is going to be one. And that is an important differentiation, the management of your credit risk is when times are good, not when times are bad. When times are bad, it's a result of the way we are managing our credit risk. So we have a strategy in place, where we are identifying our sort of weaker credits and we are moving them out of the bank and we are so glad that there are lots of banks, who are dying to buy or takeover some of what we consider to be weaker credit.

And so, we continue to do that as well as where on the risk adjusted basis, we don't see those credits yet helping us get to the 125 or higher after tax ROA. So that is our strategy in this kind of an environment. Be very cautious and never have take your eye off the credit risk, as well as other areas of risk management. And the areas of risk management that we see new areas of risks that we see emerging happen to be operational risks and fraud risk. And that is very prevalent throughout the economy. And we think in the banking sector, we have really taken steps to enhance our staffing, our skill set, our technology, our focus in all those areas of risk management.

So with that, from looking ahead, we remain very committed to our plans to end the year as Carla mentioned to you this year at about 10 billion in total assets and that would help us preserve Durbin exemption to change levels into next year and should it help us also improve our capital ratios and the normal seasonality of our mortgage warehouse business will help us get there. And as Carla shared with you, we also have moved 500 million of our multifamily loans to held for sale.

And as I shared with you, we remain confident about our core 2020 EPS target of $3 per share and we expect to continue to expand our net interest margin, focus on cost control, maintain strong C&I growth and continue to move away from lower margin businesses, really watch our asset quality very, very closely and the results should be invasive in our return on average assets as well as return on equity and no question about it, that would result in significantly higher shareholder value creation in 2020 and beyond.

So thank you for taking your time and at this time, I would like to request Britney to open it up for Q&A.

[Operator]

Yes sir, thank you. [Operator Instructions] Our first question comes from Steve Moss with B. Riley FBR.

[Steve Moss, B. Riley FBR]

Good morning.

[Jay Sidhu, Chairman and Chief Executive Officer]

Hey Steve. Good morning.

[Steve Moss, B. Riley FBR]

I want to start asking on the consumer loan growth here, it was really strong this quarter. I'm wondering, what were the drivers and what were the types of yields you're seeing within that portfolio?

[Jay Sidhu, Chairman and Chief Executive Officer]

It was – you mean it was strong this year, just wasn't the best quarter for us. But we are seeing, we are not putting on any consumer loans at all which are even close to subprime. Our average FICO score remains in excess of 740. We are originating personal loans, as well as doing student loan refinancing. And on a regular basis, we develop that technology and we are expected loan losses from these categories remain in line with our expectations and the provisioning that we had done. The net yield to us after loan losses and whatnot still is right on target with our expectations.

And we will remain very selective in this business and when we have 1 million plus consumers banking with us, as well as our knowledge and expertise in those niches, as well as our White Label partners that we expect to add on and their desire to look at selective consumer lending, we think this is selectively a growth market for us. But we will not have more than somewhere like we indicated to you in October of last year. Right now, as consumer loans are about 6% of our – of our loans of 7%, somewhere in that area. And we think can be given you a guidance that they will not exceed 15% of our loans over the longer period of time. And we remain highly confident now that that's a good allocation of our balance sheet in a selective way at this time.

[Steve Moss, B. Riley FBR]

That's helpful. So I guess just as we think about this $3 target for next year and you're pretty much there on a run rate basis here this quarter. Given the good consumer growth you're seeing, it's probably fair to assume the trend we saw this quarter granted – it's a slow down, it's still a good number, probably continues through 2020.

[Jay Sidhu, Chairman and Chief Executive Officer]

We're not going to give line by line guidance, but we are very confident about our $3 for next year. And I congratulate you to be one of the few guys who saw that coming. And so we think that we will be selective and like we mentioned that we are going to take this gradually from about 6% of our, 7% of our assets to a maximum of 15% over a period a time in the consumer loans. But our focus remains in core C&I lending. And you can see that 47% of our total loans are commercial loans. When you add the loans to privately held mortgage companies and that's where we continue to see huge opportunities.

And in spite of the flat curve to an inverted curve, we're looking at niches, whereby we can actually offer medium-term to fixed rate loans with a higher margin than existed before the decline in the five year T-bill. And so that's where we see our contribution towards our higher margins over the fourth quarter and next year. And we saw good growth and very high quality C&I loans in the third quarter. And we’re actually expecting our fourth quarter to be another very good quarter for C&I lending. And that will contribute towards higher margin for us. And that also comes with DDAs.

[Steve Moss, B. Riley FBR]

Okay. That's helpful. And then on the expense guide, thinking about it flat quarter-over-quarter here. It seems like several of the expense items were one time as in nature, regarding like – for example the crime ring. And just kind of wondering, where are the investments that might push up expenses here until the fourth quarter if you back up that crime rate expense and some of the associated professionals fees?

And then on the second thing, any color you could give around the technology cost saves that occurred this quarter?

[Jay Sidhu, Chairman and Chief Executive Officer]

I think the overall – Carla, you can please add to this. But the overall initiatives that we had and we shared this with you and your colleagues in the investment community in October of last year, an extreme focus by us on productivity improvement and defusing in the digitization efforts, as well as looking at every single expense category. And we clearly shared with you that we will be willing to make investments where we see revenues within the 12 to 18 months period exceed the investments that we are making. So technology improvements have come in with more effective use of technology by us working with our technology partners to make our fixed costs lower and our variable costs tied to continued increases in revenue.

That has been a major driver by us in a focus overall. And at the same time looking at every area of operation and seeing how can technology improve us in our customer experience, as well as customer attraction, and as well as our overall cost structure. And that we've also partnered with a very large provider of technology services towards our digitization efforts, we also have then partnered with another technology company which specializes in technology improvements for regional banks and we are executing a lot of things right now, which will result in better customer experience, as well as productivity improvement.

At the same time, looking ahead, why are we confident that technology costs and technology improvements will continue? We are very much engaged at the CEO levels with our technology partners to come up with a strategy for the future. And the cloud-based core platforms, you should expect some announcements by some banks and we are going to be one of those banks over the period of time which is going to be looking at cloud-based cores over the next couple of years. But that is existing right now and you are seeing tremendous improvements in technology, you should expect from companies like FIS and whatnot.

And we think they are very well positioned and they recognize the changes that are taking place and we are in direct dialogue with them and that is how we are managing our core expenses, as well as our core improvements in service.

[Steve Moss, B. Riley FBR]

Okay. Thank you very much.

[Operator]

Our next question comes from Michael Perito with KBW.

[Michael Perito, KBW]

Good morning.

[Jay Sidhu, Chairman and Chief Executive Officer]

Good morning, Mike.

[Michael Perito, KBW]

Sorry about that. So I had a few questions. First I had a kind of a segment reporting question. I was just curious, I know – I believe actually that you guys allocate some of the consumer balances technically onto the BankMobile balance sheet. And I'm just looking at the BankMobile segment reporting and the provision expense has kind of jumped around a little bit, it was lot higher last quarter than this quarter. I'm just curious, how do you guys allocate the consumer loans and the corresponding provision across the two entities in your segment reporting?

[Carla Leibold]

So we took the consumer loan additions that were out at this quarter and that was really applied to the Business Banking segment. And so from BankMobile segments consumer loans remains relatively flat. So that provision amount really reflected the amount of loans that had been added from the first quarter of our – in the first half of 2019.

[Dick Ehst, President and Chief Operating Officer]

And Mike just add to that, so you're right in the first half the year the consumer loan growth all was in BankMobile, it was only the third quarter, that's the additions happen on the bank side of the house.

[Michael Perito, KBW]

God it. And also…

[Jay Sidhu, Chairman and Chief Executive Officer]

But from a strategy point of view – sorry, Mike. But from a strategy point of view, our goal is that 80% or so of the funding that's coming from BankMobile will be in the consumer loans, rest will be in some kind of a liquidity oriented asset product. And then over a period of time you could see about a 10% or so of the Customers Bank business segment to be in consumer loans, but that's going to be over a period of time, and that's how we see the overall allocation. So you should expect quarter-to-quarter some stuff, but we are disciplined in that and that's why we are doing a customer segmented analysis in line with that.

[Michael Perito, KBW]

Got it. That's helpful. Thank you, Jay. And then, so just, as we think about the BankMobile balance sheet, I know there is some modest growth on the disbursement side, but I think that piece of the business is a little bit more predictable, obviously, as T-Mobile continues to grow basically rough numbers, but 80% of that incremental deposit growth you guys would hope over time to be allocated to consumer loans, which will have to be provided for with the other 20%, you'll be kept in fairly short liquidity instruments.

[Jay Sidhu, Chairman and Chief Executive Officer]

That is correct. Absolutely correct, Mike.

[Michael Perito, KBW]

Okay. And then I know you guys are typically limited in what you can comment. But obviously the White Label deposits have continued to ramp up, it did look like, at least on $1 basis though, that was a little slower in the third quarter than in the second quarter. I was just curious if there was any insight you can provide us onto kind of how those – how that program is progressing against your expectations? And if there is still a lot of momentum on the T-Mobile side as you guys see it to kind of continue dropping those balances going slower?

[Jay Sidhu, Chairman and Chief Executive Officer]

No question about it. Right now, Mike, we are in the investment phase and as you know all we have is one check account, that we are managing for our White Label partner. And we have – there is a roadmap that we've discussed and our White Label partner has discussed with us that they would like to see. And there is a plan that's been put together in accordance with that roadmap. And once the execution starts on along at line, it’s better to have all your product features, as well as your strategy from a product development point of view aligned and before you start any kind of aggressive marketing.

And then the plans are that we see our White Label business to be EBITDA positive within the next year to two years. And – but you should continue to have us remain in the investment mode during this time period, because we are not just with one White Label bank. We are in negotiations with several other White Label partners right now.

[Michael Perito, KBW]

Okay. And then just lastly, I know there is probably about 1 billion of mortgage warehouse that excuse me, will pretty seasonally come right off and help bring your total asset base down. But can you help probably bridge the gap on kind of how – I believe you guys mentioned in the release or in the deck somewhere that the plan is still to be kind of sub 10 billion at year end. Can you just walk me through kind of how we get there and what if any impacts we can expect in the model to kind of make that happen?

[Carla Leibold]

Yes. So what we've said is that continued one off of the multifamily portfolio, so we've reclassified about 500 million of multifamily loans to held for sale. And then we expect at least 300 million or more of just natural runoff combined with what you had said about the natural contraction that happens in our mortgage warehouse business just in the winter months. And then also we're expecting some runoff for sale of some single-family residential mortgages.

[Jay Sidhu, Chairman and Chief Executive Officer]

And those would be offset with some – they would be offset with some increases in C&I lending and that's why – that's all you get to the 10 billion.

[Michael Perito, KBW]

So you guys are 11.7 billion on a period end basis at 3Q, that comes down to 10.7 billion or so just from the mortgage warehouse balances probably normalized into 1.5 billion or 1.2 billion, where they were in the first quarter. And then you have the 500 million of multifamily that you expect to move in the next couple months and then have another 300 million, if I hear you right, that's going to run off in the next couple months and that will pretty much get you there. And then, there might be a couple of other moving pieces, but is that the real way to think about it?

[Jay Sidhu, Chairman and Chief Executive Officer]

Correct.

[Carla Leibold]

Yes.

[Michael Perito, KBW]

Okay. Thank you guys. I appreciate the color.

[Jay Sidhu, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from Russell Gunther with D.A. Davidson.

[Russell Gunther, D.A. Davidson]

Hey, good morning guys.

[Jay Sidhu, Chairman and Chief Executive Officer]

Good morning. How are you?

[Russell Gunther, D.A. Davidson]

Doing well. Thank you, Jay. I wanted to follow-up first on Mike’s question about deposit growth within the current T-Mobile White Label partnership. So is this the type of growth rate we should expect going forward throughout 2020 in the fourth quarter and through 2020? Again, just isolating for the T-Mobile. And then a second part of the question would be just the average deposit or deposit size relationship.

[Jay Sidhu, Chairman and Chief Executive Officer]

Well, we are not going to be happy with this kind of a rate in 2020. That's all I can say to you. And so we are not giving line by line guidance. So that's why our plans are not to see this kind of a growth rate in 2020. So I hope you can read between the lines and come up with what you think might be the case, you know the total market potential and you know the spent of that brand. And we’ve also mentioned to you that we are – it takes about 12 to 24 months to do all the analysis and sign up White Label partner. And so we are in negotiations with few and so by the second half of next year, it takes that long before we would be in a position to tell you, but we see opportunities for – pretty strong growth opportunities for BankMobile.

[Russell Gunther, D.A. Davidson]

I appreciate the thoughts there Jay. And are you guys, just a follow-up, are you able to share with the kind of average deposit relationship from the size perspective?

[Jay Sidhu, Chairman and Chief Executive Officer]

It's – right now it’s over $1,000.

[Russell Gunther, D.A. Davidson]

Okay. Thank you. And then I wanted to, if I can just go back to Steve's question on the expenses. You guys gave a lot of good guidance, but I want to make sure I am following here so, are you able to give us a sense from a consolidated basis, what that quarterly non-interest expense number could be heading into the fourth quarter and how we should think about that in 2020 and relative to that $3 earnings target?

[Carla Leibold]

Yes. So what we’ve said for the fourth quarter, that we're expecting them to be flat to down from the average or what you've seen from the first nine months of 2019.

[Russell Gunther, D.A. Davidson]

Okay. And that's on a consolidated basis. Great, thank you. And then last question for me guys, in the $3 earnings target is there an assumed redemption of some of the preferred in there or would that be upside to that $3 number?

[Jay Sidhu, Chairman and Chief Executive Officer]

I think what we want to say is that we are looking at the best ways for a proper capital allocation point of view. And the actual strategies for redemption was is reissuing it on the lower rate or all those kinds of options, everything is on the table. We are very focused on maintaining strong capital ratios and Tier 1 ratios and so we have not factored that in as an absolute requirement that we are going to use debt capital or something else to redeem that and that is needed for the $3 number. Yes.

We can get the $3 as you – I think Mike mentioned or somebody mentioned earlier that we are pretty much on that run rate guys. And so …

[Russell Gunther, D.A. Davidson]

I appreciate the clarification. I appreciate you taking my questions guys. Thanks very much.

[Operator]

Our next question comes from Bill Dezellem with Tieton Capital.

[Jay Sidhu, Chairman and Chief Executive Officer]

Hi Bill.

[Bill Dezellem, Tieton Capital]

Good afternoon, Bill Dezellem, Tieton Capital.

[Jay Sidhu, Chairman and Chief Executive Officer]

Yes, Britney, we can hardly hear you.

[Bill Dezellem, Tieton Capital]

Are you able to hear me now?

[Jay Sidhu, Chairman and Chief Executive Officer]

Yes. Bill, we can hear you now. Thank you. How are you?

[Bill Dezellem, Tieton Capital]

Very well, thank you very much. So I wanted to circle back and continue down the BankMobile conversation. What lead to that business being profitable one quarter earlier than what you had originally discussed.

[Jay Sidhu, Chairman and Chief Executive Officer]

There are the drivers of profitability. As you know those are the business as well as your margins, your efficiency improvement opportunities and maintaining the overall quality. So in the past as you know from a margin and allocating the liabilities for BankMobile into assets which are appropriately allocated to that business. So we were setting aside a lot of provision expense and not really getting the return. So we had packed that in, we knew it, maybe some other folks on Street and some of the analyst would file a little bit, but we believe they all understood it too and everybody is now seeing the results.

Some people were just off by a quarter or two, but overall we are just executing what the street would have expected us to do based upon numbers, so it's a little bit ahead of the quarter. We think it could have even been stronger, but we expensed certain items this past quarter and we are not going to see some of those unusual expenses, but there will be a little bit, perhaps less revenue on our side because of the seasonality in the next quarter. So you shouldn't expect our profits from BankMobile to be up by couple of million dollars, but still it will be stronger hopefully than what you saw in the second quarter and the third quarter, our guidance remains [Audio Gap] lower revenues, slightly lower revenues [Audio Gap].

[Bill Dezellem, Tieton Capital]

And Jay, that actually is a good lead into the next question which is, are you anticipating that BankMobile will on a go-forward basis be able to be profitable each and every quarter or will there be some seasonality with some of the lower disbursements quarter that you did not expect them to maintain profitability?

[Jay Sidhu, Chairman and Chief Executive Officer]

Bill, till we have matured in our other areas or other verticals for BankMobile, the student business will remain to be impacted by seasonality. So our objective is that, we will offset that volatility by the way having a stronger profitability starting to come after a couple of quarters from our White Label partners business. There is another new vertical that to be are developing, which we don't want to talk about today and which is very, very exciting opportunity for us.

And so with all that said, we want to gain a product, but next year BankMobile will be profitable for the entire year and that's the most important thing.

[Bill Dezellem, Tieton Capital]

Great. Thank you. And then your – on the Customers Bank side, the online app that you have developed, would you discuss the momentum that you are seeing with that and whether it is now holding steady or whether you're seeing some level of acceleration or deceleration from the kind of that first year push?

[Jay Sidhu, Chairman and Chief Executive Officer]

Bill, it's a very good question. I'm glad you kind of asked it, because a majority of the banks right now are experiencing a margin compression. And they are experiencing the margin compression because they were very asset sensitive and they don't see a growth in their business lines and they don't see growth in deposits and they are – that's why they are trying their best to accelerate the reduction in their rates that they're paying for deposits, but they never increase those deposit rates when the rates were going up.

They improved their profitability and got to all sorts of accolades from the investment community for expanding their margin because they were assets sensitive. But that happened because they had loans which are at valuable rate and they were proud of themselves for not having to raise those rates, while now what's happening is that those same loan rates are coming downtown faster and they cannot, because they never raised the rates by much. So they are having a very tough time keeping. So that creates an opportunity for someone who wants to attract customers.

And like we shared with you on the last call, when every analyst was asking everybody how quickly are you going to be able to decrease your rates? Because you want to work out what they're in into your strategy, earn expectations from the street and we were the ones who said, hey, we look at this not quarter-by-quarter, but for a year-by-year and we are well positioned to take advantage of this kind of a strategy and you shouldn't expect us to jump in. And because we can see improvement in margin coming from the asset side, as well as little bit coming in from the liability side.

So bottom-line is we have a plan and we are going to be executing that plan gradually, but for right now, while we are in the mode of shrinking our balance sheet. We are not executing our strategy on stronger growth and kind of market rate deposits but we are into low cost deposits, but in starting 2020, I think you'll see more clarity about our entire digital strategy for customer acquisition.

[Bill Dezellem, Tieton Capital]

Thank you.

[Operator]

Our next question comes from Frank Schiraldi with Sandler O'Neill.

[Frank Schiraldi, Sandler O'Neill]

Good morning. I wanted to ask about growth in BankMobile over the next 12 months or so, Jay it sounds like you guys have a lot of opportunities on the White Label side, but given sort of a lag to get these things to market the majority of growth or the driver of growth in deposits next year would be more so the current partnership. And, I am just wondering what you think the, what is the driver to move that growth rate higher? Or is it just sort of the next phase of marketing or just as word of mouth growth, just wanting to get your thoughts there?

[Jay Sidhu, Chairman and Chief Executive Officer]

I think its product enhancement, features enhancement, followed by marketing.

[Frank Schiraldi, Sandler O'Neill]

Okay. And in terms of the $4 million the fraud related loss in the quarter, could you help us think about going forward, is there some level of this sort of fraud related expense that you anticipate continuing just given the very nature of the business and you'll work through that in terms of profitability, you guys were profitable in the quarter even with it or does that just basically in your mind go back, go down towards minimal or just back to zero.

[Jay Sidhu, Chairman and Chief Executive Officer]

I think if you look back in our financials, we've had about a $1 million to $1.25 million[ph] of these kinds of like downs. And this is not just fraud we call it operating losses, so these are disputes on Regulation E, where a lot of people say, I never charged this and you put whatever reason, you got to follow the regulations and those take advantage of you or whatever.

And but we are very committed to following the regulations, as we think the people are very committed, many few, but fortunately there are few very committed to taking advantage of regulations. So that's why $1.5 million to about $2 million in that range you should expect on a quarterly basis going forward.

[Frank Schiraldi, Sandler O'Neill]

Got it. Okay. And then just finally, and sorry if I missed it, but just if you could just remind me, what the – you got there quarter early in terms of profitability. So just in terms of the thinking of going-forward the timeline for BankMobile and sort of the end game there as part of customer's balance sheet.

[Jay Sidhu, Chairman and Chief Executive Officer]

Frank, let me just share with you, just Google, joint venture banks and you will learn a lot. I'm not saying that we exceed with evaluations, but the interest in the marketplace is so high and it would be prudent for us to continue to evaluate options and alternatives and that's exactly what we are doing.

[Frank Schiraldi, Sandler O'Neill]

Okay. Just trying to, I guess 2020 could be a year where something could potentially happen before year end. I mean is that fair?

[Jay Sidhu, Chairman and Chief Executive Officer]

You have a pretty good guess.

[Frank Schiraldi, Sandler O'Neill]

All right. Thanks, Jay.

[Operator]

Thank you. Our final question comes from Steve Moss with B. Riley FBR.

[Steve Moss, B. Riley FBR]

I just want to follow-up on interest bearing deposit costs here with the fed cutting, how quickly could those reprice down?

[Jay Sidhu, Chairman and Chief Executive Officer]

We are very focused Steve on generating low cost deposits and bringing down the cost, so that you should expect our cost of funds to start to show some decreases more, more so starting first quarter, then you'll see them in the fourth quarter and but so no question about it, I think it'll be the longer period of time because we are going to use the shorter-term timeframe to attract more customers and to develop deeper relationships with them and to focus on the asset side of the balance sheet for this quarter and perhaps next quarter to continue to show margin expansion and after that the liability side of the balance sheet also contributing more towards that what you've seen so far.

[Steve Moss, B. Riley FBR]

Okay. Thank you very much. Appreciate that.

[Operator]

Thank you everyone, this concludes today's question-and-answer session.

[Jay Sidhu, Chairman and Chief Executive Officer]

Well, thank you very much ladies and gentlemen. If you have any other questions please don’t hesitate to call any of us. Have a good day.

[Operator]

Thank you everyone, this concludes today's teleconference, you may now disconnect.