Customers Bancorp, Inc. (CUBI) Q3 2017 Earnings Report, Transcript and Summary

Please standby. Good afternoon. And welcome to the Third Quarter 2017 Customers Bancorp Incorporated Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] And now, I would like to turn the floor over to Mr. Bob Ramsey. Please go ahead, sir.

Thank you, Catherine, and good afternoon, everyone. Customers Bancorps’ third quarter earnings release was issued earlier today 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 myself, Bob Ramsey, Director of Investor Relations and Strategic Planning. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that cause actual performance results to differ materially, including the risk of the results are different than currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our report on Form 10-K and also the 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bancorp’s CEO, Jay Sidhu.

Thank you, Bob, and good morning, ladies and gentlemen. Welcome to our third quarter call. As you know, we are disappointed about reporting to you some unusual or what some of colleagues call notable charges during this third quarter of 2017. That makes it important for us to spend more unusual time on this call to explain our strategies to you, the tactics, financial results and make some comments on future margins and capital goals, as well as our aspiration for continued growth in shareholder value. First of all, our reported GAAP third quarter earnings were only $4.1 million and that’s $0.13 per diluted share. In the third quarter our tax rate was 45.5% and these notable charges were resulted from the change in BankMobile disposition strategy and the Religare impairment. For that affected on the first nine months of earnings and they were -- they came at $1.42 for the first nine months of 2017. We will be discussing in more detail some of these notable charges, but essentially $0.48, they were amounted to $0.48 and like I mentioned, they were for the BankMobile disposition strategy or $10.5 million after-tax for that and the Religare equity investment, which is a big disappointment for us. It turned out to be some foreign activities taking place over there, so we pretty much written it down to practically zero this quarter and put all this behind us. Due to our strategy to reduce the size of the balance sheet during this volatile period and does had an impact on our third quarter diluted operating earnings per share also, and so we -- our total assets were $10.5 billion at end of September 30, 2017 and our operating earnings per share were impacted by the size of the balance sheet also somewhat and our operating earnings per share were $0.61 and you know this is a non-GAAP measure. We believe that it would be prudent for Customers to keep its assets below $10 billion at December 31, 2017, because that helps us to further improve our capital ratios, and at the same time defers potential effects of the Durbin Amendment back to July of 2019, giving us a lot of headroom to look at the best strategy and give us enough time to execute the spin-merge strategy. Our loans grew well over the last year. There were up $9.2 billion. That’s up 9% over September 30, 2016. C&I loans were up 24% year-over-year and this C&I loans exclude mortgage warehouse loans. Total deposits were up about 2.8% year-over-year and what the more important was, non-interest bearing demand deposits were up about 30% year-over-year, and this includes deposits of BankMobile. Our shareholder equity up $911 million was up 15.5% over last year. And our risk-based capital was 10% -- almost 11% -- this is the Tier 1 risk-based capital was almost 11% at September 30th compared to about 10% at September 30, 2016. Our book value was $22.51 at September 30th and our tangible book value was about $22, and that’s up approximately 9% over last year. Now I’d like to discuss with you briefly our top three strategic priorities. First one is to strengthen our capital ratios, so we meet or exceed our targets of 7% tangible common equity and 9% Tier 1 leverage ratio at the holding company as soon as practically possible. We believe by shrinking our balance sheet by about $500 million buy end of year combined with good retained earnings during fourth quarter we will achieve these targets by 12/31/2017 and this will definitely have a major improvement in or what we call strengthening our balance sheet. So that was our strategic goal number one. Our strategic priority number two is a successful disposition of BankMobile in a manner that maximizes shareholder value creation for CUBI shareholder. As you know we started all strategic options. We concluded that spin-merge was a best option. We need some guidance and some preliminary clearance from SEC which we got during third quarter of 2017 without that guidance and clearance spin-merge was not a viable option for us. But we’re glad that SEC gave us this preliminary clearance. So we announced the spin-merge to you on October the 20th and we expected to be completed no later than Q3 2018. Hence this plan also includes keeping by -- also keeping our balance sheet below $10 billion at 12/31/2017, gives us an ability to postpone any negative impact of Durbin on CUBI until July 1, 2019, we’ll be a highly confident that this spin-merge will be executed in the -- by the middle of next year but no later than Q3 2018. Our third strategic priority is to continue to improve our financial performance, but as we mean improving margin, improving the growth rate and core deposits, our C&I loans, because those are the franchise loans, and at the same time, keeping the bank’s -- core bank’s efficiency ratios in the mid to low 40s and end up reporting approximately 1% or higher return on assets and 11% or higher return on average tangible common equity. We believe we are well on our way to executing these strategic priorities of financial -- improve financial performance within the next four quarters. So now I would like to hand it over to Bob Wahlman to go over some of these other important items that we would like to share with you.

Thank you, Jay, and good afternoon, everyone, and thank you for dialing in this afternoon. Q3 2017 has been a challenging quarter for Customers. In my few minutes of comments this afternoon, I will focus on five topics that I believe are key to understanding our Q3 financial results and in terms of looking into the future as to where Customers go. These five items include an overview of the most notable unusual items, I’ll drill down into those a little bit further, a discussion of net interest margin impacts and an outlook as to where we think it’s going to go in 2017 and 2018, some comments in regards to operating efficiencies and expensive, a brief discussion on capital and then a little bit on how we get to less than $10 billion at December 31, 2017 and our growth plans for 2018. As Jay noted in his comments, Customers reported earnings of $0.13 for Q3 2017. Also as Jay noted is that Customers reported $0.48 in notable items and I am going to drill down in the notable item. The first notable item I would like to cover is the effect of adopting a disposition strategy of spin-off and merger of the BankMobile business rather than what we had previously -- the path that we are previous on which was sale of the business. This change in disposition strategy has the effect of decreasing earnings by $0.32 per diluted share in Q3 2017. Specifically, the accounting literature requires that we report BankMobile when we are doing a spin-merge as part of continuing operations and not as held for sale or discontinued operation. What that means from a financial many different implications, but particularly for us we had to recapture the depreciation charges that had been previously deferred during the period the business was classified as held for sale and held for sale accounting as a fair value in those depreciations. In addition, there is a $4.2 million catch-up charge or $0.08 per diluted share, also because the sale of BankMobile would have generated a large capital gain, much greater than the loss experience on the Religare investment security held in the corporation that would result for capital loss, were able to recognize a deferred tax assets with tax benefit expected to be receive in that capital loss. However, the decision to shift to the spin-merge disposition strategy eliminated $4.6 million of previously booked DTA that we recognized between the first and second quarters of this year, as well there is an additional $3.1 million deferred tax asset that would have been recognize this period in the Religare loss, because there was -- but we are not able to because there was no anticipated gain on sale. Combine that was earnings equal to $7.7 million or $0.24 per diluted share. Also as referenced in my comments, Customers recognized an additional $8.3 million impairment charge on the Religare equity investment equaled to $0.16 per diluted share. This impairment reduce Customers recorded investment in Religare, the full amount of the Religare exposure -- or the full amount of the Religare exposure to $2.3 million. Customers continue to look for strategies to exit this investment and gain that capital loss ex treatment. We deeply regret that this investment did not yield the benefits we hope for when we made this strategic investment in 2013. It is notable that Customers will report BankMobile business as part of its continuing operations, as I noted before, and not discontinued operation in Q3, and until the spin-merge is completed. Once the spin-merger is completed that business will again be reported as discontinued operations and will have to recast all the previously reported period to show it is discontinued operations. Doesn’t some -- the accounting in some ways doesn’t make sense and some way it does, but it is clearly what it requires. One last comment here, and again, I repeat Jay’s comments and that is, if you look at our Community Banking business, we reported 74% in earnings per share. Now that included $0.10 per fully diluted share for some securities gain, so $0.64 for the Community Business Banking segment exclusive of those securities gain and that’s the core bank that will be left with after we divest ourselves with BankMobile. And whilst, perhaps, appearance, it’s important to note that we do not expect any of these charges that I just covered to repeat in Q4 2017. They were truly one-time or unique to the third quarter. All right. Turning on to the next topic, which was the Q3 2017 NIM impact. The second area of interest to many analysts and to ourselves for the third quarter 2017 earnings is the reported net interest margin of 262 basis points, which is down 16 basis points from Q2 2017 to 78 basis points. And I do remind everyone that we do tend to run with a more narrow spread, but we do have a significantly lower run rate for expenses than what the bank will typically do in many respect half of what the level is for a bank normally our size. Our NIM level was below our expectations, as well as the street expectations, and there are number of items to be considered in evaluating that drop in NIM and that affect our expectations for the Q4 2017 NIM and what we will do in 2018 too. So on average -- so this is getting into the most significant of the items affecting NIM. On average Customers has been receiving about $1.5 million in prepayment fees quarterly over the past year, most of that related to the multifamily portfolio as it has reached a level of maturity that we typically see a significant number of prepayments. In Q3 2017 we had an anomaly and that Customers only received $90,000 in prepayment fees. This is a $1.4 million difference and equates to about 5 basis points decrease in NIM and we don’t expect that to be repeated in Q4 prospectively. Out of the period interest expense for one-off deposit contract, we had to make an adjustment during the third quarter of about $250,000 or approximately 1e basis point on NIM. Another significant item is the interest expense on the $100 million senior notes that we issued at the very end of the second quarter, that increased interest expense by approximately $1 million, which after considering the cost of the fund that it replaced, which was short-term funds at the FHLB rate about 135 basis point, that was about a 3 basis point -- that caused about a 3 basis point decrease in our NIM. So when you consider all these things, the compression end margin related to the increase in the cost of funding our business on the deposit side relative to our ability to pass on those rate increases to our loans cause about 7 basis points of NIM compression. Our expectations for NIM is that will bounce back significantly in Q4 2017 and stabilize at that about 275 basis point level for 2018. Particularly affecting that expectation includes some of these items. In late Q 2003 Customers sold $425 million to securities with about 150 basis points spread. Removal of the securities at that low NIM is expected to add by itself about 5 basis points to NIM in Q4 compared to Q3. Prepayment fees that I mentioned earlier are expected to return at least to the level experience in recent quarters of $1.5 million, adding perhaps 5 basis points or 6 basis points to the NIM. Customers is now pricing is at -- change some of the pricing of its loan and it’s required minimum yield of 4%, which will have an impact on -- a little bit of impact on the Q4 margin, but more impact prospectively. Customers is also expecting to sell in excess of $325 million of loans with yields that are under 3.4% in the rising interest rate environment some NIM compression from them. And so we have a net interest spread on those loans of about 2% or maybe little less and that will -- will help increase NIM in 2018, particularly as we grow the portfolios with some other higher yielding loans. And then the efforts are focused on generating lower cost core deposits to replace some of the more wholesale deposits, which we were finding are subject to a little bit of a higher beta as we go through an increasing interest rate environment. And that includes our expansion for Washington DC, some new commercial money management products and targeting specific sources of commercial low interest rate deposits from both current and new prospective clients. Moving on to capital. Capital management or Customers management monitors and manages our capital levels very closely and has established targets for each of the key regulatory capital ratios, as well as tangible capital. As Jay noted, two of those ratios and not -- just not them all, 13% is a target with total risk-based capital, 11% for Tier 1 risk-based capital, 9.5% for CET1 ratio, 9% for leverage ratio and 7% tangible capital ratio. Customers’ current capital ratios are generally slightly below those ratios, with a bit more of a gap on the common equity-based ratios relative to the target, due to Customers decision in 2016 to do more of its capital raise as using preferred stock rather common stock has been a cost effective tool or earnings per share effective tool. Customers ratios are also little less than the industry averages, reflecting the lower [ph] credit and par (19:04) at least with lower credit risk profile of the loan portfolio. Customers continues to monitor its capital levels and will take action if considers appropriate when it is felt the capital is needed and an amount of capital that it believe is appropriate. Customers will consider all capital alternatives available to us. Certainly, the balance sheet reduction we have talked about will raise Customers’ capital ratios for December 31, 2017 as will the Q4 retained earnings. Turning to operating leverage and expenses. Customers has stated one of its objective is to generate at least $2 of revenue for every dollar expense, that leads you to a 50% efficiency ratio. Customers has been able to do better than that, we told you when we were in the 50%s, we will get into the 40%s and we have even touched a very low end of the 40%s but reporting for the core bank 40% efficiency ratio last period. This period the bank-only efficiency ratio is at 46%, so still in the mid-40%s. Our efficiency ratio demonstrate that we are focused on controlling our operating expenses and have certain strategic advantages in our business model. The BankMobile efficiency ratio, as BankMobile is a service entity is higher and when we combined this as of BankMobile at this point of time as we do in recurring operations we are in the 60%. But we continue to work down the expense rates for that business with BankMobile over time and expect to see further reductions in their expenses in future periods. Speaking specifically to Q3, when you look at the segment reporting, you will see that BankMobile had $27 million of operating expenses and I would note that that include $6.2 million of one-time expenses. Those $6.2 million relate, as we’ve talked about before, $4.2 million related to the recapture of the depreciation and amortization charges, and then there was an additional $2 million one-time cost included there for conversion cost, we talked to you how we are going to go to systems conversion and almost $2 million of the conversion costs. So if you take those out we are down closer to our normalized run rate for that segment of about $21 million -- we have $21 million in our run rate, it’s been about $20 million and those as I said before were one-time expenses. Turning to topic -- the last topic, I believe I am covering and that is the, how do we get under $10 billion and then resume growth in 2018? So we have adopted very specific strategies to decrease our total assets from the $10.5 million reporting at September 30, 2017 to $9.9 billion at December 31, 2017. The specific tactics include, we are going to be selling approximately $325 million in residential and multifamily loans in Q4 at or actually as a small -- at a very small gain. The mortgage warehouse portfolio is a seasonal portfolio and is expected that this portfolio will decline about $300 million -- $200 million to $300 million from the September 30, 2017 levels. We will see some shrinkage there. Those two by themselves is $500 million, $600 million. The multifamily business line has reduced pipelines by increasing its rates and actively managed the amount of the portfolio growth, limiting new production or deferring new production into the first quarter of 2018. So we expect that will be flat to a small increase there. We do expect the core C&I business to grow. We want that business to grow and we expect that business to grow by $150 million to $170 million during the fourth quarter. This growth is factored into our calculations and we will make up for that elsewhere. And then our [inaudible] (23:06) is that we still have a $500 million securities portfolio, which when we combined with paying down borrowings, there is a tool that’s available for us to manage total assets down to the target level if necessary. And then Customers -- and looking forward to 2018, Customers expect that it will be able to rebuild its interest earning portfolio after the New Years begin. As noted above, we would expect to pick up some of that -- but we expect to pick up all the newer loan originations that we are deferring from the fourth quarter, we anticipate more than a 20% growth in the C&I portfolio for 2018. We would expect to recently rebuild some of the securities portfolio that we use for liquidity cushion and it’s our expectation we will probably peak in asset size, asset peak at the mortgage warehouse business, because that business will come up in the second quarter of next year straight down in the first quarter, but it will come back in the second quarter and we would expect that loan end at the end of the second quarter, we feel a good deal in the third quarter, it will be someplace around $11 billion or slightly over $11 billion and then we would report total assets of around $11 billion plus or minus at December 31, 2017. Those tactics or these tactics achieving our target at December 31, 2017 balance sheet and then grow the loan portfolio in 2018 are very reasonable and achievable. We believe reducing the total assets under $10 billion is a necessary and prudent step to protect our interests as the banking regulators take longer than we hope in approving the BankMobile transaction and while we are targeting midyear 2018 to execute the spin-off and merge transaction, we cautiously believe that it shouldn’t certainly take us longer than third quarter 2018. We believe the tactics plan to achieve a smaller balance sheet are easy to -- are relatively easy to execute and we will successfully manage our asset size at target level. With that, I conclude my prepared comments and I look forward to your questions. Let me hand the presentational over to Bob Ramsey.

All right. Thank you, Bob Wahlman. I want to take a couple minutes to review the spin-merge transaction which we announced last Friday and the value that it creates. Once the transaction is complete, Customers shareholders will receive approximately $110 million of newly issued stock and Flagship Bank, which equates to roughly $3.50 per share of Customers Bancorp. The transaction is expected to be tax-free to both shareholders and to Customers Bancorp. Customers Bancorp will receive $10 million in a separate sale of the deposits to Flagship Bank. The way of background Customers announced plans to divest BankMobile last fall to preserve BankMobile’s profitability under the Durbin Amendment and allow Customers Bank to continue to grow. In March of 2017, Customers announced a plan to sell BankMobile for approximately $175 million, although, ultimately the buyer was not able to satisfy the closing conditions. In May, the Bank announced the received of two unsolicited offers, one to a large U.S. Bank. In September of this year Customers finalized and signed a contract with a large retail partners to offer white-label financial services. This opportunity is significantly more valuable if BankMobile is exempt from the Durbin Amendment and able to earn the full interchange income, which is not possible if BankMobile is acquired by large bank. In the third quarter this year Customers received clarification from the SEC, it includes spin-off BankMobile, which is important, because until we got this guidance, a spin-off was not a viable option. We also recently received legal guidance where the spin-off would be considered -- would likely be considered a tax-free transaction all parties, another key factor in our decision to pursue the spin-off and merger. As we evaluate our options, we concluded the financial costs to keeping BankMobile is to great and so the real choice was either outright sale of business or else spin-off and merger. In the event of the sale, the final purchase price is the key assumption, but if you assume a hypothetical range of $100 million to $150 million, we estimate an after-tax gain to Customers Bancorp of approximately $23 million to $50 million. That equates to $0.75 to $2.60 and tangible book value per share at Customers current 1.4 times multiple tangible book. This might result an increase in shareholder value of approximately $1 to $2.25 per share. This amount could be more or less depending on the final sales price, but it gives you a range for reference. In the spin-merge transaction shareholders will receive approximately $110 million of Flagship’s stock. This valuation is based on Flagship’s planned capital raise in Customers shareholders ownership of just over 50% of the merged business. The $110 million equates to approximately $3.65 per share for Customers Bank. Considerably more than the value that we estimate would be received in a sale which I just discussed. To sum it up, we choice the spin-off and merge transaction or BankMobile, because Customers -- our investors in Customers Bancorp will receive approximately $3.65 value in newly issued stock, which we think is the best option. We expect the transaction to be tax-free to both Customers and its shareholders and we expect the shares received to be exchange traded, given shareholders the optionality to retain BankMobile’s stock and participate in its future growth or to sell it and monetize their investment at their option. Now, I would like to turn the call back over to Jay Sidhu for any closing comments.

Yeah. Thank you very much, Bob. Just a quick comment on asset quality, we remain very confident that you should not see any significant changes at all in our asset quality one quarter to another quarter when our competitors move up and down and that’s about it. From an interest rate risk point of view, we are neutral, it’s a slope of the curve that negatively -- was negatively impacting every lender in the multifamily space and we have decided that we will not let the slope of the curve if it remains reasonably flat to negatively impact our margin by certain pricing strategy that we have implemented and controlling our growth, as well as being optimistic in the way we sold our fixed rate assets when there was a dip in medium-term rates back in September. So in terms of notable charges, Bob mentioned to you, $15.5 million one-time. On top of it, Bob Wahlman shared with you about $2 million of one-time conversion charges, which were not non-recurring and approximately $1.8 million of prepayment on other adjustment to the margin, which we don’t expect that to be continuing factor. In fact in the fourth quarter, our prepayment numbers will be at or above the normal quarterly range. So, again, we regret about the one-time, this all -- this one-time unusual charges or unusual misses on prepayment fees. We believe we have a very clear strategy for BankMobile disposition now and a clear path of creating considerable amount of value for our shareholders and as well as achieving our capital goals by the end of this year, and we believe we also have a clear roadmap for achieving higher profitability in 2018. So, with that, we will open it up for any kind of questions. Catherine, if you can help us please.

Thank you. [Operator Instructions] We will take our first caller. Your line is open. Please go ahead.

Hi. This is Joe Gladue from Merion Capital. Good afternoon.

Hi, Joe.

I guess -- first, I guess, like to get a little color on how BankMobile is doing, maybe you could touch on, they still -- they able to close any new Customers in the disbursement business with new colleges and any other colleagues that give us on what progress they are making there?

Yeah. Joe, BankMobile is on target as far as the new school and the disbursement part is concerned. By the end of this year we expect to add somewhere between 400,000 to 500,000 new students, which from the different schools, that’s in line with our expectation for the year. And in addition to that the most important thing is that BankMobile was executed as Bob Ramsey shared with you a very, very important and lucrative white-label banking agreement with one of the top retail establishments in United States and that we cannot talk more about it. But it’s a very effective proposition. And when you combine this kind of things and at the same time, the unusual one-time charges for conversion and development of certain technology and technologies that we are developing for interface with this retail establishment and you combine all of those. We believe that the opportunities for Customers Bancorp shareholders we will receive BankMobile stock in the spin-merge will create interesting options for them whether they wanted just capitalize, like Bob mentioned and take the $3.50 a share or $4 a share of cash by selling it or they can keep it and see a significant opportunity as a result of execution of those strategies.

Right. And I guess, just another update maybe on the expansion into the DC and Chicago markets that you have talked about. How are they progressing and any thoughts of doing additional cities?

We are not talking about doing additional cities. We have completed the team. We have recruited some partners to join our team, colleagues to join our team in Chicago and in DC. We are waiting for the final regulatory approval to open up those offices, but the teams have been recruited. They are totally integrated with our culture, as well as our operating processes. So we expect them to be fully functional starting first quarter of next year. But we expect to open those offices next month. We have leases executed and it just takes time the regulatory environment to go through all the regulatory approvals.

I will just ask one more, more of, I guess, housekeeping item. What’s -- I guess, tax rate has jump around a lot with the change, what’s a good tax rate to assume going forward?

As the displacement get’s the way it’s 25%.

But, Bob…

And only if it doesn’t happen.

Yeah. At this point in time our forecast for the tax rate is 37.25%.

Okay. All right. Thank you. That’s it for me.

Thank you.

Thank you. [Operator Instructions] We will take our next caller. Your line is open. Please go ahead.

Thank you. It’s Bill Dezellem, Tieton Capital. A couple of questions…

Hi, Bill

…relative. Hello, Jay and Bob and Bob. Relative to the white-label business, would you talk about, first of all, whether the white-label business does that stay with Customers or does that go with BankMobile? And talk a little bit about how the asset size, how that impacts, what that white-label relationships could mean in the short and long-term, if you would please?

Sure. First of all, the white-label business that we have been discussing so far is all BankMobile related white-label business. It’s -- because right now BankMobile as you may know throughout that they have relationship with 850 or so campuses around the nation, that is basically a white-label to get student checking accounts and they have $750 million approximately in non-interest bearing deposits as a result of that. So the white-label that we have discussed with you talking about the major retail establishment in United States is the BankMobile function. Now as far as how some of this business impact -- might impact Customers Bancorp next year. We expect to launch white-label partner to be operational by the end of the first quarter of next year. So depending on when that closes, so Customers Bancorp, obviously, will enjoy those benefits. The result of the earnings model for the white-label is both net interest income coming from non-interest bearing deposit generation, as well as some interest bearing deposit generating, but the majority of them will be non-interest bearing deposits and then at the same time non-interest income coming from interchange income. That interchange income as you know is the Durbin Amendment and once you cross $10 billion mark at December 31st of any year, 18 months after the Durbin takes in. So by us not crossing the $10 billion mark at December 31, 2017, we’ve actually created some headroom for ourselves so to speak. So that if for whatever reasons something happens in our delays beyond our expectation and so BankMobile divestiture or spin-merge doesn’t happen until sometime later than middle of the year next year, we still have time and we are going to enjoy in that case some of the profitability that would be generated by the white-label. But otherwise our shareholders will definitely enjoy the profitability being gradually generated by that white-label relationship in addition to the disbursement business which should be fully operational by the time the spin-merge is effective.

Understood. And so we should anticipate that that new white-label relationship that was signed in September will go with the organization that is being spun-off.

That is correct. Because that’s the only way their profitability is created through the interchange revenues.

And so at that time the new organization will have both the student disbursement business along with the, I guess, I’ll call it the original mobile banking business that we call BankMobile and the white-label retail business?

That is correct. And but the BankMobile has developed two more line -- one more line of business beside that at least really it’s to more, one is called Perks at Work and Perks at Work is really an employee benefit package of financial services for every employer of any size. So that they get a checking account, saving account, car loans, auto loans, mortgage loans, student loans, the financing, all through their employer directly through relationship with BankMobile. So it’s a substitute for bank branches becomes the digital branch, every employer becomes basically a digital branch for BankMobile. And lastly, would be what we are calling other types of white-label partnerships. So BankMobile is -- management is in discussion with couple of other people and so all that stuff is not factored in, but that’s why we believe -- we will let BankMobile management talk about it, but we believe they have plans to continue to develop that business beyond the white-label and disbursement business that we discussed with you.

Very helpful. Thank you.

[Operator Instructions] We’ll take our next caller. Please go ahead.

Hey. Good afternoon, guys. Mike Perito, KBW.

Hey, Mike. How are you?

I am good, Jay. Thank you. Thanks for all the color over the last week or so with all this, it’s been extremely helpful. I have a couple questions for you guys. I guess, one, just a clarification question. I understand that you guys are not going to be able to disclose the white-label partner, I guess, until it’s public in the first quarter and fully operational. But is it going to be disclosed to the investors that Flagship is trying to raise capital from?

I think that’s up to Flagship and their bankers and their lawyers to determine that. Customers Bancorp has a non-disclosure agreement with our white-partner through BankMobile and under that agreement we are not permitted to disclose that till they have publicly disclosed it and announced it and that is schedule for sometime in middle of February 2018 at this time.

Okay. Got it. Thanks. And then, just, couple of broader question, Jay, on the capital outlook. Just talking out loud here for a second, I mean, it seems like most of the one-time charges and whatnot are now out of the run rate, given they have occur this quarter, which means, fourth quarter, first quarter and potentially second quarter next year, you will have some time to build capital before you really start to turn the growth on and once the spin-off is complete in the middle of the year. So that should help build TC a little bit, but it still would seem like with this spin-off not generating any capital for Customers that this external capital will likely be required at some points. So I am just curious how you guys are thinking about that as we move to these next few quarters here and ultimately how you think it is going to play out?

Yeah. That’s a good question. As our thinking, Mike, that we do not want to take below the targets that Dick shared with you. So by shrinking the balance sheet between June 30, 2017 and year-end 2017 or December 31, 2017, we want to get to our capital targets. And then we have to limit -- either limit our growth to that -- somewhere in the 10% to 15% range to maintain those targets on an average during the year or we see opportunities and strategic plans for growth beyond those 10% to 12%, 15% rate then it would be prudent for us to do a capital raise on an ongoing basis, which you would normally expect from growth companies that their capital markets. So in the past you’ve seen us take -- take our capital ratios down to support that growth and then look at capital raise opportunity. So what we are telling you is that’s not the way we will be looking at things. We will be looking at our strategic growth opportunities and raise the capital first and then go thought and start executing those strategic growth opportunities. So right now we’re focusing on, as Bob mentioned to you, going from $10 billion to $11 billion by the end of the year. So that clearly shows to you that if we do not see profitable growth opportunities at our disciplined margin rates beyond that 10% then we don’t need any more capital and we will have capital generated from within earnings but if our thinking changes we will be opportunistic and raise some more capital.

Okay. That’s helpful. And maybe just a follow-up on it, you saw, I mean, I guess, well, two follow ups, one, I guess, at what point, if we assume the BankMobile spin-off goes according to plan, obviously there still be some -- the revenue piece will be very small, but there would still be some expenses be in DFAST and $10 billion plus bank. I mean, do you guys have a rough number as to what size you guys think you need to be the kind of efficiently offset those greater expenses?

Yeah. That’s another good question. We’ve been working on DFAST preparation for the last 14 months. We are doing a dry run next month. First dry run way ahead of normally what you expect most of the banks in our position do. We will do another run next year in November and we intend to share that with our regulators to get their input and feedback, and then we will become DFAST complaint or need to be in 2019. So our expectation is, as we spent about $2 million on DFAST in 2017 and we will be spending the same about $2 million on DFAST in 2018. We have already hired all folks. We are still looking at hiring a manager, executive in-charge of DFAST only modeling, but the rest of the folks are already onboard in the compliance area and in risk management area. And so two things will hit us and still which will be approximately $1.5 million run rate for DFAST expenses, as well as FDIC insurance premium increases, which you know happen for banks above $10 billion and rest of it we have already incurred and already built into our run rate right now. So that makes it about $0.03 at the most it cost to us by crossing $10 billion and we believe that is very doable by us by clearing some operating efficiencies in other areas of the company. So that’s why we are eager to let our shareholders continue to enjoy the BankMobile growth opportunities which the BankMobile management is very bullish on. And not just use then as a one-time with raise our capital. We can raise capital so many different ways and -- but we -- what I’ve been delighted, if we would have gotten $175 million and then we would have found a way to create maybe another company for the white-label, but now we are keeping the two together and that’s the way we were thinking about it quite frankly. We were -- we didn’t have white-label…

Yeah.

… at that time. Again, so that means there was $175 without, but now with the white-label it is crazy for us to be simply selling BankMobile just to raise capital like Bob Ramsey shared with you to make a $1.65 for our shareholder. Big deal, let’s give them $4. We like that better. A hell of a lot better than $1.65. I am a large shareholder, about 3 million shares.

Yeah.

It makes difference.

That’s all. Very Helpful. Thank you, Jay. And I guess, just open the second follow-up and more of a high level question, I guess, just given the way you answer that. But what would you guys, I mean, because, clearly, you guys have been a growth company for quite some time now and there’s growth out there for you guys to get with the team you have constructed. So what would you -- what would -- in your mind be kind of that really meaningful growth opportunity that would make you come to market to raise capital?

Yeah. Two things. One, a normalized steep slope of the curve, very, very critical for us, because if you know our growth has been through C&I lending and we call that lending to C&I loans to mortgage companies and C&I loans to non-mortgage companies. That’s about 42%, 45% in that range of our balance sheet. And then it’s 40% of our balance sheet is multifamily. Multifamily is not a great business when the curve is flat. And that’s why in the flat curve environment we would sacrifice multifamily lending and focus just on the growth in C&I. So reason for our expectation for a $1 billion growth at this time next year is that we see about $650 million of that coming from C&I, non-mortgage C&I, non-mortgage company C&I, okay. And then the rest of it which is only $350 million or so coming from all other areas, including consumer, including multifamily, including CRE. Now we love the multifamily business and I want to mention that we’re not getting away from it, but we have been selling the lower yielding multifamily loans for two years now, including in the fourth quarter you will see another sale by us of certain multifamily loans. So normal slope of the curve we like our -- and our growth strategies and funding to us is also very important, like I shared with you, it’s got to be core funding and but in the flat curve when you’re doing large deposit fund-to-fund multifamily loans, that’s not an extremely attractive, it’s from a return perspective, but that’s why we are tapering our growth down and being very disciplined about margin, disciplined about ROA, disciplined about ROE, but get the normal curve and you will see this company be capable of 20% plus growth rate.

Great. Well, thanks. That’s all I have. Thanks again for all the color over the past week. It’s very helpful and thanks for taking my questions.

Thank you. And we have one additional question caller. Please go ahead.

Hi. It’s Frank Schiraldi from Sandler.

Hi.

Just wanted to -- just try to think about the near-term here the 4Q with BankMobile back into continuing operations and because I know the third quarter is a fairly weak quarter for interchange from BankMobile given the summer months. But what are your -- what is your thinking for in terms of interchange pick up in 4Q and then where -- when do you anticipate BankMobile would turn to profitability here?

BankMobile has been spending and we have been putting these expenses for the development of this white-label into the BankMobile segment in our reporting to you. And at the same time we have not spent much money at all on retention of Customers for BankMobile to develop a technology to support that. So, because we just did see return for our shareholders in the short-term coming from that. So we put the investment in where we thought our shareholders will get the biggest which is white-label. Now profitability for -- from the current business which is the disbursement business will fluctuate rightfully so I think likely said yes. It’s seasonal, third -- rather fourth quarter and the first quarter are the best quarters and the second quarters and the third quarters are the weaker, second is, I think, the weakest from a seasonality point of view. So BankMobile’s disbursement business is expected to reach some level of profitability but very, very marginal sometime next year. But really it’s the BankMobile’s management. I don’t want to be commenting on. They are the ones who should be commenting on this sort of the thing, because that business is not going to be part of our company for the longer haul. But you combine the two is really should be very attractive business in -- second half of 2018 onwards going forward and then the retention strategies for this business really should kick in based upon the technology that has been developed and the -- and it’s still being worked on, but that should kick in 2019.

Okay. If I think about like 4Q, I mean, is it a reasonable way to think about, I think about 3Q interchange, you only have one month of real strength in September and then, perhaps, 4Q you have a couple of good months of interchange revenue. So is it possible that you see something and in terms of interchange income and sort of the mid-teens in the fourth quarter, just trying to gauge range in the short-term here?

Bob Wahlman, do you want?

Bob Ramsey do you have.

Bob very much attention to line items.

I think, Frank, that we have disclose segment -- the segment reporting and if you take a look at the 2016 segment reporting numbers for the -- particularly for the fourth quarter, as well as the third quarter, that’s going to give you an idea in regards to the comparable run rate from period-to-period. We should be generally in that vicinity, plus or minus little there

And the only other thing is, Frank, there will be $2 million less expenses in the fourth quarter is our expectation with the BankMobile segment. If you are just looking at the segment profitability, because those were one-time charges in the third quarter a $0.5 then notable charges that Bob Wahlman talked about.

Yeah. So I thought this $27 million right now, we talked about $4.2 million and then the $2 million, take it down at the $20 million range and it should -- and it could go down lower than that than in the third -- in the fourth quarter.

Got you. Okay. Thanks. That’s helpful. And then, just wondering if the spin-merge for whatever reason doesn’t go through as anticipated, what is the -- what would be the thinking with BankMobile. Would you again look for just another outright sale with a partner or I guess, what I am trying get, is there any way to retain this business or just -- Durbin just doesn’t allow -- given the Durbin rules.

Business strategy will have to be different, as Bob Ramsey had discussed it on the call on the 20th of October that we would have to start charging fees. And what we are trying to do with as you may have noticed, Frank, there are some startups coming up which are trying to stop the consumer banking business. Certain banks like [ph] Chads (57:17) are also starting BankMobile type of a company inside of [ph] Chads (57:22). And so this -- we think the technology development is going to be fairly aggressive. Like our best guess is, year ago we had said, within year there will be at least three or four competitors. Number 26 from Europe announced today at Money 2020 that they are entering United States with digital banking business as such. So our thinking is that no fee opportunity and white-label opportunity and Perks at Work and direct-to-consumer is a very attractive opportunity for shareholders of BankMobile and by giving it to our shareholders the no fee strategy is going to make them compete with all these new entrance and execute in a very profitable way, because our internal goals at BankMobile were that without any fees this company could operate greater than 2% ROE over the period of time and that’s exceptional. But you need Durbin if you don’t charge fees. So we will deal with that if we have to, but we want some time, so we can think about it, but we like the growth prospect a lot and that’s why we are not going to give it away.

Okay. I appreciate. And just if I could just one last one, just wondering if you could talk about as you return to growth mode, if you could talk a little bit about your strategy to grow core funding? Thanks.

Strategies of core funding if you think about it, determine we have had the same number of branches that we have had, four years, five years, six years ago, and we have been growing our deposits and in New York -- our New York one office in [inaudible] (59:26) 1051 has $1.8 billion in deposits and Chicago operations and Washington DC operations haven’t begun. Our office in Boston has about $165 million in deposits and that’s not a very attractive market area for deposits. So we believe that this limited purpose offices with concierge banking or what we call the single point of contact banking is a very attractive opportunity. It does create a higher deposit beta for us, but we offset that with a very significant below our cost of operations. And eventually deposit war is starting. We know it is happening and if we have unlimited ability to generate core funding at market rates, we’re trying to do it at 50 basis points below market. Our cost of deposit is in the 90 basis points range right now as I believe, just going to split in the deposits then on interest bearing and we believe that trying to -- still we are growing deposits, we think this strategy the we have got it in the past, we just have to do it better by expanding into certain more geographies and we think we can do that.

Okay. Great. Thank you.

Thank you. And with no additional questions in the queue, I would like to turn the floor back over to management.

Okay. Thank you very much, ladies and gentlemen for joining us and please us a call if you have any other further questions. Have a good evening.