Customers Bancorp Inc (CUBI) 2017 Q3 法說會逐字稿

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'd like to turn the floor over to Mr. Bob Ramsey. Please go ahead, sir.

Thank you, Catherine, and good afternoon, everyone. Customers Bancorp's 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 that the results are different than currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and 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's my pleasure to introduce Customer Bancorp's CEO, Jay Sidhu.

Thank you, Bob, and good afternoon, 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 my colleagues call notable, charges during this third quarter of 2017. That makes it important for us to spend more than usual time on this call to explain our strategies to you, the tactics, financial results and make some comments on future margin and capital goals as well as our aspirations 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 the BankMobile disposition strategy and the Religare impairment. So that affected on the first 9 months of earnings, and they were -- they came at $1.42 for the first 9 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, about $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 fraudulent activities taking place over there, so we've pretty much written it down to practically 0 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 that's 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 that -- the spin-merge strategy.

Our loans grew well over the last year. They were up to $9.2 billion. That's up 9% over September 30, 2016. C&I loans were up 24% year over year, and these 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.

Shareholder equity of $911 million was up 15.5% over last year and our risk-based capital was 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 30 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 3 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 ratios at the holding company as soon as practically possible. We believe by shrinking our balance sheet by about $500 million by 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 our -- what we call strengthening our balance sheet. So that was our strategic goal #1.

Our strategic priority #2 is the successful disposition of BankMobile in a manner that maximizes shareholder value creation for company shareholders. As you know, we studied all strategic options. We concluded that spin-merge was the best option. We needed 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, so we are glad that SEC gave us this preliminary clearance.

So we announced the spin-merge to you on October 20 and we expect it 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, but we are highly confident that the 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. By that we mean improving margin, improving the growth rate in 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 -- improved financial performance within the next 4 quarters.

So now I'd like to hand it over to Bob Wahlman to go over some of these other important items that we'd 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, and in my few minutes of comments this afternoon I'll focus on 5 topics that I believe are key to understanding our Q3 financial results and in terms of looking into the future as to where Customer goes.

These 5 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 expenses; 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 2013 (sic) [2017]. Also as Jay noted is that Customers reported $0.48 in notable items, and I'm going to drill down on the notable items.

The first notable item I would like to cover is the effect of adopting a disposition strategy of spin-off and merge of the BankMobile business rather than what we had previously -- the path that we were previously on, which was sale of the business. This change in disposition strategy had 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're doing a spin-merge as part of continuing operations and not as held for sale or discontinued operations.

What that means from a financial has many different implications, but particularly for us it meant 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 is as at fair value and no depreciation. 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 experienced on the Religare investment securities held in a corporation that would be sold for a capital loss, we were able to recognize a deferred tax asset for the tax benefit expected to be received from that capital loss.

However, the decision to shift to a spin-merge disposition strategy eliminated $4.6 million of previously booked DTA that we'd recognized between the first and second quarters of this year as well as an additional $3.1 million deferred tax asset that would have been recognized this period in the Religare loss because there was -- but were not able to because there was no anticipated gain on sale. Combined, 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 equal to $0.16 per diluted share. This impairment reduced 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 continues to look for strategies to exit this investment and gain that capital loss tax treatment. We deeply regret that this investment did not yield the benefits we had hoped 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've noted before, and not discontinued operations in Q3, and -- until the spin-merge is completed. Once the spin-merge is completed, that business will again be reported as discontinued operations and we'll have to recast all the previously reported periods to show it as discontinued operations. Doesn't -- in some -- the accounting in some ways doesn't make sense; in some way it does. But it is clearly what it requires.

One last comment here, and again I repeat Jay's comment, and that is if you look at our community banking business, we reported $0.74 in earnings per share. Now that included $0.10 per fully diluted share for some securities gains. So $0.64 for community business banking segment, exclusive of those securities gains, and that's the core bank that we'll be left with after we divest ourselves of BankMobile.

And while it's perhaps apparent, it's important to note that we do not expect any of these charges that I just covered to be repeated in Q4 2017. They were truly onetime or unique to the third quarter.

All right. Turning onto the next topic, which was the Q3 2017 NIM impacts. 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 at 278 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 a bank will typically do, in many respects half of what the level is for a bank normally our size. But our NIM level was below our expectations as well as the Street expectations, and there are a 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'll 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 it related to the multi-family 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 in 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 or 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 1 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 funds that it replaced, which was short-term funds at the FHLB rate of about 135 basis points, 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 in margin related to the increase in the cost of funding our on the deposit side relative to our ability to pass on those rate increases to our loans cost about 7 basis points of NIM compression.

Our expectation for NIM is that it will bounce back significantly in Q4 2017 and stabilize at that about 275-basis-point level for 2018. Particularly affecting that expectation include some of these items. In late June 2003 Customers sold $425 million of securities with about a 150-basis-point spread. Removal of the securities at that low a NIM is expected to add by itself about 5 basis points of NIM in Q4 compared to Q3. Prepayment fees that I'd mentioned earlier were expected to return at least to the level experienced in recent quarters of $1.5 million, adding perhaps 5 or 6 basis points to the NIM.

Customers is now pricing -- is -- has changed some of the pricing on its loan and is requiring a 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 a rising interest rate environment -- some NIM compression from them, and a -- so we have a net interest spread on those loans of about 2% or maybe a little less, and that will help increase NIM in 2018, particularly as we grow the portfolio 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 to Washington, D.C., some new commercial money management products and targeting specific sources of commercial loan interest rate deposits from both current and new prospective clients.

Moving on to capital, capital management -- well, 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. Jay noted 2 of those ratios, and I'll -- just to note them all, 13% is the target for total risk-based capital, 11% for Tier 1 risk-based capital and 9.5% for CET1 ratio, 9% the leverage ratio and 7% for 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 raises using preferred stock rather than common stock as being a cost-effective tool or an earnings-per-share-effective tool. Customers' ratios are also a little less than the industry averages, reflecting the lower -- in part, at least, a lower credit risk profile loan portfolio.

Customers continues to monitor its capital levels and will take action it considers appropriate when it is felt the capital is needed and in the amount of capital that it believes 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 $1 of expense. That leads you to a 50% efficiency ratio. Customer has been able to do better than that. We told you when we were in the 50s we'd get into the 40s, and we have even touched the very low end of the 40s, reporting for the core bank a 40% efficiency ratio last period. This period, the bank-only efficiency ratio is at 46%, so still in the mid-40s. Our efficiency ratio demonstrates 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 combine the sales of BankMobile at this point in time, as we do in recurring operations, we're in the 60s. But we continue to work down the expense rates for that business for 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'll see that BankMobile had $27 million of operating expenses, and I would note that that includes $6.2 million of onetime 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 onetime costs included in there for conversion costs, and we've talked to how we're going to go through systems conversion, and it's almost $2 million of the conversion cost. So if you take those out we're down closer to our normalized run rate for that segment of about $21 million -- we're at $21 million and our run rate been about $20 million. And those, as I said before, were onetime expenses.

Turning to a 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've adopted very specific strategies to decrease our total assets from the $10.5 billion we're 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 multi-family loans in Q4 at or actually as a small -- at a very small gain. The mortgage warehouse portfolio is a seasonal portfolio and it is expected that this portfolio will decline about $300 million -- $200 or $300 million -- from the September 30, 2017, level. So we'll see some shrinkage there. Those 2 by themselves is $500 million, $600 million.

The multi-family business line has reduced [pipelines] by increasing its rates and actively manage 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'll make up for that elsewhere.

And then our ace in the hole is that we're -- still have a $500 million securities portfolio which, when we combine with paying down borrowing -- so it's a tool that's available for us to manage total assets down to the target level if necessary.

And then looking forward to 2018, Customers expects that it will be able to rebuild itself interest-earning portfolio after the New Year's begins. As noted above, we would expect to pick up some of that -- well, we expect to pick up all the new 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 reasonably rebuild some of the securities portfolio that we use for a liquidity cushion. And it's our expectation we'll probably peak in asset size at the peak of the mortgage warehouse business, because that business will come up in the second quarter of next year. It'll stay down in the first quarter but it will come back in the second quarter, and we would expect that (inaudible) in -- at the end of the second quarter and through a good deal of 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, for achieving our target at a 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 should the banking regulators take longer than we hope in approving the BankMobile transaction.

And while we are targeting mid-year 2018 to execute the spin-off and merge transaction, we cautiously believe that it shouldn't certainly take us longer than third quarter of 2018. We believe the tactics planned to achieve this smaller balance sheet are relatively easy to execute, and we will successfully manage our asset size to the target level.

With that, I conclude my prepared comments and I look forward to your questions. Let me hand the presentation off to Bob Ramsey.

All right. Thank you, Bob Wahlman. I wanted to take a couple of 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 in 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 also receive $10 million in a separate sale of the deposits to Flagship Bank. By 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 receipt of 2 unsolicited offers, one to a large U.S. bank. In September of this year, Customers finalized and signed a contract with a large retail partner 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 a large bank.

In the third quarter of this year, Customers received clarification from the SEC that it could 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 that a spin-off would likely be considered a tax-free transaction to all parties, another key factor in our decision to pursue the spin-off and merger.

As we evaluated our options, we concluded that the financial cost to keeping BankMobile was too great, and so the real choice was either an outright sale of the business or else the spin-off merger. In the event of a sale, the final purchase price is a key assumption, but if you assume a hypothetical range of $100 million to $150 million we estimate an after-tax gain to Customer Bancorp of approximately $23 million to $50 million. That equates to $0.75 to $1.60 in tangible book value per share.

At Customers' current 1.4x multiple of tangible book, this might result in 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 stock. This valuation is based on Flagship's planned capital raise and 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 chose the spin-off and merge transaction for BankMobile because investors in Customers Bancorp will receive approximately $3.65 of 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, giving shareholders the optionality to retain BankMobile stock and participate in its future growth, or to sell it and monetize their investment at their option.

Now I'd like to turn the call back over to Jay Sidhu for any closing comments.

And 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, 1 or 2 credits move up and down, and that's about it.

From an interest rate risk point of view, we are neutral. It's the slope of the curve that's negatively -- was negatively impacting every lender in the multi-family 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 strategies that we have implemented, and controlling our growth as well as being opportunistic 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, onetime. On top of it, Bob Wahlman shared with you about $2 million of onetime conversion charges which were nonrecurring, and approximately $1.8 million of prepayment or other adjustment to the margin, which -- we don't expect that to be a 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 onetime -- these -- all these onetime 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 a 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'll open it up for any kind of questions. Catherine, if you can help us, please?

(Operator Instructions)

It's Joe Gladue from Merion Capital. I guess, first, I get -- like to get a little color on how BankMobile is doing. Maybe you can touch on, are they still -- are they able to close any new customers in the disbursement business with new colleges, and any other color you could give us on what progress they're making now?

Yes, Joe. BankMobile is on target as far as the new schools and the disbursement side is concerned. By the end of this year we expect to add somewhere between 400,000 to 500,000 new students, which are from the different schools. That's in line with our expectation for the year. On -- in addition to that, the most important thing is that BankMobile was -- has 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 the United States. And that, we cannot talk more about it, but it's a very attractive proposition. And when you combine these kind of things, and at the same time the unusual one-time charges for conversion and development of certain technologies that we are developing for interface with this retail establishment -- when you combine all of those, we believe that the opportunities for Customers Bancorp shareholders, who will receive BankMobile stock in the spin-merge, will create interesting options for them, whether they want to just capitalize like Bob mentioned and take their $3.50 or $4 this year of cash, if -- by selling it, or they can keep it and see significant opportunities as a result of execution of those strategies.

All right. And I guess just another update maybe on the expansion into the D.C. and Chicago markets that you've talked about. How are they progressing, and any thoughts of doing additional cities?

No, we are not talking about doing additional cities. We have completed the team. We've included some more partners to join our team -- colleagues to join our team in Chicago and in D.C. 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 the leases executed, and it just takes time in the regulatory environment to go through all the regulatory approvals.

I'll just ask one more, more of a -- I guess they call it housekeeping item. Just what's -- I guess tax rate is -- jumped around a lot with the change. What's a good tax rate to assume going forward?

If the administration gets their way, it's 25% (laughter) but I'll let Bob handle, if it doesn't happen.

Yes. We're -- at this point in time our forecast for the tax rate is 37.25%.

(Operator Instructions)

It's Bill Dezellem at Tieton Capital. Couple of questions 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 relationship could mean in the short and long term, if you would, please.

Sure. First of all, the white label business that we've been discussing so far is all BankMobile-related white label business. So -- because right now, BankMobile, as you may know, throughout that -- they have relationships 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've discussed with you, talking about the major retail establishment in the United States, is a BankMobile function. Now as far as how some of this business impact -- might impact Customers Bancorp next year, we expect the large white label partner to be operational by the end of the first quarter of next year. So depending upon 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 margin coming from non-interest-bearing deposit generation as well as some interest-bearing deposit generation, 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 31 of the [opening] year, 18 months after that, Durbin kicks in. So by us not crossing the $10 billion mark at December 31, 2017, we've actually created some headroom for ourselves, so as to speak, so that if for whatever reason something happens, there are delays beyond our expectation and so the BankMobile divestiture or spin-merge doesn't happen till 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 disbursements business, which will -- should be fully operational by the time the spin-merge is effected.

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 is 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 called BankMobile and the white label retail business.

That is correct. And -- but the BankMobile has developed 2 more lines -- 1 more line of business besides that, at least; really, it's 2 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, savings account, car loans, auto loans, mortgage loans, student loan refinancing, all through their employer, directly through a relationship with BankMobile. So it's a substitute for bank branches; becomes a digital branch -- the 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 discussions with a couple of other people. And so all that stuff is not factored in, but that's why we believe -- we'll let BankMobile management talk about it, but we believe they're -- they have plans to continue to develop that business beyond the white label and the disbursement business that we've discussed with you.

(Operator Instructions)

Mike Perito, KBW. 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 nondisclosure agreement with our white label 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 scheduled for sometime in middle of February 2018 at this time.

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

Yes. That's a good question. Here's our thinking, Mike: that we do not want to [track] below the targets that we've shared with you. So by shrinking the balance sheet between June 30, 2017 and year end 2017 or December 31, 2017, we're going 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 if 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'd normally expect from growth companies. So that they are (inaudible) capital markets. So in the past, you've seen us 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'll be looking at things. We'll be looking at our strategic growth opportunities and raise the capital first, and then go through and start executing those strategic growth opportunities. So right now we are 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 10%, then we don't need any more capital and we will have capital generated from retained earnings, but if our thinking changes we will be opportunistic and raise some more capital.

Okay. That's helpful.

(inaudible)

And I guess maybe just a follow-up on it. And so I mean it -- I guess, well, 2 follow-ups. One: I guess, at what point -- if we assume the BankMobile spin-off goes according to plan, obviously there'd still be some -- the revenue piece will be very small, but there would still be some expenses of being a 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 to kind of efficiently offset those greater expenses?

Yes. That's another good question. We've been working on DFAST preparations for the last 14 months. We're 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-compliant, or need to be, in 2019. So our expectation is, we spent about $2 million on DFAST in 2017 and we will be spending the same about $2 million on DFAST in 2018. We've 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 on board in the compliance area and in risk management area. And so 2 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 the rest of it, we've already incurred and are already built into our run rate right now. So that makes it about $0.03 at the most in cost to us for crossing $10 billion, and we believe that is very doable by us by creating 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 that as a onetime way to raise our capital. We can raise capital so many different ways, and -- but we would have 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 the white label at that time. Okay? So it's -- that means -- that was $175 million 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 $1.65 for our shareholders. Big deal. Let's give them $4. We like that better -- a hell of a lot better than $1.65. Our large shareholder's about 3 million shares. It's a big difference.

That's all very helpful. Thank you, Jay. And I guess, just a -- then the second follow-up, and more of a high-level question, I guess, just given the way you answered it, 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've 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?

Yes. Two things. One, a normalized 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 multi-family. Multi-family is not a great business when the curve is flat, and that's why in a flat curve environment we would sacrifice multi-family lending and focus just on the growth in C&I. So the reason for our expectation for $1 billion growth at this time next year is that we see about $615 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 multi-family, including CRE. Now we love the multi-family business. I'm -- I want to mention that. We are not getting away from it. But we have been selling the lower-yielding multi-family loans for two years now, including in the fourth quarter you'll see another sale by us of certain multi-family loans. So normal slope of the curve, we rack up, 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 deposits or fund-to-fund multi-family loans, that's not an extremely attractive business from a return perspective, and 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 a 20%-plus growth rate.

Thanks again for all the color over the past week. It was very helpful.

And we have one additional question.

It's Frank Schiraldi from Sandler. Just wanted to -- just trying to think about the near term here, the 4Q, with BankMobile back into continuing operations. And if you could just -- I know the third quarter's a fairly weak quarter for interchange from BankMobile given the summer months, but what are your -- what is your thinking for -- is -- in terms of interchange pickup in 4Q? And then, where -- and when do you anticipate BankMobile would turn to profitability here?

BankMobile has been spending and we've been putting the expenses for the development of this white label partnership into the BankMobile segment in reporting to you. And at the same time we have not spent much money at all on retention of customers for BankMobile to develop the technology to support that. So -- because we just can't see a return for CUBI shareholders in the short term coming from that. So we've put the investment in where we thought our shareholders will get the biggest bang, which is white label. Now the profitability for -- from the current business, which is the disbursement business, will fluctuate, rightfully so, Frank, like you said. Yes, it's seasonal. Third -- rather, fourth quarter and the first quarter are the best quarters, and the second 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 a 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 a very attractive business in second half of 2018 onwards, going forward. And then the retention strategies for the students really should kick in, based upon the technology that is being developed and the -- and is still being worked on. But that should kick in in 2019.

Okay. But if I think about 4Q, is this a reasonable way to think about it? I think about 3Q interchange -- you only have 1 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 in terms of interchange income in sort of the mid-teens in the fourth quarter? Just trying to gauge range in the short term here.

Bob Wahlman, do you want to -- or Bob Ramsey? I don't pay much attention to line-by-line items.

I think, Frank, that we've disclosed the segment reporting, and if you took 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 a little bit.

And the only other thing is, Frank, there'll be $2 million less expenses in the fourth quarter is our expectation of the BankMobile segment, if you're just looking at the segment profitability, because those were one-time charges in the third quarter on top of the -- all of the notable charges that Bob Wahlman talked about.

Yes. So I thought that's $27 million right now. We talked about $4.2 million, and then the $2 million takes it down to the $20 million range, and it should -- and it could go down lower than that into 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'm trying to get to, is there any way to retain this business, or is just -- Durbin just doesn't allow it, given the Durbin rules?

That's -- business strategy will have to be different. The -- 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 is, as you may have noticed, Frank, there are some startups coming up which are trying to disrupt the consumer banking business. And certain banks like Chase are also starting a BankMobile type of a company inside of Chase. And so this -- we think the technology development is going to be fairly aggressive. By our best guesses, a year ago we had said within a year there'll be at least three or four competitors. Number26 from Europe announced today at Money20/20 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 in a no-fee strategy is going to make them compete with all these new entrants and execute in a very profitable way. Because our internal goals at BankMobile were that, without any fees, this company could operate at greater than 2% ROA over a period of time, and that's exceptional. But you need Durbin if you don't charge fees. So we'll deal with that if we have to. But we bought some time so we can think about it. But we like the growth prospects a lot and that's why we're not going to give it away.

Okay. I appreciate it. 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.

Strategy for core funding, if you think about it -- we have -- we've had the same number of branches that we've had 4, 5, 6 years ago, and we've been growing our deposits. And in New York, our New York -- [one] office in (inaudible) has $1.8 billion in deposits and our Chicago operations and our Washington, D.C. 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 these 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 significantly lower cost of operations. And eventually, deposit war is starting. We know it is happening. And we have unlimited abilities to generate core funding at market rates. We're trying to do it at 50 basis points below market. Our cost of deposits is in the 90-basis-points range right now, as I believe, just in interest-bearing deposits or -- and on [interest-bearing]. And we believe that trying to -- and still we're growing our deposits. We think this strategy, the way we've done it in the past, we just have to do it better by expanding into certain more geographies, and we think we can do that.

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

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

Thank you. Ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.