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Customers Bancorp Inc (NYSE:CUBI)
Q3 2019 Earnings Call
Oct 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Bob Ramsey -- Director of Investor Relations and Chief Financial Officer of BankMobile

Thank you, Brittany, and good morning everyone. Customer Bancorp's third quarter earnings release was issued yesterday afternoon along with our investor presentation. Both are posted on the Investor Relations page of the company's website at www.customersbank.com. Similar to last quarter, we will be speaking directly to our streamlined investor presentation. And so I would encourage everyone to pull down a copy. Representing the Company on the call this morning are Jay Sidhu, Chairman and Chief Executive Officer; Dick Ehst, Chief Operating Officer, our President of the Bank; Carla Leibold, Chief Financial Officer; Jim Collins, Chief Operating Officer; Jeff Skumin, Chief Accounting Officer; and myself, Bob Ramsey, Director of Investor Relations and CFO of BankMobile.

Before we begin, I would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities law. Please refer to our SEC filings, including our Form 10-K and 10-Q for a more detailed description of the risk factors that may affect our results, copies may be obtained from the SEC or by visiting the Investor Relations section of our website.

At this time, it's my pleasure to introduce Customer Bancorp's CEO, Jay Sidhu. Jay, the floor is yours.

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

So, I'd like to now draw your attention to Slide 4, and share with you some of the specific accomplishments by the team. First, in this difficult rate environment, we expanded our net interest margin by 36 basis points from a year ago and 19 basis points from last quarter. This, as I mentioned earlier, is as a result of the planned execution by us toward favorable shift in our asset mix as well as continued growth in our lower cost core deposits. Number two, talking about deposits, they grew 5% year-over-year and 9% during the third quarter 2019. DDAs grew 25% year-over-year. Number three, our C&I loans increased 26% year-over-year and 6% quarter-over-quarter, reflecting our strong franchise in Business Banking. Number four, our expenses are expected to be flat to down in the Q4 and for the first over last year that the core bank expenses grew have grown, only about 3% to 4% and have been flat over second quarter 2019. This is what has resulted in strong positive operating leverage and we consider this to be a very key accomplishment in this kind of a period when we are trying to significantly improve our profitability. Number five, as I mentioned earlier, BankMobile achieved profitability this quarter, a quarter earlier than we indicated, and is well positioned for continued profitability in the fourth quarter of this year as well as into 2020. The profitability was a reflection of the improvement in our student business metrics while we remain in the investment mode in our white label business, and number six is that as a result as reported to you, our core earnings achieved record results. This improvement in EPS, as well as our core ROA and ROE reflected the execution of these strategies and all other strategies that we discussed with you on our Analyst Day about a year ago, and I will talk about that a little bit later on.

And last but not the least is, we wish to once again stress to you that we are on track to achieve our forward guidance that we've given to you. So core 2019 earnings excluding any notable charges are expected to exceed $2.20 this year and we believe that we should report core earnings per share of at least $3 in 2020.

So, now I'd like to hand it over to Carla to go over some other highlights of the year . Carla?

Carla Leibold -- Executive Vice President and Chief Financial Officer

Thanks, Jay, and good morning everyone. I'll start off with an overview of our third quarter 2019 consolidated results shown on Slide 6. On a consolidated basis, our third quarter GAAP net income available to common shareholders was $23.5 million or $0.74 per diluted share. From a segment perspective, the Business Banking segment earned $22.8 million or $0.72 per diluted share and BankMobile earned $684,000 or $0.02 per diluted share. Included in our third quarter GAAP results are certain notable charges including $2.3 million of securities gain, which included a realized gain of $1 million from the sale of $95 million of corporate bonds and $1.3 million of positive mark-to-market adjustments on equity securities and the interest only Ginnie Mae securities that we acquired last quarter upon the bankruptcy of a former mortgage warehouse customer, both of which positively impacted our GAAP earnings by about $0.06 and $2 million of legal contingency accruals related to recent development in previously disclosed legal matters, which negatively impacted our GAAP earnings by about $0.05. Excluding these items, our core earnings for the third quarter were $23 million or $0.73 per diluted share. From a segment perspective, the Business Banking segment earned $0.68 of core earnings per diluted share and BankMobile earned $0.05 of core earnings per diluted share.

Moving on to Slide 7, our net interest margin expanded 19 basis points to 2.83% in the third quarter, up from the 2.64% reported in the second quarter and up 36 basis points from the trough of 2.47% that we reported in third quarter 2018. Our interest earning asset yields increased 19 basis points over the prior quarter while our funding costs increased 4 basis points. Our loan yields increased 17 basis points, driven by increased consumer loan yields of 6 basis points and higher multi-family loan yields of 7 basis points, partially offset by an 18-basis point decline in commercial mortgage warehouse yields due to a declining market interest rates during the quarter.

Moving on to deposits on Slide 8, we are excited about the growth that we saw in the third quarter. Total deposits were up $412 million or 5% over the year ago period with this growth coming almost entirely from growth in lower cost core demand deposits, which grew 25% year-over-year.

We also had strong loan growth in the third quarter as shown on Slide 9. Our loan mix continue to improve year-over-year as C&I loans increased $470 million or 26% as planned, multi-family loans decreased $705 million or 20% year-over-year and were replaced by about an equal amount of consumer loans. Mortgage warehouse balances were up $975 million or 62% year-over-year given low market interest rates and increased levels of refinancing activities. The higher than expected seasonal increase in mortgage warehouse balances contributed to total assets of $11.7 billion at September 30, 2019. We are still planning to end the year with total assets less than $10 billion and have reclassified about $500 million of multi-family loans to held for sale at September 30, 2019, and expect additional run-off of the multifamily portfolio of $300 million or more in the fourth quarter 2019. The natural contraction in mortgage warehouse balances in the fourth quarter combined with some residential mortgage run-off for sale are expected to bring our total assets below $10 billion.

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

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

And lastly, before I turn it back over to Jay, I'd like to talk a little bit about our CECL implementation efforts. We've made tremendous progress over the past year or so and are confident that we'll be ready for adoption on January 1, 2020. Upon adoption of CECL, we plan on taking advantage of the three-year phase in from a regulatory capital perspective. Our current estimate is that the day one impact will not be material to our regulatory capital ratios. While we still have some work to do and the actual impact will depend on loan portfolio balances, economic conditions and forecasted economic conditions on January 1, 2020, we don't anticipate that CECL adoption will materially impact our evaluation of the best uses for our excess capital, which as we have discussed, may include calling our preferred equity as it becomes callable starting in 2020, nor will it materially impact our projected core earnings per share of at least $3 for 2020. And with that, I'll turn it back to you, Jay.

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

So starting with the strategic priorities, I'd like to draw your attention to Slide 12 of the deck that we provided to you and we basically stated to you that very clearly articulated to you our strategy for the next two to three years. And number one was that our core return on average assets should be in the top quartile of our peer group, which we expected at that time to be about 1.25% or higher in ROAA. And we said that we would achieve that in two to three years. At that time, as you know, our margins were very low and our return on assets was about 60 basis points. We are pleased to share with you that return on assets today are close to 1% and that's up significantly and we are well on our way to achieving at least 1.25% return on assets over the next few years.

Second thing we mentioned to you was importance of NIM expansion irrespective of the slope of the curve and irrespective of the overall level of interest rates and we set a target of 2.75% or greater by fourth quarter 2019. As you know, we are ahead of that, and we expect in fact that our NIM should be even greater than the 2.83% that we reported to you as of September 30, 2019. And this is result of effectively restructuring our balance sheet and that is as planned showing the continued results and we are very pleased with the 36 basis points NIM expansion in just one year at a time when the interest rates went up, they came down, the slope of the curve was normal and now it's inverted to flat.

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

Next, we shared with you last year was our extreme focus on expense control and that we will spend money where we get the revenues. Positive operating leverage is more important to us than simply do what many of the other banks are doing, which is just cutting expenses. So, we expect very modest growth in the 2% to 3% range at Customers Bank this year, but in the second half of the year, it should be flat expenses. So, our expenses in third quarter were unchanged over second quarter at Customers Bank and we think you should expect that to remain flat in the fourth quarter. In the BankMobile area, we continue to spend money and we had some unusual expenses in the third quarter, which were as a result of some web-related fraudulent activities that we have put our arms around it and you should not expect that again, and, but those are the kinds of things that happen when you are a pioneer in this kind of a business. So expense control remains a top focus for us.

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

Next, we shared with you last year on our Analyst Day was a strong credit quality and a superior risk management culture. I'm pleased to share with him that our credit quality remains very strong and our reserves to NPLs. At September 30th were and 290% and from interest rate risk management point of view, the bank is relatively neutral to interest rate changes and that is why it helped us and we were not overly asset sensitive at all and took advantage of the interest rate declines, as well as we are well positioned in this kind of a yield curve that exists today. And as Carla shared with you, from a capital allocation point of view, we believe that we should be able to analyze and execute in the best way over the next two years our strategy toward redeeming our preferred stock once it becomes callable and at the same time look at continuing to report to you double-digit return on common equity that we believe is an absolute requirement from the Street and at the same time, ensure report to you higher return on assets and strong credit quality as well as maintenance of our disciplined on interest rate risk management.

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

We also shared with you going ahead we wanted to achieve a 1.25% or higher ROA and we wanted to achieve $4 in earnings per share within a three- to four-year period while close to a year is almost behind us. So, some of you might say, are you going to make it now two to three years starting next year and that would be a correct assumption on your part that we are shooting for $4 a share in earnings over the next two to three years starting next year.

Now on our views on the changing banking environment because it is changing very rapidly and we are very focused on dealing with it, understanding it, and also having a strategy that creates relevancy, resulting in superior shareholder value creation over the next few years. Today, you think about it, other than 0.01% of the banks, which happens to be the top six to ten banks in the country, you are seeing 3% to 4% average growth in deposits. You are seeing 2% to 5% growth in loans. You are seeing continued growth in loans, which are more still real-estate oriented. You are not seeing core C&I growth in majority of the banks, other than those who are niche players. So what does this mean? We think in the Business Banking arena, there is going to be a huge opportunity for people with high touch as well as high-tech strategies as well as to be focused on niches, rather than being all things to all people. That is exactly what Customers Bank is doing and then do it in a way that it's private banking or privately held businesses and then it is certain national niches. The niches that we have in place today are the mortgage so called banking the privately held mortgage companies and that we grew from zero and today is about $2.5 billion in size and we recognize that there is volatility in the market in that so we have gotten into one or two other niches, which I'll talk about later on.

And the other national niche that we have identified is in certain types of equipment leasing business, we call it the structured finance, commercial finance business, and we are executing that. Besides the leasing, there are other areas of specialty finance and that is where we are seeing huge opportunities to compete with quality players who are also going in those niches. That is how we are achieving the 20% plus consistent growth rate in C&I loans and also maintaining superior credit quality as well as doing it without adding on expenses of traditional bank branches or focused on what is the square footage of branches and how many mirrors or glasses that you have got to put in those branches. So while many of our competitors are focused on those kind of things, we are very focused on the changing environment and taking a step forward. On the consumer banking side, within the last three to four years, you've seen 55% to 60% of all the consumer lending now being handled by marketplace lenders. At the same time, you've seen the market share of mortgage lending in the consumer banking sector be consolidated among the top 0.1% of the banks in the country, and at the same time you've seen the huge expansion of the so-called high rate, the Marcus type of banks and joining other digital banks, which are taking advantage of the market rates at a time when majority of the banks in the country are hoping that the customers would never ever look at the rates that they e are paying on the deposits for them. We don't think hope as a strategy and we think you've got to take advantage in this environment to be able to have an effective strategy, which led to pay market rates, but do it in is that you still have a positive operating leverage. So that's why in the consumer banking area, we are doing it two ways. We're doing it through BankMobile to attract the core customers check-in account business and the related business. So we have developing technology today, which will make us a marketplace lender; in addition to deposit generator through BankMobile and niches, not to though to the market like traditional marketplace lenders are doing it. And at the same time we have started a digital bank within Customers Bank, which is competing with some of the other digital banks and going after the high net worth of market. So we feel that pace of change is just going to accelerate and we feel that we are very confident that we are well positioned today, but we have to remain adaptable and we have to remain relevant in this environment, and that's why we have articulated inside the company, what we call Vision 2025, and we are going through a very significant effort that we had shared with you about nine months ago, an effort called digitization of the bank. And I am pleased to share with you that that's making very significant progress if you are wondering how are we achieving improved operating efficiency and with positive operating leverage, well, it's effective use of technology and its execution of the strategies and it's the continued digitization of the bank, both from a productivity improvement as well as from customer service as well as from engagement with customers and attraction of the customers. And lastly in terms of our views on the regional and the national economy, we think it's prudent to remain cautious. We don't see signs which indicate to us that we're going to be in any kind of a severe slowdown, leave alone a recession, over the next 12 months. We had a risk Summit yesterday at our Company and before that we over through the Federal Reserve Bank of Philadelphia also heard their views on the economy and also had a chance to speak with President Harker who sits on the Board of Governors about his views on the economy. And, so we are in agreement with overall consensus that this is a time when we don't expect a recession, but we are working and running the bank as if there is going to be one and that is an important differentiation, the management of your credit risk is when times are good, not when times are bad. When times are bad, it's a result of the way we are managing our credit risk. So, we have a strategy in place where we are identifying our sort of weaker credits and we are moving them out of the bank and we are so glad that there are lots of banks who are dying to buy or takeover some of what we consider to be weaker credits. And so we continue to do that as well as where on a risk adjusted basis, we don't see those credits helping us get to the 1.25% or higher after-tax ROA. So that is our strategy in this kind of an environment, be very cautious and never take your eye off the credit risk as well as other areas of risk management and the areas of risk management that we see new areas of risks that we see emerging happen to be operational risks and fraud risk, and that is very prevalent throughout the economy and we think in the banking sector we have really taken steps to enhance our staffing, our skill set, our technology, our focus in all those areas of risk management.

So with that, looking ahead, we remain very committed to our plans to end of the year as Carla mentioned to you, this year at about $10 billion in total assets and that would help us preserve Durbin exempting change levels into next year and should help us also improve our capital ratios and normal seasonality of our mortgage warehouse business will help us get there and as Carla shared with you, we also have moved $500 million of our multifamily loans to held for sale. And as I shared with you, we remain confident about our core 2020 EPS target of $3 per share and we expect to continue to expand our net interest margin, focus on cost control, maintain strong C&I growth and continue to move away from the lower margin businesses, really watch our asset quality very, very closely and the results should be increases in our return on average assets as well as return on equity and no question about it, that will result in significantly higher shareholder value creation in 2020 and beyond.

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

Questions and Answers:

Operator

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

Steve Moss -- B. Riley, FBR -- Analyst

Good morning.

Jay S. Sidhu -- Chairman and Chief Executive Officer

Hey, Steve. Good morning.

Steve Moss -- B. Riley, FBR -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

It was, you mean it was strong this year, it just was not the best quarter for us, but we are seeing, we are not putting on any consumer loans at all which are even close to subprime. Our average FICO score remains in excess of 740. We are originating personal loans as well as doing student loan refinancing, and on a regular basis we developed technology and we -- our expected loan losses from these categories remain in line with our expectations and the provisioning that we had done. The net yield to us after loan losses and whatnot still is right on target with our expectations and we will remain very selective in this business and when we have million plus consumers banking with us as well as our knowledge and expertise in those niches, as well as our white label partners that we expect to add-on and their desire to look at selective consumer lending, we think this is selectively a growth market for us. But we will not have more than somewhere like we indicated to you in October of last year, right now as consumer loans are about 6% of our loans or 7%, somewhere in that area, and we think and we had given you a guidance that they will not exceed 15% of our loans over the longer period of time and we remain highly confident now that's a good allocation of our balance sheet in a selective way at this time.

Steve Moss -- B. Riley, FBR -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

We're not going to give line by line guidance but we are very confident about our $3 for next year and I congratulate you. You are one of the few guys who saw that coming and so we think we will be selective and like we mentioned that we are going to take this gradually from about 6% of our -- 7% of our assets to a maximum of 15% over a period of time in the consumer loans, but our focus remains in core C&I lending and you can see that 47% of our total loans are commercial loans. When you add the loans to privately held mortgage companies and that's where we continue to see huge opportunities and in spite of the flat curve to an inverted curve, we are looking at niches whereby we can actually offer medium term to fixed rate loans with higher margin than existed before the decline in the five-year TIBO and so that's where we see a contribution toward higher margins over the fourth quarter and next year and we saw good growth and very high quality C&I loans in the third quarter and we actually are expecting our fourth quarter to be another very good quarter for C&I lending and that will contribute toward higher margin for us, and that also comes with DDAs.

Steve Moss -- B. Riley, FBR -- Analyst

Okay. That's helpful and then on the expense guide, thinking about a flat quarter-over-quarter here. It seems like several of the expense items were one-time-ish in nature when -- regarding like for example crime ring. And just kind of wondering where are the investments that might push up expenses here into the fourth quarter if you back out that primary expense in some of the associated professional fees? And then on the second thing, any color you could give around the technology cost saves that occurred this quarter?

Jay S. Sidhu -- Chairman and Chief Executive Officer

I think the overall -- Carla, you can please add to this, but the overall initiatives that we have had and we shared this with you and your colleagues in the investment community in October of last year, an extreme focus by us on productivity improvement and if using in the digitization effort as well as looking at every single expense category and we clearly shared with you that we will be willing to make investments where we see revenues within a 12- to an 18-month period exceed the investments that we are making. So technology improvements have come in with more effective use of technology by us working with our technology partners to make our fixed costs lower and our variable cost tied to continued increases in revenue, that has been a major driver by us in our focus overall. And, at the same time looking at every area of operation and seeing how can technology improve us in our customer experience as well as customer attraction and as well as our overall cost structure. And that we've also partnered with a very large provider of technology services toward our digitization effort. We also have then partnered with another technology company, which specializes in technology improvements for regional banks and we are executing a lot of things right now, which will result in better customer experience as well as productivity improvement. At the same time looking ahead while we are confident that technology costs and technology improvements will continue, we are very much engaged at the CEO levels with our technology partners to come up with a strategy for the future and the cloud-based core platforms, you should expect some announcements by some banks and we are going to be one of those banks over a period of time, which is going to be looking at cloud-based boards over the next couple of years, but that is existing right now, and you are seeing tremendous improvements in technology, you should expect companies like FIS and what not. And we think they are very well positioned and they recognize the changes that are taking place, and we are in direct dialog with them and that is how we are managing our core expenses as well as core improvements in service.

Steve Moss -- B. Riley, FBR -- Analyst

Okay, thank you very much.

Operator

Our next question comes from Michael Perito with KBW.

Michael Perito -- KBW -- Analyst

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

Carla Leibold -- Executive Vice President and Chief Financial Officer

So we took the consumer loan additions that were added this quarter and that was really applied to the Business Banking segment. And so from BankMobile segment, consumer loans remained relatively flat. So that provision amount really reflected the amount of loans that had been added from the first quarter of -- or from the first half of 2019.

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Michael Perito -- KBW -- Analyst

[Speech Overlap] strategy point of view?

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Michael Perito -- KBW -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

That is correct. Absolutely correct, Mike.

Michael Perito -- KBW -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

No question about it. Right now Mike we are in the investment phase. And as you know all we have is what check income, that we are managing for our white label partner and we have, there are, there is a roadmap that we've discussed and our white label partner has discussed with us that they, what they would like to see, and there is a plan that's been put together in accordance with that roadmap, and once the execution starts on a longer time, it's better to have all your product features as well as your strategy from a product development point of view aligned and before you start any kind of aggressive marketing and then the plans are that we see our white label business to be EBITDA positive within the next year to two years, and, but you should continue to have us remain in the investment mode during this time period because we are not just with one white label bank, we are in negotiations with several other white label partners right now.

Michael Perito -- KBW -- Analyst

Okay and then just lastly, I know there is probably about a $1 billion of mortgage warehouse that will just pretty seasonally come right off and help bring your total asset base down but can you help how we bridge the gap and kind of how I believe you guys mentioned in the release during the [Indecipherable] that plan is still to be kind of sub $10 billion at year-end. Can you just walk me through kind of how we get there and what if any impact we can expect in the model to kind of make that happen?

Carla Leibold -- Executive Vice President and Chief Financial Officer

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

And those will be offset with some -- they will be offset with some increases in C&I lending and that's why -- that's how you get to the $10 billion.

Michael Perito -- KBW -- Analyst

So you guys are $11.7 billion on a period-end basis at 3Q, that comes down to $10.7 billion or so just from the mortgage warehouse balances probably normalize into those probably $1.5 billion or $1.4 billion where they were in the first quarter and then you have the $500 million of multifamily that you expect to move in the next couple of months and then have another $300 million, if I hear you right, that's going to run-off in the next couple of months and that will pretty much get you there and then there might be a couple of other moving pieces, is that the right way to think about it?

Jay S. Sidhu -- Chairman and Chief Executive Officer

Right.

Carla Leibold -- Executive Vice President and Chief Financial Officer

Yes.

Michael Perito -- KBW -- Analyst

Okay. Thank you guys. I appreciate the color.

Jay S. Sidhu -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Hey, good morning guys.

Jay S. Sidhu -- Chairman and Chief Executive Officer

Hi, good morning. How are you?

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Doing well. Thank you, Jay. I wanted to follow-up first on the question about deposit growth within the current T-Mobile white label partnership. So is this the type of growth rate we should expect going forward throughout 2020 -- in the fourth quarter and through 2020 again just isolating for the T-Mobile? And then a second part of the question would be just the average deposit -- depositor or deposit size relationship?

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

It's -- right now, it's over a 1000 products [Phonetic] .

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Carla Leibold -- Executive Vice President and Chief Financial Officer

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

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

I think what we want to say is that we are looking at the best ways from a capital allocation point of view and the actual strategies for redemption versus reissuing at a lower rate or all those kind of options, everything is on the table. We are very focused on maintaining strong capital ratios and Tier 1 ratios and so we have not factored that in as an absolute requirement that we were going to use debt capital or something else to redeem that and that is needed for a $3 number. No. We can get to $3. As you, I think Mike mentioned $3 or somebody mentioned earlier that we are pretty much on that run rate, guys. So, it should be doable.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Operator

Our next question comes from Bill Dezellem with Tieton Capital.

Jay S. Sidhu -- Chairman and Chief Executive Officer

Hi, Bill.

Bill Dezellem -- Tieton Capital Managemen -- Analyst

Is that from Bill Dezellem at Tieton Capital?

Operator

Yes, sir [Speech Overlap].

Jay S. Sidhu -- Chairman and Chief Executive Officer

Britney we can hardly hear you.

Operator

I do apologize.

Bill Dezellem -- Tieton Capital Managemen -- Analyst

Are you able to hear me now?

Jay S. Sidhu -- Chairman and Chief Executive Officer

Yes. Bill. We can hear you now. Thank you. How are you?

Bill Dezellem -- Tieton Capital Managemen -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

The drivers of profitability, well, as you know are the growth of the business as well as your margins, your efficiency, improvement opportunities and maintaining the overall quality. So, in the past, as you know, from a margin and allocating the liabilities and BankMobile into good assets, which are appropriately allocated to that business. So, we were setting aside, a lot of provision expense and not really getting the return. So, we had factored that in, we knew it, maybe some of the folks on [Technical Issues] and some of the analysts were off by a little bit, but we believe they all understood it too. And everybody is now seeing the results, some people were just off by a quarter or two, but overall we are just executing what the Street would have expected us to do based upon our numbers. So it's a little bit ahead of the quarter. We think it could have even been stronger but we expensed certain items this past quarter, and we are not going to see some of those unusual expenses, but there will be a little bit perhaps less revenue side because the seasonality in the next quarter. So you shouldn't expect our profits from BankMobile to be up by $2 million, but still it will be stronger hopefully than what you saw in the second quarter -- in the third quarter [Technical Issues].

Bill Dezellem -- Tieton Capital Managemen -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

Well, till we have matured in our other areas or other verticals for BankMobile, the student business will remain -- be impacted by seasonality. So our objective is that we will offset that volatility but with having a stronger profitability starting to come after a couple of quarters from our white label partners and business. There is another new vertical that we are developing which we don't want to talk about today. And, which is very, very exciting opportunity for us. And so with all that said, we want -- we will once affirm that next year BankMobile will be profitable for the entire year, and that's the most important thing.

Bill Dezellem -- Tieton Capital Managemen -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

Bill, it's a very good question and I'm glad you kind of asked it because majority of the banks right now are experiencing a margin compression and they are experiencing a margin compression because they were very asset sensitive, and they don't see a growth in their business lines, and they don't see a growth in deposits and they are -- that's why we are trying their best to accelerate the reduction in their rates that you're paying on deposits but they never increased those deposit rates when the rates were going up, they improved their profitability and got all sorts of accolades from the investment community for expanding their margin because they were asset sensitive, but that happened because they had loans, which are variable rates and they were proud of themselves for not having to raise those rates. Well, now what's happening is that those same loan rates are coming down faster and they cannot because they never raised the rates by much, so they are having a very tough time keeping. So that creates an opportunity for someone who wants to attract customers. And like we shared with you on the last call when every analyst was asking everybody, how quickly are you going to be able to decrease your rates because you're going to work out -- work that in into your strategy on expectations from the Street and we were the ones who said, hey, we look at this, not quarter-by-quarter, but for year-over-year and we are well positioned to take advantage of this kind of a strategy and you shouldn't expect us to jump in and because we can see improvement in margin coming from the asset side as well as a little bit coming in from the liability side. So, bottom line is we have a plan and we are going to be executing the plan gradually. But for right now, while we are in the mode of shrinking our balance sheet, we are not executing our strategy on stronger growth in kind of market rate deposits, but we are into low cost deposits. But starting 2020, I think, you'll see more clarity about our digital -- entire digital strategy for customer acquisition.

Bill Dezellem -- Tieton Capital Managemen -- Analyst

Thank you.

Operator

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

Frank Schiraldi -- Sandler O'Neill -- Analyst

Good morning. I just wanted to ask about --.

Jay S. Sidhu -- Chairman and Chief Executive Officer

Hey, Frank, good morning.

Frank Schiraldi -- Sandler O'Neill -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Frank Schiraldi -- Sandler O'Neill -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

I think if you look back at our financials, we have had a $1 million to $2 million quarter of these kind of writedowns, and this is --this is not just fraud, we call it operating losses. So these are disputes on regulation E where a lot of people say I never our charge this for whatever reason, you've got to follow the regulations and not able to take advantage of you or whatever. And, but we are very committed to following the regulations and we think that people are very committed, many, many few but fortunately we are of the few very committed to taking advantage of regulation. So that's why a $1.5 million to about $2 million in that range, you should expect on a quarterly basis going forward.

Frank Schiraldi -- Sandler O'Neill -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Frank Schiraldi -- Sandler O'Neill -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

You have a pretty good guess.

Frank Schiraldi -- Sandler O'Neill -- Analyst

All right. Thanks, Jay.

Operator

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

Steve Moss -- B. Riley, FBR -- Analyst

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Steve Moss -- B. Riley, FBR -- Analyst

Okay, thank you very much, appreciate that.

Operator

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

Jay S. Sidhu -- Chairman and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Bob Ramsey -- Director of Investor Relations and Chief Financial Officer of BankMobile

Jay S. Sidhu -- Chairman and Chief Executive Officer

Carla Leibold -- Executive Vice President and Chief Financial Officer

Steve Moss -- B. Riley, FBR -- Analyst

Michael Perito -- KBW -- Analyst

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Bill Dezellem -- Tieton Capital Managemen -- Analyst

Frank Schiraldi -- Sandler O'Neill -- Analyst

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