Customers Bancorp Inc
NYSE:CUBI
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Customers Bancorp Inc
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Good day, and welcome to the Second Quarter 2018 Customers Bancorp Inc’s Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the call over to Bob Ramsey, Head of Investor Relations for Customers Bancorp. Please go ahead sir.
Thank you, Yolanda [ph], and good afternoon, everyone. Customers Bancorp’s third [ph] quarter earnings release was issued earlier this afternoon as well as investor presentation. Both are 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; Rick 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 risk and uncertainties that may cause actual performance results to differ materially, including the risks 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 Customers Bancorp’s, CEO, Jay Sidhu. Jay, the floor is yours.
Thank you, Bob, and good afternoon, ladies and gentlemen. Thank you for taking the time to join us for this call today. I would like to draw your attention to the slides that we have provided with the press release because I’m making an assumption that you all had a chance to go through the press release. So I’d like to make some comments about the quarter and about some of our expectations for the future.
If you go to Slide 7, you can see that Customers reported consolidated net income to common shareholders of $0.62 a share about $20 million on a fully diluted basis and it was $0.02 higher when you adjust for the merger related charges. These earnings were 10% over last year adjusted for merger charges and security gains or losses principally that took place last year in the first quarter. Customers Community Business banking segment reported second quarter 2018 net income to common shareholders of $23.4 million or EPS of $0.72 and adjusted for security gains and losses this segment also generated $0.73 roughly the same amount as last year.
The BankMobile segment as we expected due to seasonal patterns of the student business reported net loss of $3.3 million which is about $0.10 per diluted share and adjusted for the merger related charges of $0.02. This segment improved over last year where the loss was $0.14 in the second quarter of 2017. Despite some temporary headwinds caused by our branch light business model as well as lack of branch based consumer deposits and relatively flat curve. We believe this was a solid quarter for the company. The spread between the two-year and the 10-year as you know fell down to 25 basis points and that was to level since 2007 and I believe, this had an impact on us as well as rest of many of the other community banks. But still in spite of this, the community business banking segment still generated a return on average assets to just over 1%.
Notable strength in the community business banking segment this quarter included a robust 21% year-over-year growth in C&I loans pristine credit will justify the release of some reserves and a 7% sequential growth in deposit balances and I’m now on Slide 8. On Slide 8, we also talk about outlook for 2018 and we know expect the community business banking to generate EPS between to $2.65 and $2.75 this year. The biggest driver in our more conservative outlook is our current expectation for margin improvement not showing up until sometime next year as well as our decision to taper the growth in total assets to between 10% to 12% in 2018, rather than the approximate 15% that we had initially signaled to you.
In this flat curve environment, we believe this would be a prudent action on our part. The most notable change in this growth outlook is going to affect our Multifamily business where we have made a decision to be extremely selective and who we extend loans to this quarter and we believe this policy is going to remain intact, field yield curve normalizes. Our net interest margin for this quarter was 2.62%. Slides 11 and 12 provide more details on the entire margin issue as well as the steps that we’re taking to mitigate the core margin pressure that we’ve experienced in the first six months of this year.
The five basis points quarter-over-quarter compression included a four basis points headwind from the seasonal reduction of BankMobile noninterest bearing deposit. So we expect to make this up next quarter. Other actions to mitigate the margin pressures that we want to share with you, are as follows. And you can see number one and I’m referring now to some of the items to that we have disclosed on Slide 11. So you can see one of the first mitigants [ph] we’d like to discuss with you is that, we have very significantly limited origination of loans below 5%. In fact all our C&I loans that originated in last quarter had a minimum rate of 5.17%.
Number two, we have basically stopped making traditional Multifamily loans to new customers and this policy will remain intact till the yield curve normalizes. Number three; we have executed approximately $1 billion notational value of interest rate swaps in the first six months of this year. Tapping over three-year period or so our funding cost in the 2.7% to 2.75% range. Number four; implemented new products and channel strategies to grow our core deposits and this includes launching of digital bank that we launched on July 7, 2018 and this geared towards gathering deposits from consumers across the country.
Number five is, we have implemented even the more attractive compensation plans and attractive teams that are taking advantage of this to incentivize them to grow core deposits. And number is is that, we’re seeking opportunities to originate high yielding assets from the commercial finance as well as the consumer sector as long as we’re satisfied with the credit risk. This will also improve our asset mix going forward.
One of the positive trends this quarter that I don’t want to be getting lost is especially given the broader margin trend was increase in loans yields which moved 25 basis points in just one quarter. Slide 12 if you look at that, you can see some more details about our loan portfolio. You’ll know it, that 84% of all our C&I loans reprice most of the immediately but all of them within one year. Some of them do reprice tied to a three-month LIBOR. I would like to also note that C&I loans including our loans to mortgage companies are our biggest portfolio making up 41% of all our loans.
And our C&I loans grew by 21% year-over-year. Now here’s the breakdown of how our asset yields improve between Q1 and Q2. Our commercial loans to mortgage companies, the average yield in the first three months of ending March 31 was 4.69% [indiscernible] to 4.93% for second quarter. Our Multifamily loan yield's been up from 3.7% to 3.9% during second quarter. Our C&I loans other than loans to mortgage companies went up from 4.34% to 4.75% in one quarter. Our non-owner occupied commercial real estate loans went up from 3.93% average yield in the first quarter to 4.05% average yield in the second quarter. So all our total loans yields went up from 4.10% to 4.35% from first quarter to second quarter.
And as I stated earlier, the average yield on the C&I loans originated in Q2, 2018 was almost 5.2% which was 42 basis points greater than our portfolio yields. Also on Slide 12, we share with you our repricing schedule of our assets in more detail. So you can see 84% of our C&I loans will reprice immediately or within one-year for sure and then if you look at even our Multifamily loan portfolio we’re looking at without prepayments about 60% to 70% of them repricing over the next three years and even in our CRE, 43% of our loans will reprice within one year.
So taking the steps that we have taken to deal with the higher cost and our strategy which is to always do what is, the best for the customers both borrowing customers as well as the deposit customers. We believe, it’s prudent to do what we’ve done and the short-term pressure that we’re experiencing on the margins is going to end and you will see within a year, our margins get starting to expand and our profitability starting to improve.
Next credit; in this area it bears to mention this quarter as disciplined underwriting has always been one of Customers critical success factors. In second quarter, 2018 the provision decreased $1.3 million from a year ago. The result methodology remained unchanged but we still were able to release some of the results. This is entirely due to the strong credit quality and better than expected resolution of specific problem loans and some of the charge offs that we have taken in the past, were created recoveries beyond what we were expecting. Net charge offs were just two basis points not this quarter nonperforming loans equal just 29 basis points, the total loans and allowance equals 150% of nonperforming loans.
Regarding BankMobile spin off we continue down the path for the spinoff and all the confidential filings that have been submitted let me just give you an update on each one of them. Flagship back in April submitted to Form 10 through FDIC, Flagship received no comments from FDI and Flagship is in a position to do an IPO. Number two, Flagship in the month of April filed an application with FDIC for approval of the purchase and assumption related deposit acquisition of BankMobile and FDIC is in the process of reviewing that application and Flagship hopes to or expects to receive an approval from FDIC in due course.
At the Customers Bancorp level, Customers Bancorp filed a 500-page Form 10 to the Securities and Exchange Commission in June and we’ve already received comments back from the SEC, we’re glad that they were very moderate comments and so CUBI is in the position or Customers Bancorp is in a position to respond to SEC in a fairly rapid pace so that the execution of the spin to our shareholders of the BankMobile technologies business can be done.
We are hopeful that still sometime shortly before or shortly after September 30 subject to the final regulatory approval, this spin merge can be executed and our shareholders can enjoy the benefit of one of the fastest growing digital banks in the country. In conclusion, I would like to say that despite an unfavorable interest rate environment we continue to focus on serving our customers, growing the right mix of loans and deposits and managing our cost to drive profitability higher. We’re also working to simplify our story and unlock the shareholder value that we believe still exists in our stock. As you know the valuation is 1.3 times book and 8.7 times 2019 earnings.
We’ve heard from several of the analysts that there are three things which affect this below market valuation and we’re very focused on them. If you believe there is something else besides these three, please share that with us. Number one is capital. So everybody is talking about that we should have slightly higher capital ratios. Capital ratios have been improved, but we’ve set targets and we expect to get to those targets within the next two or three quarters. Number two is divestiture of BankMobile. I’ve already shared with you that will get done. Number three; that we should be tapering our growth somewhat. The growth over the last couple of years was over 20%, now we’re telling you it will be 10% to 12%.
So with that I’d like to open it up for questions. So if we can please operator open it up for Q&A.
[Operator Instructions] we’ll hear first from Michael Perito with KBW. Please go ahead sir.
I actually have handful of questions, I wanted to maybe start on Jay you mentioned via online deposit gathering consumer platform you guys launched in July. Can you maybe give us some more details around that and what the mandate is there moving forward?
Sure, Mike right now it’s only offering one product which is a saving slash money market account to consumers across the country. We’re already in the first 10 days, got $10 million in deposits. In our test period, we will be relaunching and going to a broader marketing starting August 1 and we offered 2% interest for savings accounts there’s a $25,000 minimum deposit balance. We’re really going after consumers which there is a benefit to us of at least 40 basis points today over our institutional marginal cost of funds. So there is definitely an opportunity for us to grow this into hopefully into average of $100 million in deposits over every 30-day to 60-day period, that is our plan.
Sure, should we think about this kind of as a product that competes with like some of those money market savings accounts from like Goldman Sachs or American Express etc. some of those like higher 150, 200 bps is that kind of the idea of the market you’re trying to angle here or should we think of that differently?
No that is correct.
Okay.
As you know the difference between BankMobile. BankMobile was going after checking accounts from Millennial’s. This is very, very different. This is going after the consumer money that banks are hoping that consumers will never know how much money they have and what rate they’re getting and we’re instead taking a position where our positioning strategy is, that we always want to do the right thing for the customer and then our opinion, this is the way we will gather the deposits from the consumers across the nation.
And you guys show – is the mobile app I guess at this point on the customer side up to the standard it used to be to compete in that space. I’m assuming yes, but to [indiscernible].
Yes and it’s a majority of the deposits the customers in this instance do not use a mobile app, but they use desktop. But yes, we have our mobile app which is in very appropriate for these kind and we had – and it had an advantage because we have experienced and how to write a loan and how to do the security checks and verifications for those who do want to open their mobile. But so far we haven’t had anybody open it over mobile. [Indiscernible]. When people give you $100,000 or $50,000 they feel better sitting in front of a laptop.
Yes, I actually misspoke. I meant more like the online website access etc. but like I’m assuming it’s all online account opening and stuff like that.
Yes.
Obviously, yes. Okay. All right I wanted to ask a question, so I mean obviously a theme that we’ve been hearing a lot from other banks is that asset pricing competition and obviously it seems like, something you guys are trying to do directly and I thought your comments about significantly limiting originations of loans with yields below 5%. I guess my question is does that box you in a little bit from a credit perspective I’m assuming a lot of those loans that are priced thinner not always obviously but a lot of them that are price thinner, the higher quality credits. And secondly I mean, as loans kind of come up and you have all the data about repricing loans and etc., etc. is there going to be a challenge to maintain older relationships as well under that mandate or is that mandate really more for incremental originations at this point?
Mike, first of all let me just try to answer that question by once again discussing our strategy. We recruit teams and every team has a goal, has a plan and that plan is based upon reaching out to their clients and we have a private banking relationship oriented business strategy. The reason why we’re experiencing way above average C&I growth with high quality and really being able to not compete on the basis of price at all, is because of our business strategy. When you have a business strategy which is built around branches in a geographic market, there is a lot more competition. Competition from community banks and large banks. It’s not to say we’re not experiencing competition, but we’re seeing some [indiscernible] stuff going on in the banking sector right now. To give you an idea for $200 million loans that we booked in one area in C&I, we’ve looked at over $1 billion worth of potential business. And so that’s the kind of our opportunities are there. But there is – you’re absolutely right which you’re hearing from others that pricing competition, that has increased. But we believe we can compete on the basis of the price because of our superior long-term relationship that our bankers by the bankers help with those customers, but where we will not compete this structure.
Okay. It sounds good, that makes sense. And then just one last one from me. Just maybe for Bob Wahlman, but on the margin. I noticed a comment the four basis point headwind from seasonal decreases in BankMobile noninterest bearing balances. If the transaction goes as planned all else equal and it’s gone by the end of the third quarter, the divestiture of BankMobile that is, what is the impact to the margin today from the loss of those DDA balances.
Sure Mike, right now in the second quarter of 2018 and if you take a look at the community banking business segment we had a charge in the community banking business segment of approximately 3.02% for the quarter for that transfer pricing. So if we can replace those $400 million to $600 million and $700 million of deposits which they would be generating at a price less than 3% and with 100% confidence that we will be able to do that by significant margin, we will actually see some incremental benefit to the earnings that we are reporting from the bank perspective. We don’t put that in our, we don’t talk about that or anything but that’s how the numbers would work out. We’d do a little bit better than the bank only on month.
Okay, I got it. So essentially you guys are already kind of in a way not giving yourselves credit for those deposits in the margin today. So there really shouldn’t be any impact of anything slight tick up once that transaction is completed in September.
That’s correct Mike, as long as we can replace cost less than 3% and you know we’ve added that in swaps to [indiscernible] through 2.7% in a fixed basis for three years, so that’s why we’re pretty confident it’s going to be somewhat of a benefit to our net interest income.
Okay. And then actually on those swaps, I mean is that something I remember reading, there was an accounting change that made swapping on the asset side, a bit easier as well. Right I mean I guess this is, can you just maybe give us a little bit more color one that started. I know it says that the impact for those started in the first quarter 2019, but when you started putting that billion in value on and then just maybe a little bit color about what exactly it is and I’ll step back after that, thank you guys I appreciate it.
Yes, sure. We did early adopt the new accounting standard effective this year. But the swaps that we’re talking about in this particular space are the traditional swaps, we would have receive the same accounting had we done the swaps, a year ago, two years, three years ago. So it’s not taking advance of the new accounting rule at this point in time. Or hedging on liabilities.
Thank you. Our next caller will be Steve Moss with B. Riley FBR. Please go ahead.
On the Multifamily business here, can you just discuss what you’re seeing term or rate that causes you pull back?
Steve we’re still seeing people making loans in Multifamily somewhere between a low of 3.7% to high in some cases where there is not necessarily absolute pristine credit to 4.25% in the range in New York market and [indiscernible] to ask is the reason why we will accommodate our existing customers, but we’re not seeking new customers and we have a strategy to go to our existing customers in fact, with a lower rate and then encourage them to look at locking up for the next five years at a rate which is in the upper end of that range and takeaway the risk that they’re facing for a potential normalization of a yield curve or if there is continued increase in medium term rates they could really be negatively impacted. So our teams are very actively focused on contacting the customers and doing what we believe is the right thing for the customers. And at the same time that will benefit our bank because if we’re able to reprice upwards in the next three to six months, $500 million to a $1 billion of our loans by 50 basis points up, that you know is Multifamily loans that will be very beneficial to us.
Okay in terms of the margin here as we think about it going forward. What does your guidance assume in terms of rate hikes and let’s say, we get two more by year end, what are we thinking about for 2019?
We are assuming at least two more in 2019.
And we have two more on September for 2018 also into 2019.
Okay and even if we had two this year and two into next year. It’d still be able to be at least at the low end is your expectation on the margin.
That’s correct.
Okay and then on the fee side I was just wondering to get some color deposit fees in interchanging and car revenue were a bit lighter, just wondering about the dynamics that were going on there.
One is an accounting change, whereby last year I think [indiscernible] mentioned to me, that last year we were looking at income all being offset. While all coming into the income line and now we’re reporting offsetting with some of the fees that we have to pay MasterCard and so it’s netted out, where value and expenses go down, but your fee income goes up last year and now it’s started the way around. Second thing is, that we are really encouraging the customer for Life business model, so that these are not just the refund deposits or the excess from the tuitions, but we have a $1 billion in the last 12 months of organic deposits paychecks coming in, into the account whereby you see slightly less activity on the debit card than you see when they’re just paying off using their money from the student loans to pay the [indiscernible] and housing and those kind of thing that is more activity, that’s what causing it in the BankMobile segment.
Okay, thank you very much. Appreciated that.
If I could just add to that, just to define the netting that Jay described in the first part, is the result of the revenue recognition standard that came into effect at the beginning of this year, this is one of the impact for customers the new accounting standard. We didn’t do it by choice, we had to do it.
As we think about third quarter is in particular on the interchanging cards, I know a lot of that is really driven by BankMobile but, now since it's going to be hanging around we should see a pretty meaningful [indiscernible] I guess on the third quarter.
I think BankMobile we’ve given some indications to you that we think BankMobile loss will be in that $3 million to $4 million range max in the third quarter. So I think we put that in the press release. Right.
Okay, thank you very much.
[Operator Instructions] we’ll take our next question from Frank Schiraldi with Sandler O’Neill. Please go ahead.
Just a few questions, I wondered Jay you talked about obviously moderating balance sheet growth here in back half of the year. Do you have to slow C&I growth? Do you intend to slow C&I growth or is this mostly you know just we’re getting there through a reduction in Multifamily?
We’re not slowing to C&I growth Frank, as we should do – with what we’re seeing from all the teams that we’ve recruited over the years including in the last 12 months we’re seeing a very robust pipeline and we’re putting on the loans in second quarter, we put them on valuable rate loans and we start average rate of 5.2% starting, so it’s a very attractive business for us, so that it moderation of our growth rate is a result continue decreases that you should see in our Multifamily business portfolio.
Okay and then you talked about the 3%, you’re essentially the bank is giving or transferring to BankMobile. Do you think, I mean should bank deposits grow at especially giving the moderation overall in loan growth – should bank deposits outpace the growth in loans. I guess what I’m trying to get it, do you think it will be mostly wholesale that backfills once BankMobile leaves the balance sheet or do you think healthy amount will be bank deposits including maybe this new digital channel.
I think it’s all the channels and I think we put it in the press release or we believe, you should see about $600 million growth in our deposits in the second half of the year as a result of all our strategies.
Okay and those – okay so that would be core deposit growth.
That is correct.
Okay and then just wondering on the NIM guidance. Does that include any pre-payment penalty income and does the quarterly NIM, the 2Q NIM does that include any pre-payment penalty I think?
Yes it included pre-payment penalty income, NIM always includes the pre-payment penalty which fluctuates for a bit quarter-to-quarter. And in this quarter we did benefit.
Okay, I mean do you guys have handy what – how much in pre-payment penalty income was in this quarter versus the previous quarter?
I think it was over $1 million, but I don’t have the exact number.
It was $2 million this quarter and how about the first quarter?
The first quarter was very low, it was only about $250,000, $300,000, $500,000 [indiscernible] it’s very low in the first quarter. So I would assume I mean you would expect especially for slowing Multifamily, you expect the pretty healthy amount, pre-payment penalty income coming through the NIM. So does that 260, 275 include a healthy amount of pre-payment penalty income?
So Frank, what we do is we take a look at historically what we’ve collected from pre-payments, we do take a look at the rising interest rate environment and we consider the probability of extensions that is people going up further on their line, we recognize that Multifamily does not behave like one-to four-family residential mortgage loans and so we don’t extend nearly to the extend you on one-to four-family but we do that and so what we’re essentially doing is taking our historical averages, taking a haircut to that given the current interest rate environment and then using that number.
Okay, all right. Thank you.
[Operator Instructions] we’ll go next to Russell Gunther with Davidson. Please go ahead.
One of the follow-up on the margin discussion, that 260 to 275 guide over the next year or so, does that include what you are talking about in response to Mike’s question. The benefit from the transfer fund pricing if you can get funding below the 3%.
No.
So there’s potential upside effects achieved to that guide.
[Indiscernible].
Great and then thanks for that. And then on the non-QM resi mortgage is that, what we saw come through this quarter because you kind of quantify where that stands in target there?
Yes that’s correct. It was – this one turned out to be purchase of a portfolio and so we’re consuming [indiscernible] I think you’ll see ask continuing to see where we can acquire loans where the duration that matches or is better than what you see in the Multifamily business and yields in the credit which is much better than that, that’s what we’re focusing on.
Okay great and then thanks for that. Last question for me on the better than expected resolution of specific problem. Well could you guys give us some color on the type of loans that cured better than expected maybe type when they’re originated any kind of color there?
Yes, go ahead Bob.
Yes so color on that, these loans are pretty significant loan balances. They were largely legacy loans that is the – acquired portfolio back in the 2009, 2010, 2011 that had to follow subsequent to that and we’re working through. We had in the course of working through them had written them down to our estimated net realizable value as required by the accounting guidance, but then in liquidation of those assets, we’re able to realize more and so we realized almost $1 million of benefit from that this quarter.
Great, okay. Thanks for all the help.
[Operator Instructions] we’ll go next to Bill Desellum with Titan Capital. Please go ahead.
Couple of questions. The first one is relative to the white label opportunities. Would you please give us an update with that segment?
Yes, Bill. Tremendous progress has being made towards execution of the white label. We have an understanding with our white label partners that we want to delay the disclosure as long as practically possible. So whenever we do our filing, with the SEC one of the comments we got from the SEC was to disclose their name. So obviously before Flagship does their IPO, their name will be disclosed.
And has that relationship actually begun yet or is it still in a work in progress phase?
That hasn’t begun yet but that is expected to begin in the fourth quarter of this year and so it is of the nature that it’s going to be nationally num [ph] so you will not miss it.
That is helpful and you said Q4, is it when that will launch, is that correct?
That’s correct.
Thank you and then my other question is, if you slow your growth rate from that 26%-ish level down to the 10% to 12% level as you referenced. When you move your capital levels to the range that you want to be in, from that point forward are you anticipating being self-sustaining in terms of those capital levels and not in need of additional capital raises after that or how are you conceptually thinking about future capital raises relative to that new 10% to 12% growth rate?
We’ll be very hopeful that with 10% to 12% growth that would be an continued improvement in our capital ratios and we will remain very disciplined from a capital allocation process point of view and it all depends upon about the external environment. You see the yield curve normalizing, we may be opportunistic and we see opportunities to create higher returns for our shareholders that we may even access the capital markets at that time, so those are the kinds of things that all the commitment from us is that capital allocation we take it very seriously and management of capital very seriously and so if you see an inversion in the curve, we might taper our growth even more rather than take short-term risks just to create profits in the short-term with a very low quality balance sheet that’s not something we’re doing. We’re building a balance sheet which today has 42% of its loan as C&I loans. We haven’t made an acquisition, this is organically grown business. And we think there are very companies which have 42% of their loans are C&I loans. And where we are different from others is, we’re funding them with consumer deposits by co-paying that the consumers will never, ever, ever wake up. Well that’s a strategy that’s based upon hope. Our strategy is based upon actions. So we’re trying to keep our cost very low and continue to build our franchise and we have decided that C&I is the post of modern follow the business bank franchise and we will continue to build it, but only in a way that it’s profitable for us and if this is curved in words, we might even start buying back stock.
Thank you Jay.
Thank you. And it appears we have no further telephone questions in our queue at this time.
Okay, well thank you very much for taking the time. I really appreciate your interest and look forward to the next quarter. Have a good day.
That will conclude our conference. Thank you all once again for joining, you may all disconnect.