Customers Bancorp Inc (CUBI) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the First Quarter 2018 Customer Bancorp, Inc. Earnings Call. Today's call is being recorded.

At this time, I would like to turn the call over to Bob Ramsey. Please go ahead.

Thank you, operator, and good morning, everyone. Customer Bancorp's first quarter earnings release and accompanying slide deck was issued this morning 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; Luvleen Sidhu, President of BankMobile; and myself, Bob Ramsey, Director of Investor Relations and Strategic Planning.

Before we begin, I'd like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risk and uncertainties that cause -- may cause actual performance results to differ materially, including the risks that the results are different from those 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 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. I'd also like for everyone to pull up the investor deck, which has been provided on our Investor Relations website this morning. We'll be referring to those slides as we make our prepared remarks this morning.

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

Thank you very much, Bob. And good morning, ladies and gentlemen. I want to welcome everybody. Thanks for taking the time to join us for this first quarter call. Joining me here in Wyomissing, Pennsylvania, as Bob mentioned, is Bob Wahlman, our CFO; along with Carla Leibold, who is our Chief Accounting Officer. Dick Ehst, our President, is in Chicago today, because as we announced to the street we opened up a new LPO, which is going well in Chicago, and Dick is there making calls to -- with our clients in Chicago.

Bob and I decided that we will take a slightly different view -- review methodology this morning. Rather than going over the details of the press release, I'll give you some highlights and then discuss some things that may not be appropriately covered by us or the questions that we have already heard from you, discuss a few items on the outlook and then open it up for Q&A, and hopefully, end this call a little bit quicker with more information to you.

As you know, in the first quarter, our GAAP net income was $20.5 million, $0.64 a share and the Community Business Banking segment, which is our core business after BankMobile is divested, on $21.5 million or $0.67 a share. I'd like to draw your attention to the deck that we provided that's accompanying our press release.

So if you look at Page 2 of that deck, the $0.67 of the Community Business segment represented a 16% growth rate year-over-year in earnings per share for our so-called Community Business Banking segment, which is everything other than BankMobile. And the net income available for our business -- banking business was $21.5 million and this number is 14% year-over-year. At the end of the first quarter, our return-on-average assets for the Community Business Banking segment was 1%, and our efficiency ratio was just slightly below 50% as such. So this is a very clean quarter for us, and let me just now talk a little bit about BankMobile. We have absolute clarity now, as much as one can have about the BankMobile divestiture. I'm pleased to share with you that Flagship filed an application for the merger of BankMobile Technologies, which is our business line as well as the deposits of BankMobile to acquire those -- that application was filed with FDIC in early part of April. And then, earlier this morning, Flagship also filed a confidential basis Form 10 which is the -- in preparation for going public and raising equity capital as well as simultaneously merging with BankMobile, so that was done this morning. And now, the only other filings left principally by Customers Bancorp with Securities and Exchange Commission, which is going to be very similar to Flagship's first quarter -- Flagship's Form 10 filing, excuse me, and we expect to get that done over the next few days. So BankMobile divestiture is looking like still a third quarter event and the only timing issue which might impact the timing is going to be the receipt of regulatory approval by Flagship for the acquisition of the BankMobile deposits and the rest of the related business. So we are right on target. That's why majority of my comments today will be all related to the Community Banking Business segment or the business that we are retaining after the BankMobile divestiture.

If you look at Page 3 of the deck, you can see on a GAAP basis, if you take out some of the noise which existed last year first quarter, principally, from the Religare impairment that we took as well as the fact that last year in the first half of the year we had classified BankMobile as held-for-sale, so we were not expensing any depreciation and amortization expense. If you take those out, from that point of view, our earnings last year -- GAAP earnings, were only $0.59 and today, they were $0.64.

As such -- and if you look at Page 4 of the deck, you can see, when you take out BankMobile losses last year or their financial results last year and simply focus last year versus this year, that's where the $0.58 last year first quarter was the $0.67 resulted in a year-over-year adjusted EPS of 16%, that I alluded to and the ROAA of 1% and the segment efficiency ratio of just a little bit below 50%. We are expecting the segment efficiency ratio to be in the mid-to low 40s by the end of the year because we are confident that the expense initiatives that we have implemented, and you saw the result in the first quarter, you should expect to see a continuation of that. And hence, we are comfortable in stating to you that you should expect us to meet our guidance for this year of somewhere between $2.75 to $3 a share for the Community Business Banking segment.

A few things, hence, we are very proud of in the first quarter. Number one was the focus on expenses that I just talked about, and we were able to offset our NIM compression, and I'll talk a little bit about what we are doing to offset the NIM compression. And our credit quality remained very pristine. Our net charge-offs were only 3 basis points of loans, and our nonperforming loans equaled just 26 basis points of total loans. The total loans grew about 6.5% year-over-year but the important thing is that the majority of the growth was in the variable rate and franchise value-creating loans and the reductions or the low growth were in the more of the turn-based multifamily loans as well as the residential mortgage loans. So our C&I loans grew by 23%. Our mortgage warehouse lending loans grew by 11%. Our total deposits are about $250 million to $300 million higher than December 31 but they declined slightly year-over-year but there were some favorable shift in the mix as CDs declined about $670 million or 26% year-over-year. And the Community Business Banking segment's noninterest-bearing demand deposits, they increased by a same number, 26% year-over-year. So with those kind of trends, we are very focused on -- in this rising-rate environment, deemphasizing institutional deposits and high-rate noncore deposits, even if they cost us higher loan-to-deposit ratios temporarily, but we are confident that we will be able to replace, over a period of time, these noncore deposits with more core deposits and improve the quality of our balance sheet.

If you now go to -- let's discuss the net interest margin. The flat curve and the rising short-term interest rates did put pressure on us and especially the flat curve has put a lot of -- has impacted the multifamily business considerably. To give you an idea, our multifamily yields at December 31 were 3.8% last year, at this end of first quarter, they were 3.7% but that 3.8% at December 31 included 12 basis points of prepayments and in the first quarter, we reported a 3.7% yield because prepayments declined for us. However, in the second quarter of 2018, you should expect that yield to go up for 2 reasons: Number one, we are not booking loans at all for less than 4% in the multifamily. And in fact, we have now increased the target to more like 4.5%. Hence, the yield should be higher; plus the prepayments in the second quarter are expected to be higher than what we experienced in the first quarter. So the multifamily yields should go up. However, the outstandings may be lower in the second quarter and at best, maybe flattish, as such. C&I loans will continue to increase. Commercial loans to mortgage companies should continue to be about the same or higher at June 30 for seasonality, and our nonowner-occupied commercial real estate yields, which were also impacted by lower prepayments this quarter, they should remain about flat because we are emphasizing principally, franchise-enhancing variable rate loans in this environment and deemphasizing loans which are tied more to the flatness of the curve as well as more of fixed rates. Hence, we should -- you should see some stabilization of our margin, if not a slight increase in our margin in second quarter over the first quarter.

Talking about deposits at this time. Like I shared with you, the Community Banking Business segment's noninterest-bearing demand deposits were up 26%. We have initiated our incentive comp plan, which is really in our franchise that it's very handsome with awards. Our private banking teams were generating noninterest-bearing DDAs, but the deposit competition is pretty fierce. We now -- we experienced a 45% deposit beta since the beginning of 2017. We recognize that because we had a lot more institutional deposits and a lot less branch-based consumer deposits. And by the way, our branch-based consumer deposits have a beta of less than 20%. So -- and we believe the rest of the industry is going to be heading towards higher betas, no question about it. But at the same time, we want to be emphasizing much more of relational core deposits to increase our franchise value, so that even in the short term you might see some pressure continued trend lines that you've experienced on the deposits but over the longer period of time, we believe our deposit costs will stabilize and we believe that with our actions that we are taking of deemphasizing loans like multifamily and commercial real estate and emphasizing the variable rate loans as well as building -- continue to build our DDA base will result in having a more stability to our margin as such.

Now if you look at Page 6 of our debt, I want to talk a little bit about capital. And our capital ratios were mostly lower this quarter as expected, but we expect them to end the year at much stronger levels. Thinking about the tools to manage our capital. Number one is that we have tempered our balance sheet growth rate. And number two is that we are looking at the possibility of not replacing the assets that we would be divesting with BankMobile to support our capital ratios. And then -- hence, taper our growth even further to build capital as such in this market environment. From an outlook point of view, we are on track for the Community Business Banking segment to earn between $2.75 to $3 a share in EPS this year, like I mentioned earlier, and we also expect our return-on-average assets for this Community Business Banking segments to exceed the 1% level that we achieved in the first quarter, and we are shooting for, at least, somewhere in the 1.1% or higher range.

A little bit upon -- on our line of businesses. We see a pretty strong pipeline in C&I. Our mortgage warehouse is seasonal in nature, which typically at June 30, you will see higher numbers than what you saw at March 31. And like I mentioned to you, our multifamily pricing is -- right now, the market rates are below our target ranges. Hence, you should not expect to see any growth in that portfolio at this time. From a credit point of view, our credit remains strong, and you should not expect any credit deterioration from us in the near future.

So with that, we'd like to open it up for -- if any questions anybody has and so please open it up for Q&A.

(Operator Instructions) We'll take our first question.

It's Frank Schiraldi from Sandler. Just a couple of questions. First, Jay, I wondered if you could talk a little bit about -- a little more about deposit gathering and just where you're saying the greater success and if you still have confidence in the growth you talked about for the year on the deposit front.

Yes, Frank, we have confidence in the growth. We -- you should expect us to announce recruitment of the new team, which is very exclusively deposit orientated from a pretty significant competitor in New York and that team is on board. We've now completely staffed up our Chicago office, and we are starting to see some deposit growth coming over there too. We are staffing up and seeing some deposit growth coming from our D.C. office also. Plus, on our New England franchise, we were at a retreat just last week, and we are very confident that we will start to see some activity in the more relationship-oriented deposits coming from there. We have no shortage of opportunities for deposits, if we just focus on municipal deposits and institutional deposits. But we are seeing irrational pricing. To give you an idea, we are seeing like 2.4%, somewhere in that range from institutional deposits. We are not -- we'd rather see that money walk away than to pay for short-term deposits, those kind of rates. And then we have several efforts going on, and we are confident that by the end of the year, you will see a much greater growth rate in deposits from us than you are seeing -- than you noticed in the first quarter.

Okay. And then just on -- I appreciate the guidance on efficiency ratio. Obviously very, very strong bank-only efficiency ratio in the 40s and I wondered just for modeling purposes, if you could talk just a little bit about where the bank-only expense is running at this point and if that's a decent run rate to think about once you exit the BankMobile business?

Sure, Frank. This is Bob, I'll jump in here. So yes, the bank-only expenses in the first quarter were $34.3 million. The efficiency, as Jay alluded to earlier, was just a hair under 50% this quarter. As he said, we expect that efficiency ratio to trend closer to the mid-40s as we go through the end of the year. So I think, what you are likely to see is expenses rise on a total dollar number but the efficiency will trend lower as we grow revenues faster.

Okay, great. And then just finally, I wondered if -- just on the BankMobile front, I know you've talked in the past about the partnership -- the white-label partnership and I think you've talked about some new partnerships there. Is that -- any of that public at this point? Or do we have to wait, I guess, until you get the public filings closer to the IPO date to get some more detail there?

Our partners are very significant, and they don't want to see any leakage of their business strategies. And hence, the filing with FDIC -- Form 10 filing with FDIC, that was done along with the application to acquire the deposits as well as the business made by Flagship to FDIC was done on a confidential business regarding the white-label partnerships. So all we can say to you is that everything is on track and before the IPO, which is expected in the third quarter, our partner has agreed that they will be making, and we will be simultaneously making, the announcements as to who they are and what BankMobile's expectations are.

Okay. And any guesses to -- you talk about the public filings made closer to the actual IPO/spin-off dates. Should that -- can you give any color on that timing? Do you think that's late 2Q or too early to say at this point, on the actual public filings -- the filings being made public?

Yes, the filings will be made public right after the approval of the acquisition of deposits by -- from FDIC by Flagship, I mean, as soon as they receive that. And as you know, they filed -- they had to have -- they were -- Flagship was a private company, so they had to have audited financial statements before they could file with FDIC. So their application was filed in the first week of April. So you've got to give FDIC at least a full quarter. So we are talking third quarter, Frank. I would be -- I would love it, I think if FDIC is able to make a decision within this quarter but it's more likely that the Flagship will receive their approval in the early part of third quarter. And around the same time then Customers Bancorp will be announcing a record date for the dividend because it's a very significant, it's a very material dividend that we will be providing to our shareholders and the shareholders will be able to sign a value, and will be able to determine for themselves what is the future potential value of the dividend that we've given to them. And so all of that we believe will be a third quarter event.

We'll take our next question.

It's Mike Perito from KBW. So I had a few -- a couple of other questions. I wanted to start on the -- just with some financial-driven questions on the provision line. So it seems like, going forward, per your comments, Jay, the growth -- a lot more variable C&I production, which will obviously help the margin, help diversify the portfolio a bit. Is it fair though to assume that kind of the provisioning rates will be a -- maybe a little higher than historically when you were growing more in the multifamily and CRE space with the incremental C&I growth. And, I guess, as we look at the provisioning rate in the first quarter, obviously all the credit metrics look pretty good. So I mean, is that really kind of a growth-driven provision that we should be thinking about?

Mike, if you take a look at the Form 10-Qs historically and you'll see it in this Form 10-Q too, we do disclose the provision rates by -- and the provision levels currently by product.

And you will see that the provision rate for the C&I portfolio is about 80 basis points, 83 basis points, whereas the provisioning rate for the multifamily is about 34 basis points. So to the extent, yes -- to answer your question, yes, there will be some modest increase in the provisioning as we increase the C&I portfolio. There is a difference.

Okay. And then on the margin, the higher or lower prepayment penalty fees, it sounds like you expect that to bounce back. I was just curious if you have any thoughts on whether kind of the shape of the curve and the interest-rate environment could impact that going forward. And will that, potentially, be a bit more of a volatile item than maybe it's been historically, now that the multifamily book isn't growing? Or do you think this was more just a single quarter kind of timing-based issue?

That's an interesting question. We do study it, and we have a lot of conversations about that, Mike, because there are a number of different drivers to the prepayments that take around the commercial side as opposed to the residential, which seems to be much more sensitive to increasing interest rates and it does tend to expand. But there are a lot of different reasons that businesses act -- that drive that, and we're finding, at this point in time, that maybe a little bit less on the multifamily but we see it picking up in other areas of business where there are prepayments and there are prepayment fees. So overall, we think that the average that we've had over the past 2 years, we're not seeing a reason that it's going to deviate that. The mix of it may change from different products. But we're not really seeing the overall number changing at this point in time.

Mike, this is Bob. I might just add, Jay said, we do expect a rebound in the second quarter. We have had good activity already in the early part of this quarter. I would just say too, it obviously is a volatile number, right? We had a soft third quarter, a very strong fourth. The first quarter was not as strong again. We're looking good in the second. Quarter-to-quarter, it's a very difficult number to predict and it will bounce around.

Okay. No, that's fair. I appreciate the color, guys. And just one last one, shifting over maybe to strategic-type question the -- I want to make sure I heard it correctly. So the -- and I think the press release kind of hinted at this but the team that you hired in New York recently, that was the deposit focus team, correct, Jay?

That is correct. We've hired deposit focused team in New York, and we are also in the process of hiring -- we've already hired but in the process of announcing a C&I-focused team in our market area.

In the New York market area, or you just mean across the...

It's Pennsylvania and New Jersey market area.

Okay. And so, I guess, just the pipeline, when you talk about -- to Frank's earlier question on the deposit side, I mean you guys seem like you feel good about the stuff you have going on. I'm just curious if there is more hiring that's in your pipeline, that you're looking at or do you think that with these -- with the team currently in place, that will drive the deposit numbers that you guys are shooting for?

I think, it's not just one team, Mike, as you can appreciate. It's clearly all the efforts throughout the market area. So for the last 12 to 24 months, we've really improved our technology for our treasury-based services, and we recruited an individual from PNC, who has been very engaged in updating all our offerings. So we are pleased to share with you that there is no differentiation, practically speaking, between the product offerings and the deposit side between us and a Chase or a PNC or a BofA, and that was important for us. So we can -- so since March of this year, we have had -- we have our -- all that work is done. We had to switch to FIS from Fiserv. We announced to the public that's been done. And so with the teams coupled with the products that are needed to have those core accounts, that's why our confidence is much higher in our ability by the end of the year to see a turnaround in the deposit side and to have much more franchise enhancing-related core deposits rather than institutional and municipal deposits. Those will remain on our balance sheet but they will be much more core relationship oriented as such, and you will see an improvement in our loan-to-deposit ratio. We will see a reduction in our deposits when BankMobile is divested. So that is -- it's important for us to be working on all these efforts right now rather than at the end of third quarter because it's -- our objective is to try to get as much growth in deposits as possible before the divestiture takes place, so that we don't add meaningful numbers to our borrowings, if we decide to continue to maintain some growth and not shrink by the amount of sale of BankMobile deposits to Flagship.

Very helpful. And then justly lastly for me, I'm just curious, you guys launched the higher-yield checking. I'm good just curious what you guys learned and from the launch of the product, what kind of reaction you saw and if you guys have any kind of internal thoughts you could share with -- on the program that are kind of impacting your forward thinking?

Yes. Our consumer deposit was introduced pretty much in the branch-based consumer area. We've seen a $55 million increase in our consumer deposit since the beginning of the year. The launch of our consumer initiatives which principally were driven by that product.

We'll take our next question.

It's Joe Gladue from Merion Capital. Just wanted to get a few details on some of the fee income and expense categories, sort of the quarter-over-quarter change. And I guess, focusing on -- just on a few of the bigger items. Can you give us some detail on, I guess, the significant change in the -- sort of the other fees and income lines on the fourth quarter to first quarter about a $1.7 million increase, what was driving that?

The other fee income line is the question, Joe?

Yes.

And this is first quarter '18 or first quarter '17?

Well, I was asking for first quarter versus fourth quarter.

Yes. I mean, Joe, we can circle back to you. The fourth quarter looks like it was a little bit light to begin with. This quarter was a little bit more but there are several items that go in there. I don't think there was any one thing that was notable.

Yes, there's a number of different things. There is one -- there is an offset that comes in there related to increases that are happening -- or excuse me, expenses that are being incurred elsewhere but those things in there such as the sale of the fixed assets, little bit of OREO income. There is a uptick in the university fees for financial aid disbursement and some subscription revenue, some commercial lease income is now going into there, that's probably a big item that's included in there. Now that's up to $800,000 -- $850,000, and that's going in there at this point in time. The -- also the derivative valuation change goes in there and that was $250,000 behind this particular quarter, depending upon the way interest rates move, they can go either way. Interest rates going up with our derivative that increases their value. There is some -- also some swap premiums that are included in there. And so, as Bob had said, it's a mix of a lot of different things and nothing really stands out.

Okay. Of course, I was going to ask the similar question, just on the salary and benefits line. I think that the press release talked about the first quarter '18 versus first quarter '17, which were salaries line increased. But I guess, compared to fourth quarter, it was down about $1 million. And just was there any -- I guess, there's fewer days in the quarter but anything else lowering that?

I think, it was -- I can tell you a little bit. We -- after we've -- in the fourth quarter, we always have a adjustment for bonus pools. And I believe that may have had a bigger impact in the first quarter. In the first quarter, as you know, with the FICA taxes and whatnot, usually you see the salary and benefits lines go up above average a little bit. But that was more than offset by higher bonus dollars accrued by us in the fourth quarter.

We'll go next to Russell Gunther with D.A. Davidson.

First one is a bit of a follow-up to some of the others. Just hoping you could just provide some color around any targets you have for some of the newer teams that come on, be it loans or deposits?

Like I mentioned, Russell, we've announced the addition of a deposit-oriented team. We are going to be announcing addition of a C&I-oriented team. We have added to our teams in Chicago and Washington D.C. and we are also making some small additions to our various teams in New York as well as in New England. It is important that we align our teams with their talent base and the book of business that they have and what they are bringing over to us and they put together their business plans. So we look at all of that and typically, a team that we bring on, we see them breaking even within 6 months. That is a good team for us. So at this time, we are not looking at any more teams. First quarter or so is usually a more robust quarter for team acquisitions after they've had their bonuses from their previous employer. And you should not expect us to have any other significant additions at this time.

Okay. Switching to the comments you made on capital earlier. You mentioned that there are certain assets you might not seek to replace with the divestiture of BankMobile. Just if you could provide a little more color there in terms of what that strategy might look like?

So BankMobile has about $500 million of deposits. They go -- they range between $350 million to $800 million at different times from seasonality point of view. So one of the options for us would be that in third quarter, let's say, the deposits are about $500 million or $600 million, that we may choose to shrink the balance sheet by couple of hundred million dollars and not, somewhere in between and then let go of certain term assets on the other side and either sell them to BankMobile at a arm's length or in the marketplace as such. So that is what we look at from our capital allocation point of view. So that's what I meant by saying that we will take steps to not have our capital ratios be negatively impacted by the BankMobile divestiture and our goals for the end of the year capital ratio is to be significantly better than what you saw at March 31 remain, and one way or another, we expect to meet them.

Okay, very good. And then last one for me is, do you guys have a sense for just about how much capital Flagship needs to raise to get this BankMobile transaction completed?

It's approximately $100 million. So it's not significant amount because Customers Bancorp shareholders have to own 51% to keep this as a tax-free transaction. And hence, you look at -- market cap of Flagship will be more so in the $200 million-plus range.

We'll take our next question.

A couple of questions. First of all, relative to the first quarter of last year. What was special about BankMobile's noninterest income and then secondarily, what's needed to get that noninterest income growing for BankMobile?

I'll take that because I don't know if Luvleen's on the line. But [Bill], I think BankMobile's noninterest income, we don't charge any -- BankMobile doesn't charge any fees of any significance at all. So it's pretty much the debit card interchange income, which is the lion share of the noninterest income and then followed by the fees, which the nonenrolled students pay or when they use an ATM, which is out of the network, those are the 3 main sources of noninterest income and there is some seasonality to that. And -- but there was nothing significant and we -- besides that, and BankMobile did not raise any fees, in fact, if anything, is looking at moderating the fees and building new sources of revenue by retaining customers and giving them incentives to remain with BankMobile as customers for life rather than simply making approaches to increase short-term noninterest income. But when they go ahead and do their IPO, I think that will be the time for you to ask the BankMobile management team more of these questions. We are sensitive to the closeness of the IPO, and we would prefer not to talk about any of the future plans of BankMobile.

That's very, very fair. Let me ask two more questions then. Circling back to that first quarter of last year, are you able to highlight what was unique about that quarter since that is in the past? And then secondarily, can you share with us this -- what early success you are having relative to the retaining of students, as they move into the workforce?

I think, BankMobile will talk about their strategies in the IPO for retaining and attracting customers. So -- but for the last quarter, like I mentioned earlier, [Bill], there were some graduates who today are no longer students and that could have affected activities. But I'm sorry, but I don't have the details of exactly where BankMobile's details financial statements from last year first quarter. But if you are interested, we can arrange for you to speak with the BankMobile management team. And as far as to being forward looking, we would prefer not to comment on that.

(Operator Instructions)

Good, hearing no other questions. Thank you very much, ladies and gentlemen for, again, joining in and please give us a call if you have any other follow-up questions, and we look forward to speaking with you at various meetings. I know we'll be at D.A. Davidson's conference next week. We will be at KBW's conference also. And we are also going to be at Deutsche Bank Financial Services Global Conference. What else, Bob?

Three Part Advisors conference in Boston next week, too.

Okay, and Three Part Advisors' best IDEAS conference in Boston. So we are going to be looking forward to meeting many of you. Thank you so much, and have a good day.

And again, this does conclude today's conference. We thank you for your participation. You may now disconnect.