Customers Bancorp, Inc

Good morning, and welcome to the first quarter 2020 Customers Bancorp, Inc. earnings conference call. At this time, I would like to turn the call over to Bob Ramsey. Please go ahead, sir.

Thank you, Travis, and good morning, everyone. Customer Bancorp's first quarter 2020 earnings release was issued this morning along with our investor presentation. Both are posted on the investor relations page of the company's website at www.customersbank.com. Our investor presentation includes important details that we will be discussing this morning, and I would encourage everyone to pull up a copy. 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 laws. Please refer to our SEC filings, including our Form 10-K and Form 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 Sidhu Thank you very much, Bob, and good morning, ladies and gentlemen. Thank you for joining us for this call. I hope you all are safe and healthy, and as you can imagine, we are all speaking from several different locations today. I thought it would be a good idea to have several members of our management team present to be able to answer any kind of questions you have because this is an important time for everybody to understand that customers bank Corp well. So we encourage you to please look at our investor deck that we have posted on our website and please follow the deck. Joining me today, Besides Dick East, who is our President of Customers Bank, and Carla Leibold, who is the Chief Financial Officer of Customers Bank Corp., and Sam Chidoo, the Chief Operating Officer of Customers Bank, are also several members of what we call the very important executives, the Management Board of Customers Bank. Those are Andy Bowman, he is our Chief Credit Officer, Steve Vissa, our Chief Lending Officer, as well as President of our New England Market, as well as he has the commercial finance group, or the equipment leasing reporting to him. Also joining us is Lyle Cunningham. Lyle is our market president of Metro New York, our private banking teams there, as well as he's head of our specialty lending, as well as the Chicago market. And then Tim Romick is also with us today. Tim is the president of our Pennsylvania, New Jersey markets, as well as he heads our small business administration group, which has been very, very active the last couple of weeks and has contributed immensely, very significantly different numbers than what you've seen from our peer groups. And then joining us also is Glenn Hetty. Glenn is the head of our banking, the mortgage companies, and also Jim Collins. Jim is our chief administrative officer. So if we go to page two of the investor deck for first quarter that we've shared with you, I'd like to start off by talking about how privileged we all feel and so how proud we are of our team members who have really, really risen to the occasion and are working remotely. Eighty-five percent of them are working remotely, and they've done an exceptional job, in our opinion, in serving our customers, our communities very well. We've had some special pay consideration. We've had some bonuses. We've had some additional incentives for them. We've had no furloughs, and we've also added 2,500 zero-interest loans for our team members who are other than the executive officers of the company. And I'm pleased to share with you that we are so fortunate that none of our team members have been directly impacted so far by COVID-19, but their family members have been, and we pray for all those who are suffering right now. In terms of helping the consumers, as you can well imagine, our customer care center has been open 24 hours a day, seven days a week in majority of the cases. We've had a few branches that we have open their drive-in windows and appointment banking like others, but very important for the consumers, I want to share with you that it's under 5% of our consumer loan customers who are in deferment right now. which speaks somewhat about the quality of our consumer loan portfolio, and we'll discuss more of that in detail. Regarding the business customers as well as the not-for-profit segment, we are very pleased to share with you that we took advantage of helping those communities and that we have advanced For the Small Business Administration, about $5 billion in PPP loans. That's about five times to six times the average of our peer group based upon some of the information that we've glanced over that was prepared by many of you as well as investment bankers. And not only has that generated approximately $85 to $100 million in revenues for Customers Bank Corp., but has helped us attract thousands of new prospects. And we've already opened about 1,000 new business checking accounts from all of their sources, multiples of normally what you would expect from a bank in this kind of an environment where the branches are not open, but we are doing it all digitally. And We are in touch with 100% of our commercial clients, and we are pleased to share with you that it's 8% of our commercial loan customers have asked for deferments. This, again, speaks for the kind of CNI business that we've been doing, the kind of commercial real estate business we've been doing, because commercial real estate, other than multifamily, has not been a major focus for us, as you all know. Regarding the communities, we are pleased to share with you that Customers Bank has made directly or indirectly in excess of $1 million of donations for urgent COVID-19 care. We've also conducted a webinar for the entire business community in our franchise talking about how do you not only survive but also thrive in the environment after COVID-19. And we were pleased that CNBC invited me. to share with them the perspectives of community banks on this crisis. So moving on to page three, let me talk a little bit more about the Paycheck Protection Program because we have really done, I'm so proud of our teams, and we've really outperformed any of the banks in our peer group, and the results for us resemble those of the $50 to $100 billion banks in many instances. So we set out to helping banks smaller-sized businesses in all our communities. And customers expanded its platform. We developed because we have a group in our company called the FinTech Banking Group. So we developed partnerships with several SBA-approved and other FinTech platforms to expand our reach, expand our ability to help the customers. And so I'm pleased to share with you that as of Friday, 75,000 small businesses have established a relationship with Customers Bank, and we were able to offer them $5 billion, a little over $5 billion in PPP loans. Our average loan size was in the low 70s, which is well below what you've normally seen from some of the banks that we were competing with. And we expect to add approximately $85 million to $90 million in revenues from origination alone. And on top of that, in the first two months itself, those revenues from the $5 billion in loans will be approximately $1 million in net interest income in the two months that they'll stay with us. The industry is expecting up to 25% to 35% of these loans may not be forgiven and that they will stay on the balance sheet. We are we are putting all of our loans to the Federal Reserve window for the Paycheck Protection Program loan funding. And so we will get the funding in a spread of 65 basis points, and it has no impact whatsoever on our capital. So over the next two years, if 25% are not forgiven and they stay on our balance sheet, you would expect to see approximately $8 million more in annual net interest income. So you can add it all up. You're talking about approximately $95 to $100 million revenues for our company, besides helping 75,000 businesses. And that equals about, after taxes, $2.50 or so in book value, tangible revenues. common equity accretion or $2.50 book value accretion just from the PPP loans. And you will see later on, we've been pretty conservative in the reserving and still that added approximately $100 million to our reserves in the first quarter. And it just so happens that we would have added approximately $90 to $100 million over here, including their interest income. so that we have a much stronger balance sheet without any impact on our tangible common equity. From a loan modification point of view, we had to, of course, set up the deferment initiative for our borrowers who were directly impacted by COVID-19. You would hear from my colleagues talking about that. We took a very proactive action on that. And we decided to go with 30 days to 90 days type of deferment. And we did a tremendous amount of dialogue, completely understand the needs, because we believe just granting 90 days to six months of deferment is simply postponing the inevitable. And we are very, very comfortable with our asset quality and the kind of customers we have. But to make sure that there are no surprises, you have to be actively engaged in portfolio management, in our opinion. So the bottom line is our total deferment or relief represents 5.1% of our portfolio. About 4.3% of them are consumer loan customers and 7.9% of them were commercial loan customers. But the C&I deferred loans are only 1.7%, talking about that we had stayed away from some of the industries which are higher risk. and majority of our commercial deferments were in the multifamily area. Regarding customer assistance, we are actively engaged with clients to understand their situation and to minimize any credit deterioration. So 100% of the customers, Bancorp borrowers, are being contacted right now who are in deferment on a weekly basis and everybody on a monthly basis. Moving to slide four, First quarter 2020 highlights. As you know, we made, after providing $23 million in provisions in Q1, we still reported $7 million in gap earnings. Important thing is our PPNR, or pre-tax, pre-provision, or pre-provision net revenues, whatever you want to call it, was $38.6 million. And that is 53% over the first quarter of last year. That was driven by a 37% year-over-year increase in net interest income and an 11% year-over-year increase in non-interest income. Looking at the asset quality at March 31st, we built our reserves by a little over $100 million in the first quarter between 12-31 and March 31st numbers. The reserves today amount to 2.1% of our total loans for investment. That's up from 0.8% at 12-31-2019. And this compares with only 1.7% reserves for all the regional banks in the United States and 1.3% comparable reserve levels for mid-cap banks all across America. So our reserves amount to about 6.5%, 6.4% of our consumer loans. And the reserves equal 240% of our non-performing loans. And our total non-performing loans were 0.6% at March 31st. And we'll talk more about all of that. Our loan portfolio, as you've seen, grew by 18% over last year. Our CNI loans, as I mentioned earlier, grew 29% over last year. We've been gradually bringing our multifamily loans down over the last two to three years, so they were down 36% over last year. Our C&I loans make up over 50% of total loans, and commercial real estate, including multifamily, is 33%, but without multifamily is a little under 10%, or about 10% of the total loans. And our other consumer loans, which are which are home improvement loans, personal loans, as well as student loan refinancing, all combined, as well as some home equity loans, make up only about 13% of our total loans, and we like that. And the mortgages and manufactured housing are about 4% of our loans, and we have absolutely no subprime loans in our portfolio. And our definition of subprime is 660 FICO scores, not 640, as many other industries consider to be subprime. On the deposit side of it, our deposits went up 30% year over year. Our demand deposits are up 38% year over year. And from a capital point of view, our capital ratios, even excluding the accretion in capital that we will see from our efforts of retained earnings as well as our PPP efforts. Still, at March 31st, the CET1 was 10.7%. So was our Tier 1 risk-based. And the total risk base was 12.3%, and our Tier 1 leverage at 10.1% at Customers Bank. From a tangible book value point of view, excluding CECL, it was $801 million or $25.50 a share approximately. And if you include CECL, it's $23.51. And if you include the revenues we made from PPP, it's back up. to 2547, although there will be a timing issue in terms of when we will be able to recognize all the revenues coming from PPP. At March 31st, we were trading at only 0.46 times tangible book value of March 31st, as of March 31st. Moving to slide five, this is financial highlights year over year. So I wanted to emphasize year over year for you. Banks' tier one equity capital was up by 9%, and like I mentioned to you, it's 10.7% CGT1. If you look at our PB&R, that went up 53%, and the PB&R ROAA, or the return on average assets, improved by 29 basis points year over year. Our adjusted PB&R return on Common equity, that improved by 570 basis points year over year to 17.4% at March 31st. Our loans and leases, like I shared with you earlier, were up 18%. Our deposits were up 13%. DDAs up 38% year over year. Our non-interest income up 11% year over year. And like I said earlier, net interest income was up 37% year over year. If you look at slide six, you can see the tangible book value per share, as I shared with you earlier. If you look at that, that would be in our assessment, because we simply transferred the capital from the capital account to our reserve account, and so that's value per share 2560, and that means we are trading at 43% of tangible book. And you can see over here our stock price compared to tangible book. But I'm pleased to share with you that our book value per share over the last few years has been up between 8.5% to 9% per year. We move into slide 8. We at our company are very focused on risk management. And what we wanted to do was, to share with you our top five risk management priorities and discuss those with you on this call so you would have a better understanding of Customers Bank Corp. The top five risk management priorities for us are, number one, portfolio management or maintaining superior asset quality. Number two, preserving and expanding our margins. And I'll talk about each one of these separately about the highlights in a second. Number three is strong liquidity. Number four is our capital management and capital allocation process. And number five, obviously, is maintaining and improving profitability. So if you go back to the portfolio management, we are very, very focused on conservative underwriting. And my colleague, our colleague, Andy Bowman, who's our chief credit officer here, In about a minute, we'll share with you what do we mean by conservative underwriting and what our credit culture looks like. But we believe we've also been in now in this environment, especially are taking a conservative view towards reserving. The reason for that is that we, since middle of last year, have been operating in a pre-recessionary environment. We've been stress testing each and every loan, stress testing our loan portfolio and moving out of the bank the credits that were more stressed, and then trying to only focus on attracting credits where we believe in a stressed recession environment would perform better than the rest of the industry. And that's why, in addition to that, it's very important for you to note that we are having weekly contact with every one of our borrowers and deferments, and we are requiring information from them working with them, and we are in regular contact with every single borrower, maximum once a week, otherwise more frequent than that, once a month, sorry, but more frequent than that in most of the cases. And you will have my, you'll hear Andy talk more about this. Number two is preserving and expanding the margin. As you know, our margin expanded 40 basis points compared to where it was last year, March 31st, 2019. It expanded 10 basis points in Q1 2020. We expect the margin to be about 3.1% by year end, or we are saying over 3% for the entire year, every single quarter. And we believe that in this kind of an environment, it is much more important to have a stronger balance sheet and preserve your margin than to build loans. So whatever we do is we are very focused on on disciplined credit quality, disciplined pricing, as well as reducing our reliance on higher cost funding, as well as reducing our borrowings. That's why we are very confident with preserving and expanding our margin. On the liquidity side of it, the most important factors, as you know, for liquidity is strong growth in demand deposits and strong growth in core deposits. I've already shared those numbers with you. And that should result in reduced reliance on borrowings, And we have a loan-to-deposit ratio when you exclude the mortgage warehouse business that we fund with borrowing because it's only a 30-day type of loan. And so it's not a loan held for investment for us. And so we are at 87.5% of our loan-to-deposit ratio. And we have over $3 billion, which is in excess of 30% of our average assets, are extremely liquid right now. And from a capital management point of view, we are pleased to share with you that it makes no sense for us to redeem our preferred stock this year when it's becoming callable. And last year, based upon our pre-recessionary environment, style. We decided to add about $100 million in capital to the bank in the third and the fourth quarters last year. Plus, PPP will add, as I shared with you, $85 to $100 million pre-tax to our equity capital over the next couple of quarters. Both the bank and the holding company is well above the well-capitalized status. And maintaining and improving profitability, our PPNR, I've already shared with you, is showing above-average growth, and our core ROA and ROE targets within the next two to three years remain. There's a little bit of uncertainty why we can't be precise because of this environment, but we are confident that we would be in the top quartile of our peer group and our focus, which today happens to be about 125% ROA and 12% ROE. And we remain focused in the long term for having maintaining those kind of ROA and ROE ratios. And that ends up being in about $6 in core EPS within five, perhaps six years because of COVID. So now I'd like to move to slide 10. And you can just talking about our portfolio management or and our asset quality, and talking about our portfolio of assets. So CNI loans make up $2.6 billion of our loan portfolio, and the middle market in business banking itself is about $1.5 billion of it. The specialty lending is about $675 million of it, and equipment finance has about $364 million in outstanding, and this is a very, very high-performing portfolio, and well-diversified at such end. My colleagues are happy, will be happy to answer any kind of questions. The yield on that at March 31st was 4.7%. The loans to mortgage companies, it's a niche national business. We had $1.8 billion in average outstandings, which is up 46%. You can imagine where the curve is right now, that this business is booming. Right now, and it's expected to remain booming for the next at least two to three months. And we have 55, Glenn Eddy has 55 very high quality mortgage clients across the country. These are just the top quality mortgage companies, independent companies, mostly privately held in the nation. And we are a top 10 lender in this business. And we also have, as a result of being in this business, about $575 million in non-interest-bearing deposits right now. And this business also generates fee income for us, which usually averages about 30 basis points of outstanding loan balances. So it's a great business. We haven't had any losses other than an unfortunate fraud loss. at one time over the last 10 years that we've been in this business. From a commercial real estate loan point of view, like I mentioned to you, we have de-emphasized lending to retail shops. We've de-emphasized to retail shopping centers. We've de-emphasized lending to office buildings and such, but we've been focused on multifamily. And even over there, we've been de-emphasizing that over the last two years or so. So that's why The portfolio of commercial real estate is down 20% year over year. And the commercial real estate non-owner occupied was only about $1.4 billion, which is about 13%, 14% of our loan portfolio. And our multifamily is now at $2.1 billion. That's down 36% year over year. And we think you should expect this portfolio to be somewhere between $1.5 to $2 billion. We will maintain that. We are opportunistic. We think we can see some very high-quality opportunities right now, but we will remain disciplined in having higher-quality borrowers as well as the pricing has to be risk-adjusted basis. The spreads have widened a little bit, and so we will take advantage of that. As far as consumer loans are concerned, we wanted to diversify our portfolio. We wanted to build our deposits in the consumer business. We wanted to be... take the best of fintechs with the best of a bank in this business. But we wanted to be cautious. We wanted to have a limitation and put some constraints on this business as such from a growth point of view. So that's why this business, which includes personal loans, home improvement loans, student refinancing, outstandings are about $1.3 billion, which is about 13% of our loans. As such, no subprime loans at all. And again, subprime is defined as 660 for us, and you will see a lot more details that we are disclosing to you today about this business. And residential mortgages, because of interest rate risk, we have really de-emphasized that. It's only about $340 million in our portfolio. And investment securities are very clean, $700 million in our portfolio, because we have about 30-some percent of our assets are all liquid assets. You know, before we talk more about our commercial loan portfolio, and I'd like to ask Andy Bowman, who many of you may have never met, but he's a very integral part of our business. I've known Andy for, Dick and I have known Andy for many, many years. He's been with our company for many years. Andy, if you can share with the Our investors and analysts, please, a little bit about how you see and how would you define our credit culture.