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Edited Transcript of CUBI earnings conference call or presentation 25-Apr-19 1:00pm GMT

Q1 2019 Customers Bancorp Inc Earnings Call

Wyomissing May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Customers Bancorp Inc earnings conference call or presentation Thursday, April 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carla A. Leibold

Customers Bancorp, Inc. - Executive VP, CFO & Treasurer

* Jay S. Sidhu

Customers Bancorp, Inc. - Chairman & CEO

* Luvleen Sidhu

BankMobile - Co-Founder, President & Chief Strategy Officer

* Robert Hutcheson Ramsey

Customers Bancorp, Inc. - Director of IR & Strategic Planning

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Conference Call Participants

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* Frank Joseph Schiraldi

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Welcome to the First Quarter 2019 Customers Bancorp Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Bob Ramsey, Director, Investor Relations for Customers Bancorp. Please go ahead, sir.

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [2]

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Thank you, Shenade, and good morning, everyone. Customers Bancorp's first 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.

Representing the company on the call today are Jay Sidhu, Chairman and Chief Executive Officer; Dick Ehst, Chief Operating Officer; Carla Leibold, Chief Financial Officer; Luvleen Sidhu, President and Chief Strategy Officer of BankMobile; and myself, Bob Ramsay, Director of Investor Relations and CFO of BankMobile.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward looking. These forward-looking statements are subject to a number of risks and uncertainties that 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 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 Customers Bancorp CEO, Jay Sidhu. Jay, the floor is yours.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [3]

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Thank you. Thank you, Bob, and good morning, ladies and gentlemen. I also want to welcome you to Customers Bancorp Q1 2019 earnings call. We are extremely excited to report to you today very significant progress in our journey to become a unique and highly focused, high performing bank, executing on a model that in our opinion is not at all reliant on branches, but rather a high tech, supported by high touch business model, with an aim of delighting our customers with exceptional service and good value, while we stay extremely focused on our critical success factors of superior risk management and superior credit quality.

As Bob mentioned, this morning Carla Leibold -- Dick Ehst, our President, and Carla Leibold, our CFO, are here with me in Pennsylvania. And also joining us from Manhattan is Luvleen Sidhu, the President of our BankMobile division. Carla, our CFO, will first briefly discuss highlights of Q1 results, which in our opinion are in line with or ahead of our expectations. And then I will share with you progress towards all the goals we had discussed with you at our Analyst Day on October 17 last year. Of course, we recognize that many of you must be curious and excited about the progress at BankMobile. So we will have Luvleen report on that also. So first on to Carla.

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Carla A. Leibold, Customers Bancorp, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Jay, and good morning, everyone. Consistent with Jay's opening remarks, we remain laser-focused on execution and achieving each of the goals that we laid out for you at the Analyst Day in New York in October. To that end, we've developed a 3-year strategic plan and the entire management team is actively engaged in creating shareholder value by improving profitability and growing our core banking franchise. Two quarters have passed since the Analyst Day and we are successfully executing on or ahead of our internal plan.

Now I'll talk about our first quarter 2019 financial results. On a consolidated basis, our first quarter 2019 GAAP net income available to common shareholders was $11.8 million or $0.38 per diluted share. From a segment perspective, the business banking segment earned $12 million or $0.38 per diluted share and BankMobile recorded a net loss of $163,000, which rounds up to about a $0.01 loss per diluted share. Our first quarter 2019 GAAP results do not include any significant notable or non-recurring items, so there is no difference between our GAAP and our core results for the first quarter.

From a total assets perspective, we ended the quarter at $10.1 billion, up from the $9.8 billion that we reported at December 31, 2018, and down from the $10.8 billion reported at March 31, 2018. Total loans increased 2% when compared to the prior quarter and decreased 1% when compared to the year ago quarter. Throughout the quarter, we made significant strides towards improving our loan mix, successfully increasing higher yielding C&I and consumer loans, without sacrificing overall credit quality.

At March 31, 2019, commercial and industrial loans totaled $2 billion, which represented an increase of 5% over the prior quarter and an increase of 20% year-over-year. Consumer loans, excluding residential mortgages, totaled $153 million at March 31, 2019, up $79 million from the prior quarter and $150 million from the year ago quarter. Residential mortgages were approximately $700 million at March 31, 2019, up 9% from the prior quarter and 124% from the year ago quarter. Our commercial mortgage warehouse loans totaled $1.5 billion at March 31, 2019, which represented an increase of 5% over the prior quarter and a decrease of 21% over the year ago quarter. As planned, our multi-family loans decreased to $3.2 billion, a 2% decline over the prior quarter and a 12% decrease over the year ago quarter. Investment CRE loans also declined to $1.1 billion, a decrease of 30% over the prior quarter and a 9% decrease over the year ago quarter.

On the deposit side, total deposits increased to $7.4 billion at March 31, 2019, up from $7.1 billion at December 31, 2018, and $7 billion at March 31, 2018. Executing on our strategy to improve our deposit mix, money market and saving accounts totaled $3.7 billion at March 31, 2019, up 6% from the prior quarter and 9% from the year ago quarter. Demand deposits totaled $2.2 billion, which represented an increase of 13% over the prior quarter and an increase of 23% over the year ago quarter. CDs declined to $1.6 billion at March 31, 2019, which represented a decrease of 10% over the prior quarter and a decrease of 18% over the year ago quarter.

Moving on to net interest margin. We continue to see positive momentum in our expansion efforts from the 2.47% drop that we recorded in the third quarter of 2018. Our net interest margin for the first quarter was 2.59%, which was up 2 basis points from the 2.57% that we reported in the fourth quarter of 2018. Excluding prepayment fees, we saw core margin expansion of 3 basis points. During the first quarter, the increased loan yields that we achieved from positive mix changes were mitigated somewhat by a modest increase in deposit costs, given some level of repricing that occurred as a result of the December rate hike.

Turning to credit quality, our core portfolio continues to perform remarkably well and our asset quality metrics continue to trend significantly better than our peers. At March 31, 2019, nonperforming loans to total loans were 26 basis points and total charge-offs to average loans for first quarter 2019 was 5 basis points on an annualized basis. Provision expense for first quarter totaled $4.8 million, including $4.2 million for growth in the consumer, residential mortgages and C&I loan portfolio, net of the multifamily and investment CRE runoff. In addition, there was approximately $600,000 of provisions for impaired loans.

Lastly, I'd like to provide an outlook for what the remainder of 2019 is expected to look like. We expect continued margin expansion throughout 2019, reaching at least 2.75% by the fourth quarter of 2019. Our full year net interest margin for 2019 is expected to be above 2.70%, which is in line with the consensus estimate. We are also estimating that our average interest earning assets for 2019 will be comparable to 2018 average interest earning assets. Total end-of-period loans will be relatively flat from 2018 and we expect a low to mid-single digit growth in average deposits. We are also expecting 10% to 20% growth in core non-interest income from 2018 and a core efficiency ratio in the mid-60s for 2019. BankMobile is also expected to generate a positive earnings contribution by the fourth quarter of 2019. All of this keeps us on track to earn $2.21 of core EPS in 2019.

With that, I'll turn it back to you Jay.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [5]

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Good. Thank you very much, Carla. And as Carla shared with you, back in -- on our Analyst Day in October last year, we discussed in detail with you several strategies to achieve long-term goals, which we believe will ultimately drive above-average shareholder value. We said at that time that it would take approximately 3 years to achieve these goals, but that we would provide regular updates to you on our progress. So after about 6 months, we are pleased to share with you that we are on or ahead of plan to achieve each of these goals.

As you heard from Carla, along with our Analyst Day, we have a very detailed strategic plan that we are following religiously and staying absolutely on track and that's why our confidence level is very high that we are going to meet or exceed the consensus estimate and that we will report $3 a share in core earnings in 2020.

As you may recall back in October, we shared with you the following goals. Number one was that we'd like to achieve an ROA of 1.25% as soon as practically possible. While our ROA in the first half of 2019 was impacted by the timing of some growth in certain loan categories and some front-end loading of our provision expense, we expect our ROA to be about 1% by Q4 2019, a very significant improvement from our current ROA of only 64 basis points, putting us well on our way to 1.25% ROA within 2 to 3 years. To build to this year-end ROA of about 1%, we expect 10 to 15 or perhaps as high as potentially 20 basis points NIM expansion by year-end, which will reflect mix changes in both our loans and deposits.

I will talk more about this in a minute. I think a lower provision and modest profitability from BankMobile should also contribute to higher returns by Q4 '19, as Carla just shared with you. Hence we expected to expand our margin from the 2.47% at the time of our Analyst Day to about 2.75% within five quarters by end of 2019. So just to rehash the progress to-date, as you know, our NIM expanded about 10 basis points in Q4 2018 and expanded another 2 to 3 basis points in Q1 2019 to 2.59%, or a total of 12 to 13 basis points on a core basis against our target of 2.75% that we shared with you on the Analyst Day.

So we are on track to reach our approximate 2.75% NIM target by the end of this year, expanding another, as I shared with you, at least 10 to 15 basis points over the next few quarters. Our strategy is to expand NIM further, include, as you know, favorable mix shifts on both assets as well as funding, while maintaining superior credit profile. So on an average, we are increasing yields on our loan portfolio without adding any undue risk. As Carla shared with you, in the first quarter, we added about $90 million in C&I loans, we originated about -- to over $200 million in new C&I loans with an average coupon of about 5.4%, considerably above our 4.5% or so average loan yield. But the net growth in C&I loans was only about $90 million, but still 4.7% sequentially.

We originated approximately $80 million of consumer loans in the first quarter through our direct origination efforts or through FinTech partnerships. The yield on our consumer portfolio is in excess of 9%. We are on track to add approximately $400 million of good quality, prime-only consumer loans through our own origination efforts and through partnerships with FinTechs this year.

Consumer loans today make up only about 1.4% of our assets and that is an increase from only about -- negligible, less than 1% -- less than 0.5% in Q3 of 2018. But still, it will remain a relatively small piece of our balance sheet. But we like the diversity and the fact that given our growth in our consumer business at BankMobile and our preference for some diversification through short duration assets, adding some consumer loans, but only to prime borrowers makes sense to us.

We are going to continue to be very mindful of credit quality, which has long been a hallmark of Customers Bancorp. The performance of our consumer loan portfolio to-date has been much better than what we had modeled, so we are very pleased that -- with the risk profile of our loan portfolio.

We also said that we would end 2018 with about $3.3 billion in multi-family loans, which we accomplished last year and we said that multi-family loans would decline over time to somewhere between 10% to 15% of our assets, compared to 32% today. We really like the credit quality of the multi-family loans, but the spreads today are thin and we are reducing our exposure to this lower yielding relatively fixed rate assets. We expect multi-family loans to go down by another $750 million to $1 billion by December 31, 2019.

We had stated to you that we would reduce our higher cost funding and grow core deposits. So over the past year, our borrowings are down by about little over $1 billion and our deposits have grown by about $400 million. We grew deposits at the same time we improved the mix. Over the past year, we grew demand deposits about 23% and reduced time deposits about 18%.

Part of the reason we love BankMobile so much is that business has an ability to grow low cost or no-cost core deposits at a very rapid pace. We said we would build capital, which would provide us greater flexibility in terms of capital deployment. Our TCE ratio today is about 100 basis points higher than where it was just 6 months ago and we have repurchased during this time period also 2% of shares outstanding at approximately 80% of tangible book.

Our board will continue to regularly evaluate the best capital allocation strategy. We do not expect to become very aggressive in stock buybacks this year, as we want to create a still stronger balance sheet and CECL will also impact capital ratios somewhat at all banks at the end of this year. We have another very unique opportunity to potentially consider buying back our preferred stock over the next 2 years or so. If we choose to implement this strategy that would eventually add about $0.45 to our EPS.

Now on to BankMobile. We stated to you that BankMobile would -- should be profitable by the end of 2019. We are very comfortable that with all the strategies that management team has implemented and is executing, we will achieve that goal. We lost less than $0.01 a share in Q1 and expect to achieve modest profitability in Q4 2019. The T-Mobile national launch was just 1 week ago, on April 18, but is already surpassing our expectations in terms of growth of new business.

I would now like to ask Luvleen, BankMobile's President, to share with you more details about BankMobile. Luvleen?

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Luvleen Sidhu, BankMobile - Co-Founder, President & Chief Strategy Officer [6]

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Great. Thank you, Jay. I would like to give you an update on the BankMobile business. It's an exciting time for us as we are at the beginning of a new growth phase. Before we talk about where we are today, I would like to briefly speak about where we began. We launched BankMobile about 4 years ago with the understanding that consumer needs and behaviors were rapidly changing and banks were slow to adapt. The reality in the U.S. is that Americans are walking into a bank branch one time a year versus interacting with their bank on a mobile device 20 to 30 times a month. Additionally, 50% of Americans don't even have enough to pay for a $400 emergency, but banks are charging these same Americans $34 billion a year in just overdraft fees.

We launched BankMobile with a mission of making banking more transparent, affordable, seamless and empowering. We started the business with a direct to consumer approach, but after our first year shifted to a B2B2C approach, which means business to business to consumer. To better position ourselves, to attract customers at higher volume and at a lower cost. We began our B2B2C strategy with our acquisition of Higher One in 2016. Through this acquisition, we now have relationships with approximately 800 colleges and universities around the country. 1 in every 3 college bound students attend one of these 800 schools. And these students are exposed to our brand and have the option to bank with us.

Our student business is showing strength, as organic deposits per active account, spend per active account and transactions per active account are all on the rise. Most recently, we added a modest monthly fee to our student account, which can be waived for those depositing $300 or more every month. Additionally, we have added the perk of 3% interest on balances up to $1,000, for those also making this $300 monthly deposits. Overall, these two strategies are helping us provide more value to those customers who are truly banking with us versus those who have a more transactional relationship with us.

I also would like to point out that the monthly fee is nominal compared to other banks and we still provide a very attractive and competitive offering to our students. We have now expanded our B2B2C strategy with our partnership with T-Mobile. T-Mobile officially launched the partnership last week on April 18. We are delighted to have T-Mobile as a partner, as we share a common mission of creating products that solve consumer pain points. We previously shared with you that with no advertising, we had over a $11 million in deposits since our pilot launch. We know that you might be curious as to what the account activity has been since the official launch. However, T-Mobile and BankMobile have agreed that for competitive reasons we are not going to share this information. All we can say is that, that it is exceeding expectations and we are very pleased by how customers and the market have received this product. We are continuing to seek out other white label opportunities across various different verticals and we'll keep you posted on progress on this front.

Today, BankMobile has about 250 employees, of which approximately 40% are entirely focused on technology development and user experience design. With this hybrid approach of being a FinTech, with a bank charter, we are well positioned to continue our growth and maintain our position of being among the fastest growing digital banks in the country.

I will now pass it back to Jay. Thank you.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [7]

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Thanks so much, Luvleen. So as you can well imagine, this is a very exciting and an important year and an important quarter for BankMobile. And like I stated earlier, we are on track to achieve profitability by year-end. As you know, in a typical bank branch in the United States, we only will end up opening about one net new checking account a week. And there were moments in the last several days that we were opening multiples of that every minute. So we are very excited about the overall BankMobile business.

So back to -- as you can see, back to a message that we have -- we shared with you on the October Analyst Day. We are very happy with our execution so far and are looking forward to continuing to update you. In January of this year, we started -- we stated that we were very comfortable with the $2.21 consensus for 2019 and once again want to report to you that we are on track. In February, we stated that the steps that we are taking this year are just the foundation to earn at least $3 in EPS in 2020 and we are happy to report to you that we are on track on that too.

Next year we will talk more about -- with you about our target -- next target, which is to earn about $4 of EPS within the next 3 to 4 years. And today we are building the foundation for that level of profitability, which will end up in very significant increase in shareholder value. And I am happy to report to you that we are on track with that as well.

So we look forward to continuing to update you on our progress in future quarters. And at this time we'd like to open the call for any questions that any of you may have. So operator, can you please help us open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Michael Perito from KBW.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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I want to start on just a couple kind of balance sheet or – [4] balance sheet questions. So Jay, you mentioned that you believe consumer loans will grow to $400 million. Just to be clear that -- that's -- because in the earnings release you -- in the consumer bucket you kind of include residential mortgages. That should be non-residential mortgage consumer piece, right, which was $153 million at the first quarter. Do you expect that figure to go to $400 million?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [3]

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That is correct, Mike.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Okay.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [5]

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And thanks for pointing that out. In the future, we will be clear in separating mortgages from consumer loans.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [6]

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No, no, that's okay. I just want to make sure I was thinking about really. And I guess a follow-up question to that, the provision in the first quarter, I think last quarter you guys had mentioned that most of the consumer growth this year was going to be early on with the provision being early on. Is that still the case, or is there more consumer growth to come over the balance of the year now than maybe 3 months ago?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [7]

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I think Mike, we had mentioned that in the first half of this year is where majority of our consumer growth would be coming from. As you know, over the last few months, we've added various consumer loan products capability. So we now offer personal loans, we offer credit cards, we offer student loan refinancing, they were all in their infancy stage. We were setting up partnerships with FinTechs. And we are very focused on excellent and superior credit quality. We are very focused on making sure that we do not do any subprime lending and we define subprime lending as anything below a 660 score. In the industry some people consider subprime lending below a 640 score. So there might be a little bit of a chunkiness compared to your expectations in terms of when he would put them on our balance sheet. But because of our commitment to credit quality and gradually increasing our mix, rather than doing it in a wholesale way, it is the core business that we are focusing on, the core franchise we are focusing on and originating consumer loans rather than simply buying them, as is our focus. So we are involved also right now in various activities to potentially pick up new platforms to further originate consumer loans for us. So that you should expect gradual increases, even after second quarter. But I expect second quarter probably will be our greatest increase in consumer loans and then it will become more modest after the second quarter.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [8]

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Okay. For you, that would suggest there's probably one more step-up in the provision in the second quarter and then consistent with what you guys said a few months ago, the back half of the year would be pretty minimal.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [9]

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But that is correct.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [10]

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Okay. I was curious, I've been asking most of my bankers this quarter, have you guys -- are you willing to share any of your initial takeaways as you look to implement CECL, for you guys especially, since the loan book is changing a bit and the reserve is changing as we go into it? I'd be curious to see if you guys are willing to provide any color or helpful commentary around that.

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Carla A. Leibold, Customers Bancorp, Inc. - Executive VP, CFO & Treasurer [11]

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So Mike, hi. This is Carla. We're not giving any guidance on our estimate at this point in time. We are confident that we are on track to implement January 1, 2020. We are tracking according to our internal plans, which include our parallel phase throughout most of 2019. But at this time we're not giving guidance on the estimated effect or range.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [12]

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Okay. Let me maybe ask the question a little bit differently then. If we fast forward a year and there was no CECL in place theoretically, and you guys were able to build to the $400 million consumer loans and bring the multi-family down as planned and grow C&I, what do you think the right reserve under the curve methodology would be for that portfolio as you see it today?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [13]

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Yeah, Mike, I think the consumer portfolio, you should [expect] the normal, based upon our quality that we are seeing, there is about 3% to 4% through reserving. It's more so, might be closer to the 3% range based upon the quality that we are seeing, on a normal course of business. But obviously I'm not a CECL expert. So Carla and our risk management team at our company are much more of those kind of experts. So what we are doing is we are being conservative in our provisioning. We think that's a prudent thing to do and we are very mindful, as Carla stated to you. Our estimates internal for CECL are pretty much in line with what you're seeing from those very few companies that have already announced. So it's nothing unique, but we will report to you the exact impact of CECL probably in the fourth quarter.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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Okay. And a couple more here, if you guys don't mind. Just, Carla, you provided some balance sheet expectations for the year which was helpful. I think you said you expected earning assets to be relatively flat year-over-year, which was I think just a hair over $10 billion in 2018. But then you also expected period-end loans to kind of be flat year-over-year. I mean does that suggest that you guys will be looking to maybe add any investment book a little bit as we move along here? So I think earning assets were only about $9.3 billion in the first quarter.

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Carla A. Leibold, Customers Bancorp, Inc. - Executive VP, CFO & Treasurer [15]

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Yeah, we're expecting our investment portfolio to stay relatively flat year-over-year.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [16]

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So I think what we're talking about is Mike, you'll see a loan growth. And you will see seasonality in our mortgage warehouse business. So you should see second quarter average earning assets are going to be quite a bit higher than the first quarter, with a higher margin, but higher provisioning, like you rightfully estimated and picked up on that. And which positions us very well for a much more improved profitability. And you can then probably see clearer our path towards getting to that 1% or so ROA by fourth quarter and very well positioned for that sort of thing to achieve the $3 in core EPS for 2020.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [17]

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Got it. Okay. So the flat loan balances was not including the held for sale bucket and that is what brings you [down to about] $10 billion of earning asset figure for the year?

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [18]

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No, I don't think that held for sale bucket is a significant piece of it. I would say -- just keep in mind the seasonality that the loans will end the year relatively flat. But as Jay mentioned, the seasonality in our business means the mortgage warehouse business, which now is more held for investment. But that does actually grow through the middle of the year. So the average earning assets will be --

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [19]

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Right, which brings up the earning assets. Yeah, okay.

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [20]

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Yes, that's right.

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Operator [21]

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We will now take our next question from Frank Schiraldi.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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Just a couple of questions on the consumer growth Jay. Just wondered if you can give a little bit more color on expectations in terms of within categories. Is it mostly in the near term going to come from relationships with FinTech partners, and then the direct will build over time, or how should we think about growth in -- the 2Q growth that sounds like it's going to be the bulk of the growth here?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [23]

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Yes, Frank, the Q2 growth, the majority of that will be through our FinTech partners as well as with some minority from direct originations. We are developing -- spending a lot of time right now developing further technology, which will really hopefully improve our direct originations. It will still be in partnership with FinTechs, but we are trying to use and investigate using different methodologies in a very compliant fashion by using the credit underwriting processes and then at the same time expanding our credit offerings of both student loan refinancing and credit cards. There is very, very little right now in those two categories, but that's where we think over a period of time you will start to see some growth also.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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Okay. And then in terms of the yields coming on, I think you mentioned 9%. Is that something that in the near term we should expect with the growth in 2Q, is that reasonable?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [25]

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I would say so.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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Okay. And then shifting gears to -- just wondered if you could talk a little bit about the C&I growth, the strong growth you continue to see, and I know you guys have expanded geographically. So if you could talk about where the strength is geographically and in what size, sort of average size range you guys are targeting in terms of outstandings?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [27]

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I think it's -- in different markets, it's different size range. So I'll start off in the Pennsylvania, New Jersey as the market. We think the average size in this market will be about $3 million average loans. In the metro New York market, it's going to be more so in the $7 million, $8 million average size range. In our New England market will be sort of in between the Pennsylvania and the metro New York market. And in Chicago and Washington D.C., it's going to be a modest $50 million or [$100 million] perhaps and that's sort of a range of total growth in each of those markets for this year. All in all, we are looking at approximately a $600 million growth in C&I. There will be some chunkiness, some seasonality to that. And so if you look at the $600 million or so, by end of the year C&I growth and about $400 million or so by the end of the year consumer growth, that's why when I shared with you that you ought to expect somewhere in that $700 million to a $1 billion reduction in multi-family and non-owner occupied CRE, that's where we open up the space on our balance sheet, so that we can prove our capital ratios, improve our reserves, improve our margins and simultaneously improve our funding and really dramatically improve the franchise value of our company. And that's what we are focused on.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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And then did you say, Jay, in Chicago and DC together that's about $200 million of the $600 million?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [29]

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No, no, no. $50 million to $100 million of the $600 million.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [30]

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$50 million to $100 million? Okay. And then finally just on BankMobile, I don't know if you have enough detail at this point to give your expectations for what sort of fee income will be generated by the change in the fee structure of the student accounts, you know the monthly fee and how much of an offset will be that offering on balances up to $1,000.

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [31]

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Yeah. Hi Frank, it's Bob. I'll take that. Yeah, we're not going to provide a lot of guidance around that. As we said, the fees were implemented very late in the first quarter, so you didn't see much impact. You will see it for a full quarter in the second quarter. We really are trying to drive customers for life and would love for all these customers to deposit the $300 a month so that we were able to waive those fees with them using the account. So we really are trying to provide a clear path, so that customers are able to avoid those fees. But there is certainly a material piece of our customer base that are not using the accounts and we do need to cover some of those costs. And so the fees are being implemented to break even on all those accounts. So that's the way we're thinking about it.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [32]

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And so at the bottom -- at the end of the day, Frank, what you'll see is there'll be a lot more transparency, and you'll see a lot more clarity in a quarter or 2 on the direction of revenues coming in from BankMobile because the fees were basically implemented in the first quarter. The business is on target. And T-Mobile partnership was really launched in this quarter, too. So we will report to you the balances on that on a regular basis. But we will not provide to your accounts -- number of accounts on a regular basis, respecting the confidentiality objectives of our partner.

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Operator [33]

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We will now take our next question from Steve Moss from B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [34]

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I guess just following up on the T-Mobile money partnership, not sure we can go into this too much, but just wonder if you could lay out kind of the stages of the rollout here going forward with T-Mobile.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [35]

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I think Steve, I'd like to direct you to T-Mobile's press release and I think they have laid out to you -- for your review and the rest of the markets review the way they are doing it. And if you -- and I'd encourage you, if you have other questions that you should call the PR folks and investor relations folks at T-Mobile as a part of your research. And all we can say to you is that we had our own internal targets and we are exceeding those so far.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [36]

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Okay. And my second question here, just looking at the non-interest income growth guidance for 10% to 20% for this year, just give some of the underlying drivers as to how to think about that.

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [37]

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Yes, sure. So obviously a piece of that does come from the BankMobile side of the house. A lot of it does, and it does include the new fees that we are charging on those deposit accounts. It does include -- while with the T-Mobile partnership we're more spread dependent and fee dependent, there are some fees that we earn there as well, so it would include that as well. I guess that's all I would say, as I see this. Most of it comes from the BankMobile side of the house and those were the two biggest factors.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [38]

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Okay. And then in terms of just the -- just thinking about the margin for the upcoming quarter, any color around the timing of the consumer loan purchases for this [quarter] to kind of get a feel for NII and the margin this quarter?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [39]

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Okay. Yes, Steve, I think it's very difficult to really project -- it's a pretty regular, gradual -- every single day we get the business. And I think it's approximately $100 million or so of the business that came in. You can assume came in in the month of April. And so I think the complete benefit of our commercial and consumer loan growth with higher yields will become evident to you in third quarter. You should assume that our mortgage -- commercial loans to mortgage companies growth is going to be higher in this quarter because of the seasonality of the business. That also is well above 5% business. So that will impact positively our margins this quarter, again compared to the first quarter. And some of the growth that we added in the first quarter was mortgage loans, as I'm sure you folks noticed. That was more in the sort of CRA mortgage loans that we have -- we are very focused on our originations or -- and our responsibilities in accordance with CRA. So at the end of the year, we added those. They weren't necessarily high yielding loans because they were CRA loans. So some of the growth that you may have expected in our margin in the first quarter were impacted by our responsibility to add those CRA loans by the end of the year or by the first -- by January. So the bottom line is we are confident that we are on the path to get to a 2.75%, plus-minus margin by the end of the year.

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Operator [40]

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We'll now take our next question from Russell Gunther from D.A. Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [41]

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Just quickly to circle back on some of Mike's questions on the provision. You guys flagged $4.2 million for growth this quarter. How much of that derived from the roughly $80 million of consumer originations?

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Carla A. Leibold, Customers Bancorp, Inc. - Executive VP, CFO & Treasurer [42]

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About $1.1 million was on the consumer side.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [43]

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Okay. Great. Thank you. And then the decision to portfolio the SBA, how much has that been contributing to commercial growth? How much is that expected to continue to contribute and is there a chance that you guys would return to the gain on sale market in 2019?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [44]

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I think we'll be opportunistic. I don't know if we really have in the past given any guidance on that. So right now it makes a lot more sense to portfolio because in the first quarter with the government shutdown there were very significant delays. And so we've gone to a holdings on some of that portfolio. But I think we will evaluate market conditions and be opportunistic. We like the credit quality of our SBA portfolio and we are actually seeing quite a bit of growth in that.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [45]

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Okay. Great, I appreciate that Jay. And then just last one for me. Is there anything that you guys can share about how T-Mobile plans to gradually market the relationship going forward?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [46]

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I wish I could share it with you and -- but the reality is, this is totally controlled by, and rightfully so and we agree with it, the news dissemination is controlled by T-Mobile and we agree with that. They are a public company and we respect that. I think I would like to guide you as we will report to you our deposit growth on a quarterly basis. We will report to you our net interest, as well as non-interest income growth in the BankMobile segment on a quarterly basis. And I think we have increased the funds transfer pricing as you know a little bit on the BankMobile segment so that folks can see that if BankMobile were an independent company how does their profitability look like. That is our objective. We know nothing now. So that the market can start to put a valuation on BankMobile and that's going to be pretty darn significant, rather than negative, which some folks have not been able to put their arms around it and we understand and respect that.

So I think you will get a lot more color on BankMobile as well as on Customers Bank. But please be patient over the next few quarters. And so that our thinking is by the end of the year there would be a lot more clarity. And so that your confidence level we are positive and the Street's confidence level we are positive on our ability to become a high performing company in a very near future and at a time when the rest of the industry is seeing margin flatness or compression, we want to see very significant margin expansion. When the rest of the industry is having a very tough time generating non-interest bearing deposits, you're going to see us have a huge increases in non-interest bearing deposits. When the rest of the industry is struggling to find earning assets, you will see us buying earning assets, which are positively impacting because the business model of the future is what we're focused on. And that is why we are very excited about our business.

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Operator [47]

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Well now take our next question from [Elise] (inaudible).

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Unidentified Analyst, [48]

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Hi, this is (inaudible) from [McKinney Capital]. Just two questions today. First question, without spending a penny on marketing and beta testing, how did T-Mobile sign up so many new customers so quickly and how would BankMobile replicate that with future white label partners?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [49]

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Let me dig a little bit and then Luvleen if you want to add anything. When you start with a customer and you identify customer pain points and you offer them products and services which directly address the customer endpoints, you get a customer reaction and the customers embrace that. Traditionally what have banks done? They've opened up more branches, longer hours, but they basically have increased their fees and they have not been customer-centric. And as Luvleen shared with you, BankMobile's philosophy. And so for our student business, we have been using that philosophy for all our white label businesses. We've been using that philosophy and I think you should expect that in the future our other white label expansion, we will only do that if it's aligned with our customer-centric philosophy. And we are not perfect. We constantly every single day evaluate every single customer response, what have we learned, how can we improve the pain points, how can we improve our customer service standards. Just yesterday Dick Ehst, our President and I were with our management team going over every single action and reaction we've gotten. We have monitored customer feedback on every half-hour basis. And that is the way you get the best.

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Unidentified Analyst, [50]

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Okay. Second question. What are the barriers for competitors to imitate this strategy with their own white label partners, or is it just a land grab?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [51]

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I think our strategy is clear. Our strategy is we are a business -- we are banking as a service business, which means traditional banks look at attracting consumer business by what they call B2B2C, which is banks through branches to the consumer to open checking accounts. What we call B2B2C is banking through a business partner to a consumer to open checking accounts. And then majority of the digital banks that you see today use a strategy of bank with high rates and deposits to the consumer to attract money. Nothing wrong with that. But that's not the strategy BankMobile is pursuing. BankMobile wants to help attract the primary banking relationship with our customers and that is where we've spent about $100 million in the last 4 years, since we launched BankMobile, and we have 140 full time people or partners who are engaged with us on developing our proprietary technology. It is not easy. It's very easy to say that it's a strategy, but it's not easy to execute. And our technology is proprietary. And we are very focused on continuing to leverage that technology and to show to our partners how they can benefit their engagement with their customers. And it has to be aligned with their strategy to improve their performance. So we look at banking as a service as a win-win. It must be win for the customer, it must be win for our partners and it's win for us and it must be done in an absolute complying fashion with superior technology and superior customer service.

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Operator [52]

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We will now take our next question from Bill Dezellem.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [53]

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I have a group of questions. First of all, relative to your $3 guidance for 2020 or your $3 target, does that include CECL, and I'm thinking about excluding any initial implementation expense -- ongoing provision, is that included when you think about the $3 target in '20?

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Carla A. Leibold, Customers Bancorp, Inc. - Executive VP, CFO & Treasurer [54]

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Yes, we did include our estimated effective CECL in those amounts.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [55]

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That's quite helpful, Carla. And then two BankMobile questions. First of all, did we hear correctly that the interest that you are paying is on balances up to $1,000, not over $1,000, is that right?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [56]

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Correct. That's totally for the student business. For BankMobile -- now T-Mobile, I think as we saw in the T-Mobile's press release, T-Mobile has clearly articulated how their product works and that is 4% interest on up to $3,000 of balances.

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [57]

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Hey, Bill, on the fee business, we pay interests up to a $1000 if they meet the minimum deposit requirement.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [58]

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Which is $300?

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Robert Hutcheson Ramsey, Customers Bancorp, Inc. - Director of IR & Strategic Planning [59]

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That's correct, per month.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [60]

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And then as we think about these white label relationships, or future white label relationships, they won't need in terms of the fees and or interest provided to look identical to T-Mobile. What you describe, the 4% that's what T-Mobile chose and how they wanted to structure it. But a different organization in the future could choose a different structure. You do have that flexibility, correct?

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [61]

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Oh yes, certainly. In fact, we have a flexibility to make sure that we meet the needs of our partners and the technology is appropriately developed in a flexible way. It's not cheap, but that's where we have the 100-and-some people working regularly and it takes time. So it's -- in our opinion it's not going to be very easy for others to copy this very quickly.

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Operator [62]

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There are no further questions in the queue at this time.

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Jay S. Sidhu, Customers Bancorp, Inc. - Chairman & CEO [63]

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Thank you very much, everybody, really appreciate your taking the time. If there are any other questions, please give us a call. Thank you and have a good day.

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Operator [64]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

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Luvleen Sidhu, BankMobile - Co-Founder, President & Chief Strategy Officer [65]

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Thank you for calling.