Q4 2019 Earnings Call
Excuse me every went looking for your patience and holding this call will begin momentarily. Thank you.
Good morning, and walk through the fourth quarter 2019 customers Bancorp Inc. earnings call.
At this time I'd like turn call over to Mr., Bob Ramsey. Please go ahead Sir.
Thank you Travis and good morning, everyone customer Bank Wars fourth quarter 2019 earnings release was issued yesterday afternoon, along with our Investor presentation.
Sit on the Investor Relations page of the company's website Www dot customers Bank Dot com.
In recent quarters, you'll be speaking directly to our streamlined investor presentation. So I would encourage everyone to pull a copy.
Before we begin I would like to remind you that some of the statements. We make today will be considered forward looking these forward looking statements are subject to a number of risks and uncertainties that may cause actual performance results could differ materially from what is currently anticipated.
Please note that these forward looking statements speak only as of the days this presentation.
Undertake no obligation to update these forward looking statements and lighter new information for future events, except to the extent required by applicable securities laws.
Please refer to our FCC filings.
Leading our Form 10-K , and 10- Q4 a more detailed description of the risk factors that may affect our results copies may be obtained from the FCC or by visiting the Investor Relations section of our website.
At this time, it's my pleasure to introduce customer Bank Wars, Chairman and CEO , Jason do Jay the floor is yours. Thank you very much a Bob and good morning, ladies and gentlemen.
Thank you so much for dialing in for our Q4 2019 at the entire your 2019 financial results call.
Joining me. This morning, guys. Here, then why I'm missing, Pennsylvania or did you start President Karzai Bible, Our Chief Financial Officer, Jeff supplement, our Chief Accounting Officer and couple of other colleagues up my.
Before we talk about the results as you probably have noticed by now we made a decision late in the fourth quarter to cross the 10 billion dollar Mark in total assets or we had planned all year to manage the balance sheet below this threshold to preserve our durbin exemption and focused on optimizing our balance sheet.
I'm going into fourth quarter, we found ourselves looking at considerable opportunities for growth both in the short term and the long term and a clear path forward for bank mobile as a separate company.
And that is why we decided to do a very detailed review.
And we also notice that our high are highly profitable mortgage warehouse business was not experiencing the typical level no seasonal decline that you normally see at this time in the fourth quarter. Additionally, looking at the implementation of C.. So well we saw the opportunity to add loans this year into fourth quarter.
At a fraction of the provision expense flowing through our income statement.
We would have incurred.
Considerably higher amounts relating to our income statement for the very same assets next year ultimately we weighed the cost in benefits of remaining above.
10 billion and concluded that the incremental revenues from about one of the have billion last so fabric joining us it's far exceeded the cost of durbin and the opportunities we see into future.
And as you know the Durbin de will now be affected by Durbin starting July the first so late in the quarter, we've decided that it mid.
Sense not to reduce our balance sheet as we were thinking about at some time and as a result in 29 team. We grew our total assets loans and deposits by 17%, 18% and 21% respectively for the year and we continue to see good growth opportunities ahead.
No talking about fourth quarter 2019, as you know net income to common shareholders was about $24 million or 75 cents per diluted share and fourth quarter 2019 income is up up about 70% year over year and.
So for a audra tone on average assets was 97 basis points up from 71 basis points in Q4, two when do you team and our adjusted return on average assets, which is pretax pre provision for fourth quarter 2019 was about 1.6 cents.
Oh, we're delighted to report that the margin continued to expand it expanded six basis points in the quarter. It expanded six basis points, even if you take out the prepayment income from boards third quarter and fourth quarter and for 2019 or the NIM was 2.75% on for the entire year Ann.
Spansion up 17 basis points over the 2018, and we expect to continue to see margin expansion as Carlo will talk about it at all.
Total deposits as I mentioned earlier grew 21% year over year, but more important is on demand deposits grew 34% year over year, a continuation of the gross that you've experienced over the last several quarters from a loan mix point of view, we improved the rule loan mix well see a night loan.
It's continued to grow at a healthy no pace. We are pleased to report 26% year over year growth and 6%. During Q4 29 team quote is always a very good quarter for our or what we call our specialty finance or <unk> and leasing business and we are delighted to see.
That continued improvement and growth as a result of the 15 person team that you had recruited about three or four years ago. They have now reached about four to 500 million and Outstandings.
Commercial loans to mortgage companies they increased to 850 about 840 million auto almost 60% year over year and like I mentioned earlier, we did not have been a seasonal decline of any significance, but there was a 245 million decline or 10% during Q4 29 team.
Our other consumer loans increased about little over a billion year over year as part of our strategy to diversify our balance sheet and do have.
Financial technology related opportunities into consumer business, it's all fintech business onboard the deposit side as well as a lending side of it and and we think that is very important and our entire emphasis on the into consumer area are only for prime customers.
No subprime loans at all in our portfolio the average FICO scores up this consumer loan.
This is 744 and consumer loans. So I'm pleased to report to you are performing better than expectations and if this continues indices. So the environment don't be surprised if you have some releases provisions.
Multifamily loans declined as planned 27% year over year and 15% during fourth quarter 2019 in court level talk to you wouldn't give you more of a guidance on the on that.
On the various aspects of our loan portfolio going forward from expense point of view, we that's been a very important target for us we decreased our noninterest expenses by almost a million dollars during fourth quarter 2019, but significant improvement in efficiency ratios fourth quarter 29 tuna fish.
Since you did show was about 57% down from about 70% in Q4 2018 and for the year. The efficiency ratio was 65% and if you just look at customers Bank alone our efficiency ratio was just a tad over 50%.
A bank mobile segment, we're very pleased to report to you is continuing to do broke progress in a nice way from a profitability point of view.
I didn't know earnings contribution by Bank mobile was five cents per diluted share during the fourth quarter and this is the second consecutive quarter of bank mobile segment profitability and as you know for the and then the last year and 2018 Bank Mobile segment reported loss of 42 cents a show so it's a nice tone at all.
From a credit quality point of view nonperforming loans were only 21 basis points of total loans and reserves equaled 265% of nonperforming loans and you would expect us to the board higher charge offs are generally speaking during the big so far Oh far loan portfolio and.
I'm pleased to report to you that our charge offs are running below our expectations and we expect that to continue to remain in that.
In that same category.
Before you hear from Carlo to discuss our financial results further let me briefly share with you.
Deliberations our board has been engaged with over the past year regarding vision 2025 has been a succession planning our board believes it is very prudent to go through a strategic options to review on a regular basis with a goal of helping develop a strategy that is in the long term and short term into.
Best interest of our shareholders our team members customers and that communities we serve.
The result of those deliberations the board and top management.
After a considerable amount of discussions are concluded the opportunities exist to execute a growth strategy second produced double digit growth rate in annual revenues over the next few years and potentially generate very significant returns for our shareholders.
Clearly saw an opportunity to execute what we call vision 2025, resulting in $6 in core earnings per share by year end 2025.
However to execute such a strategy in this rapidly evolving environment. It calls for a top team that has exceptional leadership and human skills financial skills technology skills and experience in capital markets in regulatory affairs and risk management.
And alignment with our culture.
The board concluded that a next generation of management team was critical to be green for maximizing the chances of superior execution as boards, our president Dickey used and I are expected to do to retirement age is in the next few years.
We conducted a thorough review of our management and leadership talent and concluded we are really blessed by an exceptional team and practically all critical areas all the bank.
As part of this process.
We are I'm delighted to share with you as we reported yesterday the board or give the additional responsibilities of Chief Executive Officer Ulster Bank to my partner colleague and friend for many years decreased and charge the board's big Guy to help grow.
The next generation of management.
And to make sure that we maximize the chances of considerably above average.
At baobab regeneration of shareholder value over the years. So now let me hand over to <expletive> to tell you a bit more about the process.
Thank you Jay and good morning, everyone I'm delighted to have an opportunity to share with you our succession planning process.
Over the past 12 months, we have been very focused on reviewing all the count at the company.
As groom future leaders.
As a result this process has.
Provided the.
The opportunity to create appointments at the bank.
Over the last several much.
We have appointed.
Oh leibold.
Who is our.
Chief Financial Officer, Treasurer, Carla brings about 30 years of experience that's deal.
And we are absolutely delighted that.
Car, let's take it on the additional responsibilities.
Measure.
I guess Goodman, who was formerly a park isn't a regional accounting firm was appointed Chief accounting.
Propose the holding company.
Jim Collins, who has been a partner a change of mine.
Lisa last 20 years and years here at that.
That that customers.
Another 10 years previous.
Initiation.
Jim was appointed or.
Executive Senior Vice President and Chief administrative officer.
Both the bank.
As Jay mentioned as a critical areas at the company of course, our risk management mismanagement. It's is led by.
Our friend and colleague for many years a top Josh.
Tom has formally our chief credit officer, and that new responsibility has been transition to Andy Bowman.
Andy also brings about 30 years of experience both in major organizations as well as regional or let's say.
Oh Wow Cunningham.
Recently appointed.
Had a specialty lending and our private banking group in New York, which is further expand to Chicago area.
Lyle also comes but a significant experience Bose.
Actually lending.
As well as the responsibility to leap.
A significant groups in major banks.
Last a 20 530 years.
Glenn Heady.
Who heads up our banking for mortgage companies.
Glenn has taken on the additional responsibilities.
Being assigned as president of the.
That group, but he also has responsibility to the.
The private banking.
Her to teach for E banking mortgage companies, which includes deposit acquisition in addition to.
Providing commercial loans too.
Mortgage companies mortgage backed companies throughout the country.
The and Steve This of course continues to be our chief lending officer.
Steve is based upon our England market.
So I think it at this point that you know the responsibility for really understanding that the key roles and the company.
And how weekend.
We continue to attract talent.
And this ever involving environment.
Board also mandated or.
Just to identify all the talent with varying skill sets, who would become candidates to succeed Jana as Jay mentioned, we retire.
We conducted a national search for that individually.
The the process did that are resolved it.
<unk> <unk> satisfactory candidates.
So felt in our and our process.
When we.
Focused on really what you know the skill set necessary as Jay mentioned the capital markets are critical.
Uh huh.
Skilled at we continue to need here at that customers, you know as well as the opportunity to really expand our our revenue generating business its.
And then the corporate development Arena.
Joe we isn't at one point.
I came to join the board and the after this exhaustive search.
Oh internally that's true we've come up let's say a solution.
Which we believe will stand the test.
And ER and as we announced yesterday and the press release.
We have come to terms with the.
Sam.
And I I couldn't be happier that.
That opportunity at and Sam has agreed to join us use it.
Actually going from today.
But the sample, we'll we'll spend a next couple of years.
Continuing to embed themselves.
Decisioning other of our future.
And that we have.
Rather robust a program set forth for Sam.
And make sure that.
As we transition to it to another like that that Sam it's positioned to complete this company.
<unk>.
So we all have read Sam's background, the press release I'd be.
<unk>.
But oh, we are absolutely delighted.
[laughter].
So with that I hand, it back again good. Thank you. Thank you <expletive> .
And Oh I've got to show this would do that or when they first brought to Sam's named to the attention to the board.
Suggested and I have excuse myself completely from any kind of a involvement in that process and a and it's really an independent board decision and but I am so delighted to that Oh, we have exceptional management team here at the company and the right time to boards because John .
Obvious to recruit and two part.
The top management team and they take that responsibility very seriously so.
So we have several candidates now at a company or two but to really take this company. After the next level.
So with that I'd like to handed over to carve that out to show. The grew a lot more details bought up an actual itself.
Thanks, Jay and good morning, everyone.
On slide five.
Which really highlights the significant improvement that we've seen in Oliver profitability metrics across the board beginning with our fourth quarter GAAP, earning money come to common shareholders was 23.9 million or 75 cents per diluted share compared to the Jaco corridor that's 68%.
Well <unk> GAAP net income and 70% growth interlude pdps.
The return on average assets was 97 basis point in fourth quarter 2019, 37% higher than the 71 basis points that we've appointed in fourth quarter 20.
Also our return on average common equity was 11.6% in fourth quarter 29 team up 53% from the year ago corner.
Assistant with that trend, you'll see similar improvements in all of our non-GAAP metrics year over here, what's core earnings for fourth quarter, 2019, 24.3 million or 76 cents per diluted share.
43% increase corn yeah.
As expected we had further NIM expansion during fourth quarter 2019, increasing six basis 0.22, 0.89% and lastly on slide five I'll just highlight the improvement that we had in the pretax pre provision adjusted our away which was up 42%.
Fourth quarter 2019th.
I'm pointing this out because it's close to 200 million of the consumer loan growth in the fourth quarter close within the last week at the year. Accordingly, we recorded provision expense I understand there, but what seem to benefit to our revenue until the first quarter 2020.
Moving on to slide six you'll see that it was relatively clean quarter from a notable items perspective, our 75 cents GAAP earnings for the fourth quarter equates to 70 cents or any kind of business banking segment, well think mobile and five cents per diluted share marking their second consent.
End of quarter profitability.
I will also comment that included in our fourth quarter results is about 800000 law and the sale of 230 million of non qualifying residential mortgages, which is included in mortgage banking income on the face of our income statement.
You recall in second quarter 2019, we recorded severance.
Since it as we made the decision [laughter].
Moving onto slide seven.
Our net interest margin expanded six basis points to to 89 in the fourth quarter up from the 283 reported in the third quarter and up 42 basis point from the trough, 2.47% that we reported in the third quarter 2018, our interest earning assets.
Yields decreased 11 basis point, when compared to the third quarter, but increased 30 basis 0.1 compared to the year at the corner.
Our fourth quarter 2019 cost of interest bearing liabilities decreased 16 basis points since third quarter, 2019% to 2.17%, but was flat when compared to the fourth quarter 20 team the cost of our interest bearing deposits was down 18.
At this point for the third quarter 2019, we do see opportunities to bring our funding cost down further in 2020 as we continue our efforts to grow core low cost deposits and run off higher cost funny looking out into 2020, we think I know.
Chris margins haven't Pete and while others are expecting flat to down margins were expecting another 20 basis points. There so net interest margin expansion.
Tapping into 20.
Moving on to deposit on slide eight.
S.J. discussed we decided to review our balance sheet growth strategy, and we're really excited about a year over year growth that we saw total deposits were up approximately 1.5 billion EUR, 21% over the year ago period with 0.7 billion of this growth.
Coming from an increased and lower cost.
For the non topic.
We also had strong loan growth and improved portfolio composition year over year as shown on slide 910, our loan mix continues to improve year over year I see an island increased 8.5 billion EUR, 26%.
Plan multifamily loans decreased 0.9 billion EUR, 27% year over here and were replaced by about an equal amount of consumer last year over year, our mortgage warehouse portfolio increased 0.8 billion or 58% [laughter].
No decline of about <unk> point 2 billion in the fourth quarter.
2019.
Focusing on our loan composition at year end, we really like the balance portfolio Corsi in islands make up about 25% of the portfolio.
Mortgage warehouse makes up close to 25% or the portfolio multifamily loans made up close to 25% of the portfolio and investment creep in consumer loan make up the remaining 25% or sell we're also really happy about the reduction.
And our multifamily portfolio and a 40% concentration that we had a year ago. We do expect this portfolio run off even further in 2020 would like but would like to keep about 10% to 15% of our total assets and multifamily loans were also being very selective.
In the multifamily loans that were trying to keep focusing on the overall relationship with the borrower and retaining those that really build franchise value.
Well, we think about the asset mix longer time, we are targeting asset composition of about 30% to 40% of course the nylon.
10% to 15%.
My family loan.
15% of the more the banking mortgage company.
About 15% to 20% in investment crate and structured commercial real estate and about 15% to 20% in consumer loans.
Moving on the operating cost and efficiency on slide 11, we did see significant improvement in our fourth quarter 2019 efficiency ratio over the year ago corner.
For the business banking segment operating expenses as a percentage of [laughter].
The average assets remained stable at about 1.5%, which has significantly lower than our peers.
Strength overall.
I will come in here that there was some portion of our overall growth strategy will result in higher interest, earning assets as well as some expense growth to drive the overall balance sheet growth.
Alright.
Turning to credit quality on slide 12, our portfolio continues to perform well at December 31st 2019, nonperforming loans to total loans were only 21 basis point and on a year to date basis net charge offs to average loans were only eight basis.
And lastly, before I turn it back over to Jay I'll make a few comments about our system implementation efforts.
We have currently estimating that day, one effect will be an increase to our existing allowance for credit loss down somewhere between 40 to 60 million on our commercial loan portfolio. Our estimate is very consistent with the industry overall at an estimated increased ranging.
2020, 30%.
Additionally.
Like most of the industry the largest estimated impact to see so it's on our consumer loan portfolio that being said, we're not expecting a material impact to our regulatory capital ratios taking into consideration. The after tax effect of the day, one impact and the three year phase.
From a regulatory capital perspective.
For 2020, we're not giving guidance on our provision expense. However, we are confirming our target of $3 or E. P. S. In 2020.
We're also comfortable with the crime range and analysts estimates in the first half of the here, but we do expect full year EPS to be the $3 were not giving quarterly EPS gun.
Sector E P S to follow what typical seasonal pattern with lower mortgage warehouse balances.
In Q1, but as should build throughout the year, we expect to grow average, earning assets Adam mid single digit pace. However, our loan growth will be more heavily weighted in the first half of the air which means that our provision expense will drop in the second half a day here.
Allowing us to grow U.P.S., even with the July one revenue headwind suddenly durbin effect.
And with that I'll turn it back HM Okay. Thank you very much a car left so.
I was kind of shared with you some of the details. So we're very pleased because they'd be built a very strong foundation for the bank and once again.
I via true what Karla mentioned that we are comfortable with a $3 heap years school years for 2020.
Let me just summarize for you the status of what we showed where the street a in October 2018, or not and listed and the basic team on that day was if you want to build a bank boards for the short term in long term with a strong very strong focus on risk management.
And and that risk management is a process that is embedded in everything that we do and then be set some study clear cut articulated.
Targets first one was that we want to achieve 125, Ohio Ottaway, what would the next two to three years. So as I shared with you in cordless yield would you ought away. It was about 1% for the Q4 2019, and that's up significant leap from <unk> 0.7, 0.7, and we are well on our way to achieve the 125 auto.
<unk> and other adjusted Ottaway pretax pre provision in Q4 2019 was about 1.6%. So you can figure out a or the the strong foundation that we build that's karla mentioned is going to that seasonality in our businesses, especially our mortgage warehouse business and also.
So in some of ours is a bank mobile business.
So that will have an effect so don't expect the straight line.
Quarter by quarter, but from a year to year bases. So we're very comfortable with $3 and no need for sure for 2020, our second goal that be articulated to you was to achieve NIM expansion to do 75 or greater by fourth quarter 2019, and I'm. So pleased to show would do the Buda.
About 290 289, a in fourth quarter 29 team and a customer's UBS has effect could be used to restructure the balance sheet, but we're not done but we believe that there's a lot of opportunity for us to lower the cost of our deposits for the do continue to improve the quality of our deposit franchise.
We continue to have a very balanced loan portfolio with a strong focus on credit risk as well as other aspects of Rick disc management.
The third priority, we shared with you was that bank mobile segment would achieve profitability by yearend 29 team and I was at a time when we had lost 45 cents Oh, so approximately what would be just four quarters in bank mobile and this is the one that the majority of you would really suspected suspecting how are we going to achieve.
This already leased to share with you today with both the noninterest income net interest income and management of expenses and opportunities for to grow the business Oh, we worked on all the levers as well as at the same time, focusing on risk management or that the bank mobility.
You bet profitability now that the customers Bancorp as cross the 10 billion dollar Mark.
Hi, Automotives should would you as you would expect us to we are the exploding every strategic option for bank mobile at this time and you should look out for information from us over the next few quarters.
On the expense side of your chewed review that it's going to be a very important focus for us and you should not expect to a us do ever get away from that focus so I'm pleased to share with you. The consolidated the good efficiency ratio was about 56% and it was about 50% for just customers bank.
At the ended the year and that's a a pretty significant improvement in all areas because our efficiency ratio was about 70%.
At the end of Q4, 2018 and that from Doug, 70%, we took it down to about 57% in one year.
End of Q4 29 team.
[noise] then no we've talked about continued improvement in our franchise I'm very pleased to show the do that Oh, Ddrs grew 34% year over year and that we continued to execute on our strategy well you have a little reducing the concentration risk, especially the concentration risk into multifamily loan.
Yeah, well, which should be we didn't do we liked the credit quality of those loans, but that became a little bit a little bit Oh.
You know some clouds over that.
We had some legislative actions, but still we do a very detailed review and we don't see any any concerns in the kind of multi family loans that you have originated over the years in New York area, but it's the laws yield higher end to end the longer duration assets is the reason main reasons, why we want to deemphasize that and a and really.
Like the shorter duration.
And also using the financial technology ER and relationships.
Both with the Fintech phones, as well as using financial technology ourselves to originate ourselves high quality from prime customers, a consumer loans up through various means and today Oh, we have a we are direct originators of Oh, both student loan refinancing.
Direct originators of course the loans.
As well as we have partner does actually was a couple of open ducks are the ones. The that we have done the most with his upstart and we plan to continue to take advantage of these opportunities.
The next I don't we talked about was maintaining a strong credit quality and superior risk management I think good color has shared with you enough about that but we remain very focused on the strongest management culture. It is obvious that you should not compare our charge offs on a percentage increase quarter to quarter without looking at the mall.
June expansion quarter to quarter, because the mix change comes with some jobs, but it's the net interest income and the revenue growth and profitability and a there's no question about it in isolation looking got charge offs is not prudent in this kind of it or is this kind of cost structure, where we are.
Looking got to restructuring our balance sheet.
And as I've stated earlier, our charge offs are running below our expectation and B you shouldn't be surprised to see sold which should we all of his question the sanity, Oh fast being coming up with T cells, but it is what it is a that you might see you a us to even come up with some releases.
In the future quarters.
And Oh, we continue to look at two capital and ER and the capital is very important for us and capital allocation is a very important decision for us and we will continue to always evaluate different options and ER and we would have we are sharing with you that.
Our goal is to well over a period of time not to go below 7% in P.C. and a and that's what we are focused on and at the same time look at opportunities to redeem our preferred stock as it becomes callable over a period of time.
So no up very quickly I want to share with you a little bit about ours is the could make the various teams. So we have the older either good or with a tremendous amount of experience in scope to real estate as well as in private equity Oh paused structured real estate Ah Ah team we see.
It's in the keys to do some a you know with some financing for for commercial finance companies that are involved in the into real estate sector.
We do that in the Cnine side anyway that is has come sooner the better credit quality. So that team is very experienced and we are expecting oh. So some very good results out of the team up over the next couple of years.
At the same time, a we are a dozen time dig and his colleagues are.
Are involved in active discussions with three or four other teams and we will report to you as we go forward on AWS up on a there's also the team. This is not the time to.
To conclude on those teams because they all want it we are only the cooling the age teams and they're all looking for their bonuses before they move over to us.
Oh, and ER last point I'd like to make is Oh I'm. So pleased to report on behalf of <unk> entire management team that this year, our management team elected to deceive all their bonuses and customers Bancorp stock.
No cash bonuses for the annual bonus so I'm pleased to report to you that including our top three and five executives, we paid out $8 million in bonus and so our management team has acquired $8 million in customers Bancorp stock.
It's sort of equivalent to insider buying and so we are a good they accepted no cash bonuses and took at all in stock and they also agreed to hold that stock for up to three years, because it'll only best over the next to three years and we're very pleased.
With that show of confidence by the entire management team and not just short term, but over the next to three years to four years for the company. So what does that mean know what is the management looking got from an outlook, which makes them feel so optimistic about the future as you know I'm seeing I'll say.
It again that you should expect us to on three Bucks a share over the year in any yes, and up and we are continuing to look at the profitability of the bank mobile segment there'll be some seasonality, but that's going to continue to remain profitable even after absorbing.
And we.
As I shared with you the Durbin will affect us starting July 1st, but Oh, we you should expect us to announce some results from our strategic options review of bank mobile as we have more information to share with you.
From a quality because point of view over the next few years up we expect a $4 in earnings are over the Internet a three year period and $6 in earnings by 2025, which technically used almost six years.
And from a core out away point of view or again, we're looking at achieving 1.25 or higher auto way within about a two two or three year period, and if you look at a balance sheet of somewhere between $15 billion to $17 billion by 2025 and.
Fly a 125 or away you can do your numbers and come up with what that means vote, yes.
Along with the assumption for sure accounts.
The current valuation as you all know based upon the January 17th closing stock price of $22.56 is that we are trading at price to book.
Off to tangible book of 86% and price to consensus 2020 bps of 7.9 times and drives to management schools for 2020 at 7.5 times, so with that.
Travis if you can please open it up for questions.
Thank you if you like to ask a question. Please signal my signaled by pressing star one point your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function has turned off to allow your signal to reach our equipment. Good press star one to ask a question.
We do have a first question.
Hi, Steve Moss with B. Riley FBR.
Hello, Steve Good morning.
Good morning, I, just want to start with maybe one follow up on the path for bank mobile should we expect the transaction to be completed by year end.
I would say so.
Okay.
That's that's helpful. And then just on the on the growth opportunities, you're seeing Jay or you know should we think about it being a little more consumer oriented in the first half a year and perhaps as the new hires come on whether its CRC and I see that growth and the latter half or you're just trying to think about how much.
We expect to see for growth in kind of what the mix of growth is.
Yes, Yes, Steve are you know we are for she and I go to second half as old as stronger for us than supposed to huh.
Also from a banking to mortgage companies, a mortgage warehouse business, usually a bit over the first quarter and the fourth quarter typically are the slowest, but then the C and I make set up for the for the mortgage warehouse weaknesses in the fourth quarter. So you should expect us.
To stay within our target allocation or we're not talking about significant increases in the consumer business beyond where we are right now in terms of allocations, but God luck has given you the guidelines for our overall allocations and you should expect a that it would be more on maintenance of our consumer business.
Some modest growth in our consumer business, along with see an eye business into first half of the year and then starting in second quarter, you should expect to see an eye as well as a mortgage warehouse business to start to pick up I'm old and you should not expect considerable amount of consumer business into second half the year and that's why.
What the indications that kinda give you a you should see earnings really accelerated in the second half of the year to get to that speed or no.
Okay. That's helpful. And then in terms of the margin outlook you know given there was an increasing consumer loan purchases and on a lot of who was in the in the latter part of a quarter.
No.
What's with the near term step up in the margin and just expand a little further on the consumer loans that were added this quarter can you give more details the type of loans was it more student or personal and just what was the overall yield on on the new new consumer loans.
Oh, well, let me just take that's quickly so the yield on the consumer loan for US we're looking at it two ways and most important whether you're looking at it is a net yield to us up to charge offs and also whether we require them at a discount or be acquired them at a premium and the ones that be originating ourselves.
Which is considered to be part of our business on the student to refinancing site up and ER and that is coming in at a about 6% for us.
And and then we will have you expect to charge offs on that side, because it's the windows refinancing to be more so in the 30 to 40 50 basis points on deposits the loan size, good expecting jobs to be the too.
3% range and up and of course and on site. So obviously, if you're looking at minimum the yields to us into five and a half percentage range. Now you can do your math overall, but that will result in a ER and in higher charge offs as a percentage of loan outstandings going forward.
Well, there, but there will be much more than offset by higher revenues are going forward, but we still have are going to be the remaining very disciplined in terms of Barbara so far a focus on just a the prime customers. We're also developing relationships with some marketplace lenders.
So that we would originate for them or and then do what you see somewhat different acts like a crossover bank and like the <unk> bank and others are doing.
So that itself a will help us.
And ER handing in keeping some of these loans voters shorter period of time on our portfolio.
And in fees, our revenues as what does increase up the income that's what the band and Sam is working very much on that side of the business the and a and we believe that will add to our revenues without adding to our but at this profile. So those are the kinds of things Steve that we are working on right now when I mentioned.
To you that we're looking at INTECH related opportunities in the consumer sector.
Okay.
[noise] excuse me in terms of them just in terms of margins step up here you know should we look about perhaps five to 10 basis points increase quarter over quarter.
I'm just kind of curious as to how we think about 20 basis points or so of margin expansion in 2020.
So we are expecting a gradual increase each quarter throughout 2020, and commenting on that full year actually 75, so far expecting 20 to 25 basis points targeting at that 3% net interest margin range on an average for 2020 .
Okay. That's helpful. Thank you very much [noise].
If you find that your question has been answered you may removed yourself from the Q by pressing star too.
Next question.
Hey, good morning, it's Mike Perito from KBW happy a happy new year everybody.
Happy New year my good to hear from you.
Start off this kinda like that.
Actual question, maybe for you Jamie I I appreciate that color that you guys provided kind of on deep Deep Board review process that sounds like you guys want to maybe in late November December .
I took into account question, but I, just wonder I I'm curious why the fixation I guess on on EPS targets. You know that are so far out I'm wondering if you could you know extrapolate out a little bit for me I mean, it seems like I come out the analyst at least my view is that you guys, where we're really focused on on the profitability and kind of blocking and tackling.
Near term towards that target and you know I guess it just seems like that 2025 bps target clouds that a little bit and removes some of the focus there I mean, maybe not for you guys from the street per or the Bachelor perspective, and I just wonder if you could Ics explore a little bit more like why the decision to provide that type of target at this point.
Yeah very good question I'm. So glad you asked that question.
Oh my the role of boards of directors is to look at both short term and long term.
And then you look at the strategy is very important not just to look at quarter to quarter into annual earnings but to also look at strategy, what kind of skill set do you need to achieve that strategy, what kind of staff levels do you need what kinda systems and in banking business is very important.
To have this management processes in place and that we have fully vetted out our strategies. So that you're looking at it from what are the risks what are the opportunities what is the we call it like becoming masters Oakley external environment as brothers Masters up our internal environment, which means and.
Authentic self assessment of what truly is a skill set.
What can we really do so we had laid out to you.
The last even at that enlisted Mike if you recall that in three to four years, you should expect us to make four bucks a share now we've said is that two years gone it's now to treat.
So it is a stepping stone we are not in the business of delivering shareholder value by focusing one quarter to quarter earnings. We are in the business well looking at long term and short term and building a company with strong foundation and strongest management. That's why are we decided that it was important.
When into five years, or so period that you would see a change and retirement or some top executives that it is a boards responsibility on this wasn't just done into fourth quarter. This was done throughout the year. This process started in the beginning of the year.
The search process that they mention in the review process, where all the candidates and appointment of called as the see a full it took place in the fourth quarter well. The 2018. So this is not just a a knee jerk reaction to come up with $6 land we.
It was entered we have this summits.
Twice, a year or does it summit in September or October I think we presented to the entire management team.
Our strategic plan, which game gave us the three daughters, the $4 into $6 stepping stones and what other risks involved in that and what are the opportunities involved in that and what are the other steps from an execution point of view that we are focusing on.
And and we showed that without regulators also the ending with our management team and before we would make and public we don't we're not expecting to gain anything from telling the award that we are looking at $6 and the in in five to six years and $4 into the two years.
That's up to this great because eventually felix execution that matters, but we feel that we ought to be transparent and we ought to be sure, but with the street all the things that the board of directors as their fiduciaries are expected to do from the shareholders point of view that they ought to know how the board.
Is functioning and all the management is functioning and what will be thinking from wants to add a few points.
Okay understood. Thanks for that Guy and then I'll, maybe just a couple of follow ups off that I mean, one you know it sounds like the you guys long time and external search initially one when looking for and your secession planning I think that was explaining it [laughter]. It sound like that wasn't successful I'm just curious.
You could maybe expand a little upon you know why you think that that wasn't successful was it you know something.
Skillset driven was it culturally driven it just seems like you guys casts a pretty why now I'm just curious what some of the the hold up where there and then and then secondly, you know just on on policy for the first question you know I mean.
Obviously the environment, it's dynamic right. So it's hard to know yeah, we don't who's going to be the next president or what the economies and to be like et cetera, and I guess you know as you guys look out.
I actually see P.S. targets I mean, how do you kind of prioritise profitability versus the P.S. targets. I mean, you know for example, it it's been 2023.
Uh huh.
You know you could hit your $4, yes target, but but your profitability won't reach your three year targets would you Conversely flip it the other way and is it a profitability target more priority I mean, I I understand ideal world hopefully both are cheap concurrently, but I'm just curious how you guys doing internally is what the biggest priority is the P.S. or or the profit.
Ability targets. Thank you I'll I'll answer the last one first and then let <expletive> good to talk about the details of the process. If you heard us Oh my that our number one strategic priority is targeting other tone on average assets up 125, or <unk>, we are not backing away from that.
From that we are not targeting $4. If he has an 80 basis points out away I want to make that very very very but it's very clear all right. So we're not targeting a margin of 2% and or you'd be as well so six bucks a ship.
Well I like I gave you. The example, so profitability is more important for us than DBS and B, but.
Good management teams do boats.
And that's what we're focused on Oh.
Oh, no I'm not.
Sure with you a little bit about the process and then we'll open it up for more follow up questions that you may have.
Thank you Jay Oh, the important issues to focus on.
As is our banking model.
And and arc our culture.
Most of which we think are somewhat unique in our business.
The the banking model that we that we enjoy your customers say onsite load a very flat a single point of contact back.
And it's very it's difficult for anyone to.
Not familiar with that back.
The success that back by all the efficiencies that back.
To deliver the exceptional service to our customer base very difficult for anyone to come into our or Jake.
Not intimately familiar with how that follow up rich.
So that was one ish.
But the second issue and equally is important and in some cases more important is our culture.
We have a call a non side load culture here.
To that customers.
And that is a different model than most organizations Riverside Park.
Joe in order to really continued to deliver.
Sectional performance, which as Jay mentioned to you we anticipate over the next several years.
It requires a an absolute collaboration among the banking functions in the organization.
To deliver that exceptional customer experience.
Joe you know and to lead with dignity and at least the trust.
In the process is critical.
So when you look at the universe of opportunities out there universe candidate chapter very excuse.
And our judge.
That that lineup to both our bank battle as follows our culture.
So that really caused us to.
I think differently about.
About the search.
Obviously the skills required our.
And its exceptional understanding of the capital markets exceptional understanding of the other fintech. The a dynamic changes that are taking place.
In the banking industry, especially as it relates to technology.
And up at the same time.
The line that up with a.
As a cultural.
Culture is between the Cherokee.
We're not more Perkins okay.
Are there was really the best.
Possible choice.
Uh Huh lines up with all of the critical factors.
Yeah, and our search process steps.
And I tell you just to add.
It is not easy to recruit talent and bio missing Pennsylvania.
I've done that difficult, even though it's nothing sovereigns bancorp.
It is easier to recruit talent and circling back to Boston areas and so that also became a little bit of somewhat dependent goods for us when people are doing a search.
Okay got it so Mike and so he has anybody at times, but I want everybody. So yeah, I'll I'll jump back.
Hi, guys that have cats, but thank you for the color appreciate it.
Mike.
Next question.
Good morning, it's Frank Schiraldi from Piper Sandler.
Hi, guys don't Bonnie.
But funny that sounds difference, you're not fight with Sandler [laughter].
It's hard to get you [laughter] hard to get it was hard saying, but not much has changed I guess, that's that's a good thing.
I'm not saying they did a good company.
Thanks, and I just wanted to just a couple of questions. Just curious on a first if you guys have some more detail you can provide on on not realize going through the 10 billion or given the size you were able to get to a you get that earning stream and and part.
You know a partial offset is Ah durbin, depending on on you know what happens with bank mobile I guess through 2020, but if you could share with us as it stands what the Durbin expense you know the expenses going through 10 billion, what that revenue hit it looks like for the back half of 2020.
I think a you know as you.
No that and bank mobiles income statement. The card revenues. They include a for an ATM fees and Mastercard incentive fees and other types of income and still bank mobile that ends to interchange revenues of approximately 18 or $19 million for the full year.
And Durbin is expected to reduce that amount by somewhere in that somebody in the defense one to the types of transactions Bush at a bare minimum studies would send it could be as high as 40, 50%.
So so you can figure that out but a we has called lumps here that this would you you should not expect a and impact on the on customers Bancorp, yes in the second half of the year as a result of Dorvin, because we have strategies in place to overcome that many other banks use and many are to overcome government Oh.
Oh, we do not believing that just for Durban, Dubai bank that to us makes no sense.
So we are using our organic growth and that's why when towards strategic process and a and maintaining that growth capital is important for us. So you should not expect on an average to see a considerable growth and not a assets only gas its oh, but the continued.
Mix shift to can prove our margins and continued to improve our profitability metrics like what Mike was call asking us about and not just meet yet.
Oh, Yes school by just going up our balance sheet. The main reason for increasing our or growth in assets Oh somewhat earlier than we expected was the do have a strategy. So that you should you want to street will not be disappointed because of dormant.
Okay, and then but just thinking about bank mobile you mentioned a you expect thank all to be profitable again in 2020, you know I would imagine that would be a front loaded just given that impact from durbin, but do you think you know I guess it could you share any more color on on your expectations in terms of you know levels of profitability for bank.
Mobile and do you think it can remain profitable in them in the back half the year.
Yeah, I think bank mobile should be profitable in 2020, and a and like I mentioned earlier Durbin should not be a factor until July the first.
Because the business banking segment gets the benefit from a the increases in the average earning assets like I said earlier the cost absorbing in 2020 will be allocated to that business banking segment.
The earnings benefited from the extra wanting to have billion like I said earlier is expected to politics eat the six month cost with the door.
So that is the only the way to look at it and Ah Ah and we are hopeful or like a I think a of your question by Steve.
There should be an action taken by us on Bankmobile divestiture or sometime in 20 or 22, so that Ah. That's why we are on be commenting on the second half of 2020, ER and a and then you know customers Bank Oh, we'll have a somewhat different fin tech related.
And she is very important very I can't and overemphasize, how important technology is to the business all banking in fact, I'm speaking at a participant that conference with the partly as a CEO or talking about finpac and banking on Tuesday.
And Ah and a you know we are really I was devoting a lot of time to that so it will evolve over a period of time, but we see huge opportunities to wants with Dupont up technology based services business banking.
And ER and do a so the government will not be an issue for us after 2020.
And then then just finally, just wondering if you could comment at all on a your targets in terms of capital levels, a and and.
And also you know given that 2020 hours a year, where you you know you expect I'm glad to have a you know the sort of the endgame with bank mobile is this is a would these targets be sort of less of a concern on until you know go through that process. So if you could just you know at any time targets common.
Yeah, a common ratio and or whatever whatever you know you target in terms of capital and then I'm you know when you you know sort I expect to get there.
Again, you know like I said earlier are you should do we are targeting the remaining a 7% or higher from a T.C. point of view and don't measure us on a quarter by quarter basis, because we have seasonality with slightly above average seasonality in sum up our businesses compared.
To the other banks and we are also growing.
As such so we will evaluate opportunities for the proposed and so I told so ER and looked at the call dates and ER and up. So we are capital allocation is very important for us and a and by keeping our T.C. floor at about 7%.
Door higher for 2020 on an average I think we'll give you a pretty good idea and we can manage our balance sheet to try to also achieved that by ended the year. We're pleased that the regulators are not looking at Oh, I see so charges as a as a real capital charge and I'm sure.
Sure based upon the conversations we had but some of our investors. Neither all day because it is something which is the only a which side, which a portion of the balance sheet are you, having extra capital there and a and rightfully. So when do you have more consumer higher charge off that.
Since we ought to have higher reserves and that's what we're doing a would see solvent guidance that we give to you and up and so we are confident that Oh, you know capital allocation strategy will remain an important for us, but we do not envision any cap gone common stock offerings.
At all if that's your question don't expect that for coming from us until we are creating a market multiples.
Okay, all right great. Thank you.
[laughter].
Next question.
Hey, Good morning, guys. It's also got there from Davidson.
Hello, how are you that's fine fine. Thank you.
Just want to start on the consumer portfolio. Appreciate granularity you guys shared there in terms of yeah. The mix even within that I was just hoping to get some color in terms of.
Yeah that billion plus portfolio as a whole how you're thinking about reserving for that and and what that implies or what you assume if around net charge off perspective.
I think Russell the I, let Karl I add onto this but like I shared with you earlier in one of the answers to one of the questions. You. You would you should expect on an average charge offs, Oh for 2% to 3% for the consumer loans on an annual so in C. So that's why the number is high.
It does equates to about 6% Cecil charge, you know for the consumer loans and up and because our duration is in the two to three year range for the kind of consumer loans that we are putting on and Ah, but our eggs actually charge offs are running somewhat lower that's why.
Hi, I commented that don't be surprised with the c. So methodology that we are required to follow a which.
It's kind of crazy, but it's going to make your life a lot more difficult ER and it's going to make on lifelock more difficult I don't know what the how does a benefit to it but it is what it is but so it that's why we cannot give you the guidance on the on those and it will become much more difficult for us to predict because we have to look at quantitative factors.
And qualitative factors on a quarterly basis for our entire portfolio and we'll be talking a lot about unnecessarily stuff, which doesn't shouldn't affect your order value, but it is what it is so I'm just giving you a simple answer Sim.
It was in charge offs when consumer loans. The way we are doing it is the is the is the way from an economic point of view is what you should see.
That's perfect I was I appreciate the clarification on the 2% to 3% on the whole portfolio and the dynamics. There. So thanks for clearing that up for me Jay.
Just some questions around what's going into the three dollar earnings per share number just on a few line items. If you could the first is what you guys assume from a gain on SP a loan sales.
How that would trend given what showed up in this quarter as well as whether or not the $3 assumed any contribution from preferred redemption and 2020 as well as considering buybacks.
No buybacks enjoy 20, okay, not only make that very clear to you because from our capital allocation point of view buybacks on this important and achieving our capital target. So no buybacks I think we've been looking at capital allocation on a quarter by quarter basis. If you go these <unk> all right and what does.
The opportunities or we will only buyback constant for right now if that is the best option for us and we will look I'd like to any of their office Oh available to us and it's very difficult and we do not want to get into the business. So feeling good line by line or are you.
No. It some as two beds for you and but all I can say is.
Oh look there's seasonality also in days for your lending business and you should expect more of those gains to be coming in in the fourth quarter for us we're expecting good yielding has to be Oh, you can translate that into what good means that means you should do five where you I would say is it's gonna be many movement at least what do you.
Before you know a good is.
<unk> better than what you saw okay. So ER and that's what we are expecting against the against a in the end to go to the fourth quarter of next year well. This year. Okay got it got it not very helpful. Jay. Thank you and then just to clarify though the $3 does that include what the preferred would do for 2020 or.
No something it does not okay got it.
What we factored Durbin cost I'm, just want to make got here.
Yeah, no very clear appreciate it and then.
Yeah, just stepping back it does sound like 10 billion is something that's in there rearview now kinda for good and I want to be clear or have you guys comment if that is in fact the case.
And then whether or not that.
Changes anything as it relates to your relationship with with T. Mobile and I was just trying to get a sense for you know that lost interchange revenue at least up front, how that's going to play out and what those dynamics are.
We have up but you know we 10 billion is definitely into their merger and the way. The regulations work is that if you are about EUR 10 billion football full quarters as you have to be becomes our.
Primary compliance regulator and don't have been a you know exemption is no longer there a small bank exemptions long, but no longer there that's pretty straightforward and that will apply to.
To us Oh for all our White label partners Oh, we have committed where we have committed that we will make up for the for their children.
Unless and until we find a banking partner.
That is acceptable to them and do us a you know so that they can no. There's no interruption into service and that is the commitments, we are making drawn or white label partners.
And the duration of that relationship is how long do.
Oh, it's a my believe it's a at least three years.
Okay, Great. That's it for me guys. Thank so much.
Thanks.
<unk>.
<unk>.
Hi, This is Matt Damon from Titan Capital management.
I don't know, Matt Hi, Jay a couple of questions. One just started out now that you have crossed the 10 billion dollar Mark how much of a focus is it on hiring additional teams to it to continued to grow.
I guess in particular this is probably more focused on the scene I business, but just generally speaking as well.
I think Oh I think.
They shared with you.
Matt that a you have to constantly look at or what kind of skill set and what kinda staffing levels to be need in every area of the company has been growing and Carlos should we view that you should expect some expense increases as we are continuing to increase but we are looking out there are two things very important thing.
Our aspect from a a strategy execution point of view.
One is focus you know that you got to be focused on doing a few things very well and so we are remaining very very focused on that business banking side and in the consumer side. It's all technologies related we're not getting into any business. It's not the consumer side, which are not technology trip and on the business.
Banking side also our focus is high touch.
Supported with high Tech and up so so that's why are you will see a that focus continue second thing is scale you do need scale into businesses. Okay. So that's why in businesses, where if you don't see an opportunity to scale up a it's better to get out rather than being in lots of businesses. So scale.
Sales and focus are going to drive driving our strategy.
So yes, there will be recruitments of P. whenever CBC scale, but they'll be recruitment talk teams both on the deposit side as well as onto running asset side in those opportunities for scale and Ah at the same time, if you don't see any businesses like call. It like you do the example of mortgage.
Business for the Nonqualified mortgage a you know we saw an opportunity and we quickly decided you cannot get to scale over there and it doesn't beat our property.
The Soviet quickly decided to get all at once in Awhile you know, it's always happens good things just don't work out if they don't work out get out of it and who want.
Okay. We have no further questions in the queue at this time.
Okay. Thank you very much sorry for not going beyond our one year one hour time period, but are we really appreciate you taking the time, Oh I plan to be with Carla.
To see many of you are you know we're actively O with this year. So look forward to do enjoying some hopefully some good growth in channels Revaluing 2020 and beyond thank you so much.
Thank you, ladies and gentlemen conclude todays teleconference. You may now disconnect.