How Customers Bancorp learned to stop worrying about Durbin and love growth

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Customers Bancorp has made two changes that should have a big impact on its future.

The Wyomissing, Pa., company scrapped a longstanding plan suppress growth, ending last year with $11.5 billion in assets. That will subject Customers to the Durbin Amendment’s cap on interchange fees on July 1.

Customers also hired Sam Sidhu, the son of chairman and CEO Jay Sidhu, as its head of business development and chief operating officer of its bank, making it clear during its quarterly conference call that the younger Sidhu is in line to succeed his father.

The decision to accelerate growth hinged on several factors, including “considerable” short- and long-term lending opportunities and continued strength in the mortgage warehouse business, Jay Sidhu said during the call.

Total assets increased by 17% in 2019.

Implementation of the Current Expected Credit Loss accounting standard also played a role. CECL requires lenders to reserve for loans when they are originated, replacing a standard that required a provision only when a loan showed signs of distress.

“We saw the opportunity to add loans … at a fraction of the provision expense flowing through our income statement,” Jay Sidhu said.

"Ultimately, we weighed the costs and benefits of remaining above $10 billion and concluded that the incremental revenues from [more than $1.5 billion] of average earning assets far exceeded the cost of Durbin and the opportunities we see in the future," he added.

Customers also noticed that its mortgage warehouse business was not experiencing the typical level of seasonal decline.

The company's fourth-quarter earnings rose by 68% from a year earlier, to $23.9 million.

The sudden strategic shift could potentially pressure capital and credit metrics while limiting of Customers' flexibility, Michael Perito, an analyst at Keefe, Bruyette & Woods, wrote in a Thursday note to clients.

Customers had been avoiding caps on interchange fees because of the impact it would have on BankMobile, the digital division it created in 2015. The company had attempted to spin the unit off in 2017 but eventually decided to table the move after a regulatory snag.

Jay Sidhu said Customers recently conducted another strategic review for BankMobile, which was profitable for the second straight quarter and should stay in the black after the impact of the Durbin Amendment sets in. He promised to share more information at a later date.

BankMobile recently started offering student-loan refinancing through a partnership with LendKey, a technology firm that matches borrowers with lenders. The bank is also behind T-Mobile Money, a digital banking offering for the cellphone carrier’s customers.

Customers announced in early January that Luvleen Sidhu, Jay Sidhu’s daughter, had succeeded him as BankMobile’s CEO.

The other big news from Customers involved the addition of Sam Sidhu, 36, who had been CEO of Megalith Financial, a fintech-based special-purpose acquisition company. He has also served on the board of Customers Bank for the last eight years.

Jay Sidhu, who is in his late 60s, said during the earnings call that he recused himself from the decision.

Richard Ehst, Customers’ president and chief operating officer, outlined the process that led to the hiring decision, telling analysts that he recommended Sam Sidhu after an “exhaustive” national search failed to produce any “satisfactory” candidates.

“Sam will spend the next couple of years continuing to embed himself in the decisioning of our future,” Ehst added. “We have a rather robust program set … to make sure that, as we transition to another life, Sam is in a position to lead this company in the future.”

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