Customers Bancorp Q4 2023 Earnings Call Transcript

There are 13 speakers on the call.

Operator

Thank you. David Patti, Director of Communications, New Havens.

Speaker 1

Thank you, Rob, and good morning, everyone. Thank you for joining us for the Customer Bancorp's earnings call for the Q4 full year of 2023. The presentation deck you will see During today's webcast has been posted on the Investors webpage of the Bank's website at customersbank.com. You can scroll to Q4 'twenty three results and click download presentation. You can also download a PDF of the full press release at this spot.

Speaker 1

Our investor presentation 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 Please refer to our SEC filings, including our Form 10 ks 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 section of our website. At this time, it is my pleasure to introduce Customers Bancorp Chair, Jay Sidhu.

Speaker 2

Thank you, Dave, and good morning, ladies and gentlemen. Welcome to Customers Bancorp Q4 and full year 2023 earnings call. Joining me this morning are President and CEO of the Bank, Sam Sidhu Customers Bancorp CFO, Carla Leibold Customers Bank CFO, Phil Watkins. I will give you some introductory comments and then my colleagues will While the banking industry has largely recovered following the events from last spring, There is still a lot of uncertainty and lot of headwinds facing our industry. However, customers, banks, differentiated strategy industry trends gaining strong momentum in 2023 and we expect that to continue into 2024.

Speaker 2

We continue to execute on our strategic priorities and are pleased to report that we are delivering another strong quarter for our shareholders. We are also very excited about the prospects and look forward to sharing our outlook for 2024 with you later on in this presentation. As a forward thinking bank with strong risk management, we believe we are creating tremendous franchise value across the bank as an opportunity to create new and deeper existing client relationships, resulting in stronger loan and deposit growth. As you know, we are reporting $1.90 of core EPS for Q4 2023 With continued deposit transformation, higher margin, no expense growth during the quarter. We generated $1,100,000,000 of core deposit growth in the quarter.

Speaker 2

We used these deposits to improve the overall quality of our funding base, Including the planned exit of BMTX deposits from our bank on December 1st, As well as paying off about over $700,000,000 of high rate wholesale CDs during Q4. Capital levels increased substantially again with our tangible common equity to tangible asset ratio now over 7% And our CET1 increasing to 12.2%. We are extraordinarily proud of our ability to meet Exceptional with our NPA ratio down in the quarter and reserve levels are robust at almost 500%. We have only about a 1% loan exposure to the office sector of commercial real estate, and our average loan size to the offices Less than $4,000,000 We believe the office sector will continue to create challenges for the industry in the coming quarters. In addition to the future benefit from continued improvement in our deposit franchise, as well as top quartile capital ratios, We are seeing attractive loan origination opportunities.

Speaker 2

These are primarily loans where we have a holistic and primary relationship with a client. We have ample liquidity and capital to support a 10% to 15% loan growth in 2024. Moving on to Slide 4, I'd like to take a moment to reflect back on the promises we made going back to our 2018 Investor Day, Just about 5 years ago. Today, on the 5th anniversary of this Analyst Day, We are thrilled to say that we have delivered on all these promises, the promises that we made to you at that time. Here they go.

Speaker 2

Let me share those with you. Number 1, we are now, as I said earlier, 7% TCE ratio. And at that time, we were talking about perhaps getting to 7%. Number 2, we've delivered 15% average annual tangible Book value growth and at that time we were shooting for just under 10%. We've achieved a NIM of 3.31 and at that time we were at 2.40 NIM.

Speaker 2

We have a core ROA of 122 and our goal was at least 1%. We are reporting a return on common equity of 18.3 And our goal was at least $10 And we delivered $7.72 of core EPS in 2023 surpassing our is that we maintained a strong risk management culture throughout this period. Turning to Slide 5, We again reiterate our priorities to you, which remain absolutely unchanged. They are Moderating growth during these uncertain times, while strengthening our balance sheet and having a strong risk management culture. We are so proud of what we've accomplished in 2023 in an extremely challenging environment for our industry.

Speaker 2

Our commitment to risk management and a client first mindset, where clients say, Wow! Is positioning us well to navigate In this challenging environment, I want to salute and express our gratitude and thanks to all our team members for their hard work and their continued dedication to serving our clients flawlessly. Lastly, we want to recognize all our investors for their support and confidence in us. As you know, Customers Bancorp was the number one performing publicly traded bank stock in the United States in 2023, as measured by stock price and total shareholder return. Clearly, the markets are recognizing the strength of our performance, and we commit Before I pass the call on to Sam, I want to welcome Hal Ghesh to the call.

Speaker 2

Hal joins the call from B. Riley Securities, Very recently initiated coverage on Customers Bancorp. We want to thank all of the research analysts for their efforts

Speaker 3

Thanks, Jay, and good morning, everyone. We will provide more detailed guidance on 2024 at the end of the presentation, We've made significant strides in 2023, positively remixing 15% of our deposits in just the last three quarters alone. Number 2. As Jay mentioned, we bucked the industry trend by expanding margin in 2023. We'll look to sustain that momentum in 'twenty four with continued improvement of our deposit franchise and also by remixing into higher yielding loans.

Speaker 3

Number 3, we're focused on driving profitability through our steadfast commitment to operational excellence We expect we'll pay huge dividends in 'twenty four and beyond. Number 4, we will maintain we will continue to maintain A strong capital base and liquidity while growing our loan portfolio. Number 5, we will never deviate from our credit first principles. We will achieve this through ensuring the right client selection where we have a fulsome two way relationship. Number 6, Making our clients say wow is what increases customer engagement and builds franchise value, especially given the void created by the recent market disruption.

Speaker 3

Moving to Slide 7, you can see our GAAP financial highlights for the Q4 and the full year 'twenty three. Turning to Slide 8, I'll comment on our core results for the quarter and year. In the Q4 of 2023, We produced extremely strong results across all profitability metrics, earning $1.90 in core EPS So net income of $61,600,000 For the full year of 'twenty three, we produced core EPS of $7.72 On net income of $248,000,000 2023 was an exceptional year in which we delivered a record $687,000,000 in net interest income. This record is all the more impressive given that prior years benefited significantly To the tune of 100 of 1,000,000 of dollars from our efforts in PPP. Our core ROA for the Q4 was 122 And our core ROE was 16.9%.

Speaker 3

For the full year 'twenty three, our core ROA was also 1.22, And our core ROE was 18.3%. We continued our margin momentum in the quarter. The combination of our strong deposit growth and interest earning asset yield increase led to margin expansion of 11 basis points in the 4th quarter to 3.31%. This was up from 3.2% last quarter after adjusting for the outsized accretion from the portfolio we acquired from the FDIC. We continue to transform the quality of our deposit balances, which I'll provide more detail on shortly.

Speaker 3

The modest decline in Deposits in the quarter was driven by the planned outflows of service deposits that we previously disclosed as well as by the repayment of over $700,000,000 This is a very strong base for us to grow off of in 24. Credit quality remains strong As evidenced by our NPA ratio of just 13 basis points. And reserve levels remained robust at almost 500% of NPLs. While we do not see any signs of weakness in the portfolio, we remain highly focused on portfolio management. Turning to slide 9, I want to provide some additional color on the impact of the delivery of promises Jay discussed earlier.

Speaker 3

Over the last 5 years alone, we have grown our balance sheet at a 17% compounded annual growth rate. But more importantly, we've also more than doubled our deposits over the same time period. We accomplished this growth without raising a single dollar of common equity capital. Our loan to deposit ratio is now 72% as compared to 120% at the end of 2018. And our liquidity position has increased about 10 times, with our cash and short duration available for sale securities portfolio available to provide us ample liquidity to reinvest into loan growth in 2024.

Speaker 3

Now let's turn to Slide 10 to discuss how this transformation has and improved our net interest margin by more than 70 basis points. Diluted EPS is up by more than 4 times And our return on equity has increased by more than 900 basis points. While we are very proud of the transformation we have accomplished, We believe the best days for Customers Bank are ahead of us. The investments in talent and technology that we made over the last several years are reflected in our best in class We continue to see a large opportunity to capitalize on the once in a generation dislocation in the banking industry, putting commercial clients If we capture mere basis points of market share, it will have a material impact on our franchise, and anything in percentage point terms will be truly transformational. We have been extremely focused on operational excellence by improving our people, processes and technology and expect these continued efforts will pay dividends, Driving positive operating leverage.

Speaker 3

This operational excellence is evidenced by the doubling of our balance sheet since 2018, but our employee count It's down by almost 20% over a similar time period. As Carla will provide more detail on later, starting late in 2022 And accelerated early in 'twenty three, we undertook efforts to exit non strategic relationships to materially increase our capital levels. These efforts are now bearing fruit as we have ample risk weighted capital and liquidity to fund strategic franchise enhancing loan growth. We look forward to delivering for our clients and shareholders again in 'twenty four and beyond. Turning to Slide 11, the highlight of the franchise.

Speaker 3

We again generated strong core deposit growth of $1,100,000,000 in the quarter. This represents our 3rd consecutive $1,000,000,000 plus growth quarter and enabled us to repay $743,000,000 in high cost wholesale CDs in the quarter. The $3,100,000,000 of deposit growth in just the past three quarters represents a 15% positive remix of our deposit franchise. It is worth noting that our non interest bearing deposits increased by over about $1,000,000,000 over the same time period And $2,500,000,000 over the course of 2023. This is a huge testament to the power of our team in action.

Speaker 3

Similar to last quarter, I want to highlight not just the quantity, but also the quality and granularity of this deposit growth. The growth we achieved was a team effort across the franchise. Once again, more than 20 of our deposit channels saw growth in the quarter. More than 40% of these deposit channels experienced growth of $25,000,000 or more, demonstrating the broad based nature and quality of our deposit transformation. Total new commercial accounts opened in the quarter, again, was impressive and in excess of 500.

Speaker 3

As expected, Our cost of deposits increased slightly by 15 basis points in the quarter, due in large part to the planned non interest bearing service deposit outflows. I'd note that our interest expense continued to trend in the right direction, declining by $3,000,000 in the quarter, Positively impacting our net interest income. This is in contrast to all of the industry and driven by our deposit gathering successes. We remain deeply focused on the quality and stability of our deposits. And at the end of the quarter, 77% of our deposits were either insured or collateralized.

Speaker 3

Approximately $1,500,000,000 as we continue to backfill the previous growth. We anticipate onboarding this pipeline over the next 2 to 3 quarters. Turning to Slide 12. Here we highlight both the success we've had in gathering core deposits as well as in paying down wholesale funding. The $3,000,000,000 of inflows in the last couple of quarters has been used to pay down more than $2,300,000,000 of wholesale CDs And $850,000,000 of FHLB advances.

Speaker 3

But there remains a significant and impactful opportunity ahead. Approximately $2,000,000,000 of wholesale CDs will come due in 2024, which provides significant value creation opportunity as we look to convert our deposit pipeline over the next coming quarters. While this opportunity is meaningful, it is important to remind everyone that like most banks, There will always be a place for some level of wholesale funding on our balance sheet. Moving to Slide 13. Our net interest income was $173,000,000 in the 4th quarter.

Speaker 3

This number is in line with our previous quarter adjusting for the outsized accretion. Despite the modest reduction in interest earning assets, our net interest margin in the quarter was 3.31, which exceeded our 3.20 to 3.25 target guide for the quarter and represents 11 basis points of margin expansion on an apples to apples basis. We hope to continue this trend of funding mix And cost improvement in 2024. With that, I'd like to turn the call over to Carla to provide additional detail.

Speaker 4

Thank you, Sam, and good morning, everyone. On Slide 14, you can see the trends in our loan portfolio, The yield on loans and our loan to deposit ratio. We reduced our loan balances by about $600,000,000 in the 4th quarter As we remain disciplined on loan prices and selectively extending credit and using balance sheet capacity For holistic banking relationships, the consumer held for investment loan portfolio continued to decline Giving normal planned runoff, while our consumer held for sale loan strategy continues to gain momentum. In the Q4, we achieved our $10,000,000 annual run rate goal for fee and fee like income Credit Protection. We have completed our strategic loan portfolio remix and are excited about resuming loan growth.

Speaker 4

As you will hear from Sam in our 2024 guidance, we have strong conviction in our ability to resume loan growth across the bank And to do so at accretive yields. We will reinvest securities cash flows, excess cash balances Once deployed into loans that liquidity will generate approximately 300 basis points We have an enviable loan to deposit ratio Compared to our regional bank peers given the success and continued momentum of our core deposit generating initiatives. Our strong liquidity position provides us the flexibility to generate holistic, relationship based loan growth without significantly increasing the overall size of the balance sheet. Moving to Slide 15. We are pleased to report another quarter of core non interest expenses in line with our guidance.

Speaker 4

Like many banks our size and those much larger, We incurred a special assessment from the FDIC as a result of the banking failures in early 2023. Our one time expense associated with this special assessment was close to $4,000,000 and was fully accrued in the 4th quarter. Our core non interest expense to average assets remains best in class at 1.67%. Our core efficiency ratio also remains strong at 47%, which was in line with our 3rd quarter ratio After adjusting for the outsized accretion in that period. We will discuss our forward expectations later in the presentation, But I want to provide a few points of commentary right now.

Speaker 4

We committed significant resources during 2023 Importantly, none of these expense reduction opportunities will take away from client facing positions, Risk management and compliance are critical technology investments. In fact, these are the areas we plan to enhance even further By redeploying savings, many of our anticipated expense savings will come from items like contract negotiation, Vendor Optimization and Reduction in Outside Service Utilization. On Slide 16, We continue to operate with robust levels of liquidity as evidenced by more than 200% at $11,400,000,000 at year end 2023. During the Q4, we redeemed $340,000,000 Of callable Federal Home Loan Bank Advances, which had a cost of close to 6%. We also Sold 295,000,000 of securities at roughly book value.

Speaker 4

The combination of these two actions On Slide 17, we highlight a very important component of shareholder value, growth in tangible book value per share. In 2023 alone, we grew tangible book value per share by an impressive 22% That will be recovered into tangible book value per share going forward. We expect to recover about $1.50 of that in 2024. The 22% growth in tangible book value per share in 2023 Compares favorably to our regional bank peers that generated 13% growth. Our longer term track record is even more differentiated.

Speaker 4

If you look over the past 5 years, we've generated a compounded annual growth rate of 15%, While our regional bank peers have generated only 4% growth. We believe we are among the best in the industry on this metric. Based on our current outlook for earnings and recovery of AOCI in 2024, we also expect to end 2024 With more than $55 of tangible book value per share. I'll also point out that our tangible book value and GAAP book value Are virtually the same. Turning to Slide 18, our TCE ratio ended the 4th quarter at over 7%, Which was an increase of 50 basis points in a single quarter and over 100 basis points in the last two quarters.

Speaker 4

AOCI continues to negatively impact this ratio by about 64 basis points. Our estimated CET1 ratio ended the 4th quarter at 12.2%, which was an increase of 2 basis points for 2023. Adjusted for AOCI, this ratio was 11.2%, Which is top quartile among banks with an asset size between $10,000,000,000 $100,000,000,000 The improvement in our CET1 ratio Of 260 basis points is among the top 5% of all publicly traded U. S. Banks during 2023.

Speaker 4

In 2023, we executed successfully on our goals and significantly improved our capital levels. Given the continued uncertainty in the market, we feel it is prudent to continue to maintain higher levels of capital going forward. On Slide 19, credit quality in our portfolio remains strong across all metrics. Nonperforming loans ended the 4th quarter At $27,000,000 and our nonperforming asset ratio was just 13 basis points. Net charge offs overall Came in line with our expectations.

Speaker 4

Commercial net charge offs remain at very low levels and consumer net charge offs Our provision expense of $13,400,000 came in well below expectations In the Q4, primarily due to the reduction in loan balances held for investment, Which benefited provision expense by roughly $6,000,000 Absent this, provision would have been in line with our previous estimates. Our reserve level in dollars declined modestly quarter over quarter given the lower loan balances I just discussed. We feel we are well reserved at a coverage ratio of 114 basis points of total loans held for investment, Which increased 2 basis points during the Q4. We remain extremely well positioned for the potential challenges ahead For the commercial real estate market, the office and retail sectors of commercial real estate each only account for approximately 1% of our total loan portfolio and continue to perform well. With that, I'll pass the call back to Sam

Speaker 3

Thank you, Carla. Turning to Slide 20. We wanted to provide you our outlook for 2024. We've broken our guidance into 3 categories. Firstly, our financial targets.

Speaker 3

These metrics included ROA, efficiency ratio and net interest margin. You will note that as opposed to providing specific guidance, we will manage the business to an attractive efficiency ratio. We believe this provides us the flexibility to make investments Secondly, from a growth outlook perspective, our deposit growth We expect loan growth to resume in 2024. We're seeing attractive opportunities across our franchise led by our national corporate businesses. The strength of our capital and liquidity position provides us the ability to book 10% to 15% loan growth.

Speaker 3

As we mentioned previously, we anticipate this will be funded with securities and cash in 2024 as opposed to meaningfully increasing The overall size of our balance sheet. These efforts should allow us to generate PPNR growth between 10% to 15% in 24 Our operating assumptions are consistent with what we've disclosed with you over the course of the year. We will target a CET1 ratio of about 11.5% And a TCE ratio of about 7.5%. Our tax rate is expected to be between 22% 24%. With that, I'd like to finish on Slide 21 with some concluding perspectives.

Speaker 3

This was another incredibly strong quarter and year that we're very proud of I'll mention again, we generated over $3,000,000,000 of core deposit growth in the last three quarters alone, significantly improving and transforming The quality of our deposit franchise. Continuing to improve our deposit franchise remains our top priority in 2024 And we are prepared to continue this march with our robust pipeline. Our net interest margin improved substantially over the course of the year And drove higher profitability on a more liquid and better capitalized balance sheet. Our industry is looking to reach a NIM Our credit quality remains exceptional, but we will stay vigilant in monitoring our portfolio. Our business model is highly focused on risk management and our ability to

Operator

Your first question comes from the line of Hal Ghosh from B. Riley Securities. Your line is open. Hey, good morning, everyone, and Congratulations on a terrific year quarter. The loan growth guidance is simply an outlier and pretty terrific in this environment.

Operator

Can you give us a feel for the areas or industries that are contributing to this growth? And if I could ask one follow-up on expense growth, it's been

Speaker 3

Thanks, Hal. Really appreciate it and welcome officially and formally. So firstly, to focus on the loan growth and the loan portfolio, 2024 is going to be a year of Franchise enhancing loan growth as we replace the non strategic assets we removed beginning In the Q1, accelerate in the Q2 of the year with a capital call non strategic line sales and then the runoff that we've And in many cases, deposit rich customers, which include Venture Banking, Fund Finance. We also are expecting contributions from Community Banking C and I. We also like our fixed rate equipment finance business.

Speaker 3

But all in all, we're remaining very selective. But with a 72% loan to deposit ratio, we have a tremendous amount of flexibility on our balance sheet. So 'twenty three was the year of positive transformation in 2024 is that's going to continue in 2023, but 2024 is really going to be rebuilding The loan book, frankly, to directionally close to levels that we started at the beginning of 2023. So the pipelines are strong and hopefully that answers your question on the growth part of your question. So, sure.

Speaker 3

The second question you had was, I believe, on non interest expense. So I think we've done a really good job. Carla talked about A couple of things. Firstly, we've managed our quarterly number at about $89,000,000 plus or minus of core non interest expense over the last three quarters. She also talked about some operational excellence initiatives with some detail.

Speaker 3

And really our focus, as you saw on the guidance slide, is going to be managing to an efficiency ratio. And We will continue to focus on trying to drive savings in the core, recurring expense space. Having said that, we'll continue to invest Wherever we see opportunities, you heard me talk about deposit teams and really we won't Hold back on expenses and reinvesting those savings. However, we will always hold have the governor of that efficiency ratio. So Long way of saying, we'll look to I think we're sort of at the high 40s right now.

Speaker 3

We're going to get to the mid 40s in 2024. And we'll look to at a minimum, look to maintain directionally Our core expense base, but really driving that revenue growth, which is going to help us get to that efficiency ratio target.

Speaker 5

Thank you very much.

Operator

Your next question comes

Speaker 5

from the

Operator

line of Casey Haire from Jefferies. Your line is open.

Speaker 6

Yes, thanks. Good morning, everyone. So, apologies if I missed this, but can you guys your NIM guide of 320 to 3 What kind of Fed funds forecast is embedded within that? And what kind of deposit beta are you assuming if

Speaker 3

Good morning, Casey. I'm happy to take that and Carla feel free to jump in with any clarification that I miss. So the NIM guidance is pretty wide. There's a lot of deposit remixing and loan remixing that's happening. You also heard me talk about the deposit side, the 2,000,000,000 or minus more of wholesale CDs that are maturing in 24.

Speaker 3

So really on the high end of the range, We would sort of assume cuts that it would be more in line with the Fed dot plot, But you could have faster loan originations that happened earlier in the year as opposed to middle to later part of the year. And it could assume And then the inverse really on the lower end of the range. So the range to be clear is about 3 to 6 cuts depending on the market and the Fed dot plot. So on the lower end of the range, it would be higher and faster cuts and really the inverse of what I just described.

Speaker 6

Got you. Okay. So 3 to 6 cuts, 6 cuts would, I would assume, get you to that 3.20, 3 would be to the higher end of 3.40. And then just underneath that, what kind of like, apologies, the deposit beta?

Speaker 3

Sure.

Speaker 6

Like on the first

Speaker 3

Yes, it's embedded it's really embedded in the guidance. The way to think about deposit beta is on the way up, we had a high deposit beta, which Really impacted us in 'twenty two, but really tapered off in 'twenty three. And in fact, we peaked in the Q1 of last year. High deposit beta, high cost of funds benefits you on the way down and we expect a high beta on the way down.

Speaker 6

Got you. Okay. And just lastly on your so the deposit remix, so $2,200,000,000 of wholesale CDs Maturing this year. First off, what is the rate on those maturities? And then if I'm doing the math correctly, It looks like you've got core deposits up $1,500,000,000 to $2,000,000,000 And if all in deposits are growing low single digits, There's going to be some rollover of that $2,000,000,000 Just want to make sure that's correct.

Speaker 3

Yes. Casey, good question. So overall, we'll look to remix most, If not all of that into with core deposit growth, it really depends on the overall pipeline and mix. The cost of that in this year is actually pretty close to 5%. So So there's a tremendous opportunity from a cost of funds perspective.

Speaker 3

So hopefully, one of the things I did mention is that we're down to about 18% of wholesale CDs I know from our peak a couple of quarters ago, our business model is branch light. So there's always going to be a place for some portion of wholesale funding in our balance sheet. And we'll look to be thoughtful about recasting any small portion of that over the course of the year. But again, most, if not all of that, we'd look to remix through the course of the year with core deposits.

Speaker 6

Very good. Thanks guys.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Peter Winter from D. A. Davidson. Your line is open.

Speaker 7

Thanks. Good morning. I wanted to ask about The balance sheet sensitivity, I mean, as of 3Q, the balance sheet is fairly asset sensitive. So I'm just wondering, Were you able to reduce any of that sensitivity in the Q4? And what's the plan on trying to reduce some of that in 2024?

Speaker 3

Sure. Absolutely. Good morning, Peter. So a high rate environment should be most challenging for a bank Like us, given that we don't have the retail network. However, we neuter that with the deposit trends and really the positive mix shift into non interest bearing lower cost deposits The down rate is going to be beneficial to us from an asset sensitivity perspective.

Speaker 3

As you know, there are limitations from a perspective in the sense that our K is going to be out in a couple of weeks. But even if you look at our September 30th numbers, Non interest bearing deposit growth increases your asset sensitivity. However, rolling off of Fixed rate wholesale CDs into floating rate deposits decreases your asset sensitivity. So we're very prepared for declining rates. And while we're moderately slightly asset sensitive Today, the shock that you'll sort of see in those types of financials is not necessarily representative of how we will actually operate in a gradually declining rate environment, which is what we in the market overall expect directionally, whether it's 3 or 6 to be determined.

Speaker 7

Okay. And then just how do we think about average earning assets from 4th quarter level? I mean, Positive outlook on the loans, but funded with excess cash and securities cash flows. Just how do we think about the average earning asset growth rate?

Speaker 3

So I think, I talked about the 10% to 15% growth rate. If you take the midpoint of that range, it really you can sort of directionally You're getting back to twelvethirty onetwenty 2 in terms of our directional loan balances. That earning asset mix shift is really going to be coming from cash and securities as opposed to any changes in the balance sheet. So you can sort of think of the average earning assets as Moderately flattish. I'd also mention that I think we've disclosed our securities portfolio is somewhere in the low to mid 5% range On a blended basis, our cash, as you can probably appreciate, is generating something directionally similar.

Speaker 3

And our incoming loan yields are typically, especially for some of our national corporate businesses, which is where Greater than 50% of the expected growth is planned to come from, it sort of gives you an extra 300 basis points plus or minus spread above what Those earning assets are currently yielding.

Speaker 7

Got it. Just my last question, You guys are in some of these businesses of the failed banks last year and then you of course bought Signatures Venture Capital Banking Portfolio from the FDIC. Are you seeing a lot of opportunities to add more bankers to the platform?

Speaker 3

Yes, Peter, that's a great question. I think you sort of heard me talk about Market share gains and the 100 of 1,000,000,000 of impacted customer deposits and loans from the failed institutions. I think that what's important about our business is we haven't added any new business lines or new business verticals. We happen to have a lot of High quality, low risk, high growth opportunity commercial verticals at our bank existing today. From a lending perspective, we have very strong lenders across the franchise.

Speaker 3

From a deposit perspective, I think You're absolutely right. There will be opportunities for us to find teams and individual performers In motion because clients are in motion. Clients have already changed banks once or twice in the past 12 months. And folks are looking to find high

Operator

Your next question comes from the line of Michael Perito from KBW.

Speaker 5

So obviously the guide for 2024 is pretty thorough. I just had a couple of high level questions I'd love some color on, if that's all right. Number 1 is just You guys are pretty clear and laid out the remixing opportunities for 2024. But I was wondering if you could go a layer deeper just on the mindset around Balance sheet growth. Like what are the pieces of the equation when that comes back into consideration in more earnest?

Speaker 5

Is it a certain capital level? Is it a certain amount of liquidity remixing or Just trying to get a better sense of your thought process around when balance sheet growth might and could resume.

Speaker 3

Thanks, Mike. Yes, absolutely. So So firstly, starting from a capital perspective, we hit our minimum target of 7% by the end of the year, which was really important to us. We expect in the first half of the year, We would hope to achieve at least a 7.5% TCE. I think from a regulatory capital perspective, we've more than Cleared and gotten to top quartile levels.

Speaker 3

We think it's important to be at that 7.5% type range. Focusing on the inside of the balance sheet for a time period, then I'll address So, from a loan growth perspective, I think we've pretty much covered that from sort of a transfer of cash and securities to loans within the asset side of the balance sheet. From a deposit perspective, We are while we're top quartile or top decile and all the other most important profitability and balance sheet metrics, I think from a self awareness perspective. From a deposit side, we're still on the higher end. And we'd like to continue to improve the mix and reduce the cost And the cost sensitivity of those deposit customers over the course of the coming quarters and years.

Speaker 3

And that's really what our focus is going to be on. You heard me talk about deposit led growth. I think the real differentiator for Customers Bank today is The customers and the teams that are in motion that are going to really help us enter 2025 and beyond Are going to help us build deposits first internally, and then a deposit led growth in 'twenty five and beyond, maintaining our current

Speaker 5

That's helpful color, Sam. Thanks. And then just you mentioned the expense guide kind of shifting to the efficiency ratio to to give you guys flexibility to invest where you see opportunities. Just was wondering if you could maybe spend a minute, not that you guys need more because You've obviously been very busy and done very well. But what initiatives or what does that mean?

Speaker 8

Like what are you going

Speaker 5

to look to invest in? Is it new business lines? Is it just adding more people in the business you've added over the last 2 years, just would love another layer deeper on that as we think once again about the kind of forward outlook and growth opportunities.

Speaker 3

Sure. Absolutely. Our reinvestment for the near to medium term is really going to be focused on continuing to build out the infrastructure. You heard about sort of treasury management, marketing, a lot of the support functions that allow us to have the breadth of products and services, generate fee income, enhance the customer experience. Those could also sort of bleed into sort of technology and other AI type initiatives, which will help enhance the customer But the real focus from a true material sort of non interest expense perspective It's going to be on people that help us service and acquire new customers really focus on those deposit customers.

Speaker 5

So you think the biggest area for investment will probably be growth facing people as you guys continue to scale infrastructure.

Speaker 3

That's absolutely right. Yep. There's a lot of folks that have had logos on their Business cards changed in the past 9 months and there's a lot of folks that have elected to change the logos in their business cards who are now looking to change again.

Speaker 7

Great.

Speaker 5

And then just one last one for me. Just would love a minute on kind of where you guys are at On the technology roadmap, I mean, any kind of internal investments in your core or other capabilities, just not really kind of an earnings I'm sure it's baked into your budget and efficiency ratio guide, but just would love any flavor you can give on where you guys are spending

Speaker 3

Yes. Sure, Mike. Happy to also take that. So I think that we're always Looking to streamline and improve the effectiveness of our technology platform. We were one of the first banks Going back 7 or 8 years ago to invest in middleware that sits on top of our legacy core, we are probably on the 3rd iteration of that today and continue At our institution, we have developers, we have API developers, we have a lot of experts who have come from both big and small institutions who can help us continue to enhance our technology platform.

Speaker 3

But we're really looking to rewire and re architect things Over time, again, it's not requiring investment, but it's really going to enhance and streamline the way that we look to port in and add new So that's one. Again, similarly on some of The now, I guess, more legacy type software providers like a Salesforce or Ncino were multiple years into probably second or third contract Negotiations and whenever those come up, which come up in the next sort of 12 months or so, we typically look to Pivot and reset and reuse that as an opportunity to redesign and Think about what we've learned over the past couple of years. Think about sort of the new business lines. And in many cases, what's really interesting is some of the new team members that we bring on Have different ways of doing things that we can sort of export to the rest of our organization in a very positive So hopefully that gives you a bit of flavor. I touched on AI as well.

Speaker 3

And these are the types of things that are very low stakes Investments and Initiatives.

Speaker 5

Great. No, definitely helpful. Thanks, Sam, for taking my questions. Appreciate it. Have a good weekend.

Operator

Your next question comes from the line of Steve Moss from Raymond James. Your line is open.

Speaker 6

Good morning.

Speaker 9

Sam, on the deposit pipeline here, just curious if you could give a little color on the underlying mix, Whether there's a mix shift or this quarter here and just also what you're thinking is roughly the average cost of deposits

Speaker 3

Sure. Absolutely. Good morning, Steve. So just to sort of recap, I think I mentioned this earlier, it was broad based across the franchise. This is the $1,100,000,000 of core deposit growth, not dissimilar at all to last quarter.

Speaker 3

We had almost 2 dozen, we had 20 of our deposit channels that saw Good growth and these channels had growth of $25,000,000 or more individually, which really sort of helps put In New York, about a third came from our Financial Institutions Group, and the balance was more broadly spread across the organization. So it's a little bit of a shift from Towards more of our private client groups versus last quarter, which was more focused on the Venture Banking Group because of the migration of portfolio at the end of the second quarter that really brought on those customers in the Q3. But I think what's more relevant is just to zoom out and focus on the 3,000,000,000 Over the past couple of quarters for a second because I think that really puts color on the total transformation. So about a quarter of that came from our private clients groups, 15% to 20% came from the Venture Banking Group, 20% from our Financial Institutions Group. And the balance was spread across the organization like fund finance, commercial real estate, equipment finance, consumer and others.

Speaker 3

So It's also worth mentioning, as we added $3,000,000,000 of core deposits, we also increased our non interest bearing deposits by about $1,000,000,000 over the same time period. So Hopefully that gives you color on where the deposit growth came from. The pipeline is Very similar. So don't need to sort of rehash it. But I think on the venture side, the team was more on Transitioning customers in the Q3.

Speaker 3

Q4 was outgoing business development, and we're going to start to see the customer growth So, all in rates when accounting for the non interest bearing balances are coming in not so dissimilar to last quarter and sort of that mid-three percent range right now. So I think that we're optimistic. We're getting close to an inflection point in the interest rate hiking cycle. So hopefully, this is where things will continue. Having said that, I think it's very important to note, we're not going to miss market share opportunities by standing on ceremony, especially given all of this So if we need to bring in true primary customer relationships and have a portion of those deposits be at market rates, We won't shy away from that.

Speaker 9

Okay, great. I appreciate all that color there. And then Some more questions on the loan growth side here. You mentioned the VC, Fund Finance, Community Bank C and I and Equipment Finance as drivers of loan growth. Just kind of curious, do you view like Fund Finance and Community Bank as the primary drivers relative to VC and Coven Finance?

Speaker 9

Just how do we Kind of think about that mix and the opportunities you see.

Speaker 3

Sure. So in terms of originations, I think you hit the nail on the head. It's really it's fund finance, Venture Banking, equipment finance, healthcare, on the corporate side and then community banking really will be on the sort of the more traditional C and I and Nothing really to report on CRE. What's worth noting on venture banking is, as you can appreciate, these lines are typically not like, say, a fund finance line where Their average typically average outstandings are hovering within a tight range. So you have a sense of what a commitment leads to in terms of outstanding.

Speaker 3

These are typically slow draws. So we may have originations, and that also helps be the catalyst to bring over deposit relationships. But we don't expect draws and outstandings really Thank you.

Operator

Your next question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.

Speaker 10

Good morning. Just as you talk about maintaining higher levels of capital here

Speaker 9

in the near term and

Speaker 10

you mentioned I think 11.5 percent CET1 for assumed for 2024. Just curious What you think the right level for the bank is longer term? Is the TCE ratio a bit of a governor on that? Or any sort of targets maybe When things calm down a bit and a little more certainty in the marketplace, where you think the right level of capital is?

Speaker 3

Sure. Frank, appreciate the question. So from a CET perspective, I think we had set an ambitious goal at the beginning of the year Of 11%, 11.5%, which we crossed and really got to top quartile from a regulatory capital perspective in the 3rd quarter. TCE, as you rightfully noted, has really been our governing, constraining capital level, which we've gotten to sort of What I would call the minimum of a target range and expect in the near term or the next quarter or 2 to be at that Deposit mix is more or less complete and deposit growth could potentially lead to balance sheet growth, but that's not something we expect in the next So I think 7.5% feels like the right target from a TCE perspective. So as we think about Going off of there and sort of casting a bit more of a longer term range, I think we've always talked about a broad range Of 7% to 8%.

Speaker 3

I think now that we're talking about a minimum level of wanting to get to that 7.5%, I feel like that is going to be Our more medium term target, our organic capital generation has really ramped up. And we expect

Speaker 10

Okay. And then I believe you're just under 20% total brokered at this point, deposits. And it sounds like Given maturities over the next 12 months that probably should fall below 10%. Just curious if there's any sort of Hard line in terms of where you want to get below. You mentioned brokered or wholesale is Part of the mix for a bank going forward.

Speaker 10

So just curious on that, Brian.

Speaker 3

Good question, Frank. And yes, we're at 17% Today or as of twelvethirty one, and declining even further. So I think we're more or less At the level where we would have targeted that we wanted to get to. I think even getting building off further from here It's really going to be dependent on core deposit growth. So I do think that we'll continue to make significant headway as the year progresses, getting closer to that 10% plus or minus range.

Speaker 3

There's no immediate target. There are benefits. And I think the bias and stigma for any bank for some portion of wholesale contractual insured CDUs as part of an overall funding base and funding strategy, especially for a commercial oriented Non retail branch based bank makes sense. It's something we'll continue to evaluate over time. I don't have a specific number for you in mind, but do feel that We're going to continue to significantly reduce even from the 17% we have today.

Speaker 10

Okay. And then just on the Sorry if I missed it, but on CBIIT deposits in the past, you've talked I think about a 15% max sort of From a standpoint of concentration, is that kind of where these are sitting now? And then as you think about core deposit generation, How do you think about it? Is this still core? I mean, obviously, if we get some rate contraction, that could become a little less attractive in the near term So just curious where those are and how you're thinking about that business longer term?

Speaker 3

Sure. Absolutely. So the answer to your first question is, yes, we have and continue to. And frankly, it's been very, very stable. So 2,200,000,000 plus or minus again in the quarter, so on an average deposit perspective.

Speaker 3

So that's constant for 3 quarters in a row. We're managing it very well and also managing it well with our customers and holding those in cash. In a longer term basis, we'll continue to evaluate As rates evolve, we're in discussions with customers. We're providing business critical not necessarily fully operate without the technology we're providing. So I think we feel very privileged to be in that type of position.

Speaker 3

Our customers are very privileged to be Working with us, over time as rates decline, we're still at a significant at today's rates. And so there's several 100 basis points Before that would necessarily be below our NIM average. And there are different things that we're exploring, including fees Over time, that will continue to evaluate. But we're not really holding any excess funds there. These are truly sort of

Operator

Your next question comes from the line of Matthew Breese from Stephens Inc. Your line is open.

Speaker 11

Hey, good morning everybody.

Speaker 7

Just looking at loan growth guidance for

Speaker 8

the year implies kind of a rough figure, dollars 1,600,000,000 I I know you talked about coming from cash and securities. Could you break down for us how much you expect to come from cash and how much from securities?

Speaker 3

Sure. It's I'll give you sort of rough directional numbers, Matt, just sort of based on maturity Schedules and cash flow amortization. That's typically going to be in that range of $600,000,000 to $800,000,000 that's going to come from the securities book. And the balance would come from cash. And we're at a 72% loaner deposit ratio today.

Speaker 3

Even with sort of thinking about The high end of the range would still be have a 7 handle below 80% or below from a loan to deposit ratio. So hopefully that gives you some governors and some framework to think about that.

Speaker 8

That's great. That's what I need there. And then going to the NIM, it sounded like the pipelines blended yield is in that kind of 3.50 range. It's not To dissimilar from where we are now, is that $350,000,000 a good proxy for where we might see peak deposit costs in 2024? And when do you expect that to occur?

Speaker 3

So it is I think you sort of heard me reference, we're sort of at That overall inflection point from a deposit perspective. We also talked about the wholesale CDs Continuing to decline, I think it's worth mentioning that From a growth perspective, you also heard me say that we're not going to be imprudent about taking market share. Our interest expense You know, can and should continue to decline even before rate cuts. So yes, while the output of a cost of interest bearing deposits may change, The deposit mix is really going to be the main driver of ups and downs. Interest expense should be maintained.

Speaker 3

And ideally, It should trend downwards on this sort of flattish type deposit base. So we feel privileged to be in this type of a trend. And we feel confident in sort of our deposit pipeline and backlog.

Speaker 8

Okay. And then two other quick ones. The first one is just in regards to specialty lending balances were down around $400,000,000 this quarter. And I was curious What was the drivers that, what happened there and expectations for that kind of line item for 2024?

Speaker 3

Sure. As I mentioned before, it was sort of targeted. These were lower margin, slightly below 300 basis points, 2.50 plus or minus type spread from that particular business line, from the specialty. It was within our Fund Finance business specifically focused on our lender finance business. These loans were really Rolled off in late December.

Speaker 3

We'd sort of planned for them and opted and elected not to renew. So nonstrategic From a business line as well as a customer relationship perspective, non strategic from a deposit perspective and non strategic from a primacy relationship perspective. So hopefully that gives you some color. And we'll look to that gives us sort of More opportunity to refill that with more strategic loan growth in the year. Understood.

Speaker 8

Okay. And then the last one was just appreciating that Credit metrics for solid NPAs were basically flat at 14 bps or 13 bps. I did see that substandard loans increased about 20% quarter to quarter. And I'm just curious what happened there and is there anything worth mentioning?

Speaker 12

Yes. Hey, Mac. Good morning. So Yes. The sub standards did increase by that.

Speaker 12

It's actually really related to a single credit that migrated in the portfolio. And It's worth noting on that that we actually have 100% coverage of the loan amount in cash from the borrower at the bank. So it's a bit of a unique situation. And since the quarter, there's actually been some positive developments on that credit as well. So we wouldn't be surprised to see that re upgrade during the

Speaker 8

Okay. Just curious, What was the loan tied to in terms of commercial, of course, real estate, consumer?

Speaker 3

It was something in our commercial finance, Equipment Finance business. So again, it's a large loan large relationship, dollars 60,000,000 plus. I don't know the exact number. And it's 100% backed by cash.

Speaker 8

Got it. Okay. That's all I had. Thanks for taking my questions.

Speaker 3

Sure.

Operator

Your next question comes from the line of Bill Dezellem from Titan Capital Management. Your line is open.

Speaker 11

Thank you and nice quarter. So relative to your Guidance about loan demand. Given that that's a bit unusual for the industry right now, would you talk to us about what you've seen in terms of

Speaker 3

So Two major things to highlight that I haven't already covered on the call today. Firstly, is that our lending teams have been sitting on their hands for the past 12 To 15 months, really. And I think that there's a lot of pent up demand from existing customer relationships, even when not taking into account new opportunities. That's amplified by there being now fewer competitors in many of our national corporate verticals, which I've sort of highlighted What the components of those are earlier on the call. So the combination of the pent up demand plus fewer competition And our sort of focus on these national low credit risk verticals, It's not a stretch for us.

Speaker 3

And because we were targeted in reducing our non strategic assets, It's really just getting our portfolio back to where it was 12 months ago. So it's not a stretch, and it's all relative to our size and the business lines

Speaker 11

Thank you, Sam. And then have you seen that loan demand change And get stronger over the last 4 months or basically the demand has been there, Your bankers have just been in a holding pattern.

Speaker 3

Yes. Over the last 3 to 4 months, it's really hasn't changed much. It's just been that our discipline has been on making sure we focused on capital and having a very strong base to build off of. So I haven't seen a material change. And I think what's also important to note is we're not CRE dependent like many of our And I think that's really helping to benefit us in the sense that we have a broader, more C and I commercial oriented base that's helping to source this input.

Speaker 11

That's very helpful. And I know we're running a little long here, but one final question. Long term, Not in 2024, but beyond, how are you thinking about the loan to deposit ratio? Where what's the range that you find as

Speaker 3

Sure. So I think I talked about Between sort of where we are in 80% plus or minus for this year, likely sort of staying in the sort of the mid to high 70s. Longer term, we've been sitting on very prudent cash balances. And part of that is by nature of The events of March of last year. Longer term, where we used to be at 120% in 2018, mostly driven by some of our The focus on our mortgage warehouse business, which we felt comfortable and sort of given the short duration and liquid nature of that portfolio and going to the higher end of the overall peer group.

Speaker 3

We feel probably more in the mid-eighty range, feels like a more medium term. But it's something we'll continue to communicate about

Operator

There are no further questions at this time. Mr. I turn the call back over to you for some final closing remarks.

Speaker 3

Thanks so much, everyone. We really appreciate your continued interest in and support of Customers Bank.

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Earnings Conference Call
Customers Bancorp Q4 2023
00:00 / 00:00
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