Community Trust Bancorp Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2025
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Operator

Hello, and welcome to the Customers Bancorp, Inc. 2024 4th Quarter and Year End Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to David Patti of Customers Bank.

Operator

You may begin.

David Patti
David Patti
Communications Director at Customers Bancorp

Thank you, Sarah, and good morning, everyone. Thank you for joining us for the Customer Bancorp earnings webcast for Q4 and the full year 2024. The presentation deck you will see during today's webcast has been posted on the Investors webpage of the Bank's website at www.customersbank.com. You can scroll to Q4 and full year 2024 results and click Download Presentation. You can also download a PDF of the full press release at the spot.

David Patti
David Patti
Communications Director at Customers Bancorp

Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward looking. These forward looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward looking statements in light of new information or future events, except to the extent required by applicable securities laws.

David Patti
David Patti
Communications Director at Customers Bancorp

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 Relations section of our website. At this time, it's my pleasure to introduce Customers Bank's Core Chair, Jay Sidhu. Jay?

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

Thank you, David, and good morning, ladies and gentlemen. Welcome to our 2024 Q4 earnings call. I hope you all had a wonderful holiday season and are off to a great start in 2025. Joining me this morning on this call are President and CEO of Customers Bank, Sam Sidhu and Customers Bancorp's CFO, Phil Watkins. I am this morning pleased to share with you that in 2025, we'll be celebrating the 15 year anniversary of starting Customers Bancorp.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

From the humble beginnings of our family and friends making a $17,000,000 equity capital infusion to take full controlling interest in this in what was at that time a $200,000,000 asset New Century Bank and which had only $70,000,000 in core deposits, but also had 30% non performing assets From those kind of beginnings, today Customers Bancorp has been built into a thriving $22,000,000,000 asset bank, a high performing bank. Please join me in congratulating and thanking our team members and our Board of Directors who have worked very hard to make all this happen. Of Directors who have worked very hard to make all this happen. For those of us who made the $17,000,000 investment in Customers Bancorp 15 years ago, we also can celebrate because we have made about 7 times our money over over this 15 year period, even though we are still trading today at below book value. We believe that the best days of Customers Bancorp actually lie ahead.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

That's just one of the reasons why the entire management board or what many people call the executive and senior management team this year has elected to take their entire 2024 bonus in stock rather than in cash. We are a future focused bank. Through the hard work of our exceptional team, we built a franchise that is extremely ready for the future with diversified deposit and lending platforms that in our opinion are truly unique. We are very well positioned to continue our evolution from a small community bank to a well diversified regional business bank with a national presence in several niche businesses and a business model that truly reflects the single point of contact for our customers. Our strong results this past quarter and over the past several quarters and years underscores this transformation and the progress we've made.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

Reflecting on 2024, it was truly a pivotal year for us and a year of strategic investments in our foundation for the future. We believe this will stand out as one of the most transformative periods in our company's history. And like I stated earlier, we are very excited about the future of our company. Moving now to Slide 3. Most of you are familiar with the Customers Bank franchise.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

For those that are newer to our story, let me briefly highlight what makes our model unique. We are not a traditional bank. We are very well positioned, diversified, tech forward institution operating across community banking, corporate banking and digital banking franchises. We believe we are building a bank of the future. Our goal is to provide clients with the breadth of products and services that you'd expect from a larger bank, while delivering the personalized high touch service of a private bank.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

This is what we mean by single point of contact. Exceptional client service is not just a priority for us, it's the cornerstone of our culture and the key to our success. The focus this focus is so central to who we are, it's embedded in our name. Our dozens of teams of outstanding and experienced bankers deliver for their clients through a high touch single point of contact model supported by a high-tech platform. We have been a consistent recruiter also of top talent and that we believe is a major strength of our company.

Jay Sidhu
Jay Sidhu
Executive Chairman at Customers Bancorp

While the frontline teams that I've talked about that we've added over the last several years get most of their attention, We believe we've added excellent leaders and team members across the entire organization, including credit, risk management, compliance, marketing, treasury management, human resources and of course, technology, just to name a few. Their efforts are continuing to level up the way we operate and are fueling the phase next phase of our growth. With that, I'll pass it over the call over to Sam on Slide 5 to add to this and share with you the highlights of the quarter and the year. Sam?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Thanks, Jay, and good morning, everyone. To the couple 100 live participants who've already joined the call. Really appreciate your interest. I'm thrilled to have an opportunity to walk you through our excellent quarter in more detail. But first, I wanted to take a minute to reflect on what this incredible organization and my colleagues have accomplished since I had the privilege of joining the management team, which is exactly 5 years ago this week.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

As you can see on Slide 5, over this time period, we have delivered exceptional franchise enhancing deposit led growth. The bank has essentially doubled in size over the last 5 years, ending 2024 with over $22,000,000,000 in assets led by an impressive $10,000,000,000 of net deposit growth, which is 17% annually. Incredibly, we accomplished all of this while growing our capital ratio significantly with CET1 up 400 basis points, providing us tremendous flexibility today. Slide 6 shows how the execution of our unique strategy has resulted in a huge increase in our earnings power and profitability. Net interest income is up 19% annually, and our core EPS is up over 2.5x over the last 5 years.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

This is even with the significant investments we've made in 2024. Our margin has also increased by 40 basis points over that time. As we've said many times before, we believe sustainable growth in revenue, EPS and tangible book value are the key metrics for long term performance in bank stocks. Customers has delivered an awesome annual growth of 15% revenue, 20% EPS and 16% in book value, which is higher than the top quartile of banks between $10,000,000,000 $100,000,000,000 in assets. This has resulted us in being the top performing publicly traded U.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

S. Bank stock 2 of the last 4 years. We're proud of what the team has achieved but even more excited about the prospects and momentum going forward in 2025. With that, I'll move to Slide 7 and touch on our areas of focus. The top priorities for our company and senior management in many ways look very similar to last year, which highlights the consistency of our strategy.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Our clients are at the forefront of everything we do. Every decision we make is guided by the understanding that our clients are the foundation of our success. It is their trust and partnership that enable us to grow and thrive. When our clients succeed, we succeed, and we also believe what gets measured gets done, as evidenced by our best in class NPS. We're committed to building on this momentum, and we will continue to look for ways to enhance the client experience and deliver moments that truly make our clients say wow.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Next, our top financial priority remains improving our deposit franchise even further coming off of a year of incredible success. In 2024, we were opportunistic in hiring and continued to gain market share, allowing us to reduce our wholesale funding and other high cost deposits. Our cost of funding improved in 2024 and with the tailwind of rate cuts, we have achieved an impressive total deposit beta of 64% thus far in the easing cycle. This is an amazing accomplishment, especially considering we had industry leading loan growth of 12% over the same time period. This provides us great momentum for 2025 and as a result, we think the opportunities ahead are even stronger.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We'll continue to look to grow the loan portfolio as we see strong opportunities across our diversified verticals for franchise enhancing loan growth from holistic relationships. We believe that a pro business government agenda should lead to higher industry loan demand, though we're not counting on that in order to meet our goals. As we continue to execute on both sides of the balance sheet, we will seek to grow our net interest income above the industry average. As we've said many times before, uniquely, the easiest path for us to do so is by lowering our interest expense. 2024 was a year of investment for us.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

One of the key areas of investment is our risk management infrastructure as we strive to meet and exceed our own and regulatory expectations with enhancements across people, processes and technology. If we achieve the goals we've set for ourselves, we believe risk management can be a strength and competitive advantage for Customers Bank. We will continue to undertake operational excellence initiatives to increase fee income and reduce expenses in certain areas to provide the fuel to reinvest into our franchise. We will not hesitate to make investments that will position us for the long term. We are so focused on finding efficiencies across the platform and to be able to make those and we're privileged to be able to make those investments while still achieving positive operating leverage.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We will do all this with not taking our eye off of other key risk management areas ensuring we have we maintain strong capital liquidity and credit quality. Turning to Slide 8, you'll see that the many accomplishments that delivered a strong 4th quarter are also providing great momentum for 2025. We once again had $1,000,000,000 of gross deposit inflows in the quarter and we continued to remix out our higher cost deposits. This led to a lower deposit cost of 39 basis points. We bucked the market trend growing our loan portfolio at an industry leading 19% annualized pace.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

The combination of these factors resulted in a net interest income growth in the quarter of 6 percent and also increased margin by 5 basis points. We as I mentioned, we executed on operational excellence initiatives and are on track to achieve our target of $20,000,000 which we'll be able to reinvest into the franchise. As part of this, I'm thrilled to say that as we guided last quarter, we fully transferred all CBIIT customers to our in house developed Cubix platform, which both improves our controls and is providing a $5,000,000 annual run rate fee income as well as 3rd party technology expense reductions supporting the transition. We achieved all of this while maintaining strong credit quality. Advancing to Slide 9, you'll see our GAAP financials.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And then moving to Slide 10, I'll run through the core financial highlights for the quarter and the full year. We delivered core earnings per share of $1.36 in the quarter on net income of 44,000,000 For the full year, this was $183,000,000 in core net income or $5.60 in EPS, which represented a full year core ROE and ROA of 11.4 92 basis points, respectively. These results, while strong, included a year of transition and significant investment, which impacted profitability in the short term. But Q4 represents a nice jumping off point and provides great momentum as we head into 2025. As we see positive operating leverage from the benefits of investments we've been making, we expect our ROE to improve to the mid teens and ROA north of 1%, respectively, over the medium term.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

On that note, I'll cover our deposit transformation on Slide 11. We are once again thrilled with the team's efforts to improve our deposit franchise, which was firing on all cylinders. To recap some of the incredible results, total deposits increased by more than $775,000,000 or 4%. Non interest bearing deposits led by our Cubix platform increased to $5,600,000,000 or 30 percent of total deposits, now standing at about the top quartile of banks between $10,000,000,000 and $100,000,000,000 We reduced our broker deposits by around an estimated $500,000,000 in the quarter and once again brought in over $1,000,000,000 of gross deposits. Importantly, this continues our streak since early 2023, now at 7 quarters in a row, averaging at about $1,000,000,000 in deposit inflows per quarter, which we're using for remix.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

As I mentioned, by successfully running a deposit playbook, we reduced our average cost of deposits by 39 basis points in the quarter or 64% beta so far in the down cycle. As a reminder, our deposit beta on the way up was about 60%, so we're off to a great start. And importantly, we had strong stability in deposits in connection with the repricing efforts. The teams we brought in since early 'twenty three are doing incredible work. They manage relationships with over $1,700,000,000 of granular, low cost relationship based deposits, approaching about 10% of our deposit base in just 18 months.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

The new commercial banking teams we hired last year managed about 900,000,000 deposits at year end and about $1,000,000,000 as of this week. We've increased the commercial client count of our franchise by almost 50% in the last 2 years, which is just exceptional. Through their efforts and across the company, we've already transformed the deposit franchise. To recap and put this in perspective, since March of 'twenty three, we've paid down $4,500,000,000 of wholesale CDs and borrowings. Over that same time period, we've increased our non interest bearing deposits by over $2,000,000,000 And in the next phase, we've been reducing the level of higher cost and less strategic deposits at a consistent clip.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

With a deposit pipeline of over $2,000,000,000 led by our new teams and with contributions across the franchise, we are still in very early innings as we walked you through last quarter. As I mentioned earlier, we believe we are well positioned to reduce our interest expense further to drive NIM and NII higher. With that, let's turn to Slide 12 on the loan portfolio. The Q4 was another exceptional quarter of loan growth for us. We delivered $670,000,000 of franchise enhancing loan growth, which was diversified across our platform.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

This quarter, the largest contributors were from fund finance, our new commercial banking teams, commercial real estate, health care and mortgage finance. We continue to be able to step into the void in the commercial real estate lending market as we provided fulsome relationship based loans accompanied by significant deposits. To put that in perspective, the $340,000,000 in multifamily and commercial real estate loan book increase over the last two quarters has been more than self funded with real estate industry related deposits coming from high quality institutional owners looking for a new relationship bank. As you can appreciate, this type of self funding is really unheard of in the real estate industry and underscores the void we are filling in the market. Our lending is also very granular with an average loan size of around $6,000,000 originated in the quarter.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Despite our modest growth, our concentration remains under 200%, which is proving to be a significant competitive advantage against our peers. For the year, we grew the entire loan book by $1,600,000,000 which was about 12.3% growth and within our 10% to 15% target. This really bucked industry trends with most banks seeing very little increases in loan balances. Importantly, this growth has been well diversified coming from the many groups and channels of our franchise. Despite this growth, our loan balances are still below where they ended in 2022.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We have focused on replacing the less strategic portions of our loan book that we exited over the last 2 years with strategic franchise enhancing and holistic relationships. While our deposit franchise and transformation gets more focused, the franchise transformation is frankly evident on both sides of the balance sheet. We're seeing great opportunities to continue this momentum as we get go into 2025. With that, I'll pass it to Phil.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Thanks. Thanks, Sam, and good morning, everyone. On slide 13, we've provided the components of our net interest income, which was $168,000,000 in the quarter, and our net interest margin, which increased to 3.11. The 5 basis points of expansion in the quarter was driven by the liability side of the balance sheet as we lowered deposit costs and had higher levels of average non interest bearing deposits. You can really see this in the breakdown of the components of our 6% growth in NII.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

While interest income was down modestly, we were able to drive down our interest expense by about 7%. This led to the increase in NII for the quarter and also helped expand our margin. As Sam mentioned, further interest expense reduction is our strongest lever for continued margin and NII growth in 2025. In the quarter, we exited about $480,000,000 in low yielding securities and we reinvested about a third of the proceeds in securities with 250 basis points higher yield and the balance into loans. As most of you know, over the last few quarters, we've taken steps to gradually reduce our asset sensitivity.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Even so, we feel that our modest asset sensitive profile gives us good optionality, and that's really proving out today. Generally, a higher for longer rate environment with an upward sloping yield curve should be a tailwind for customers bank. And importantly, the organic actions on both sides of the balance sheet would be expected to more than offset any impact from potentially falling rates. As a result, we feel we are well positioned regardless of the near term rate trajectory. On slide 14, we'll cover non interest expenses.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Core non interest expense was $108,600,000 for the quarter. This was up about $2,200,000 compared to q3 adjusted for the one time credit in non income taxes we had last quarter. The primary driver of the increase was higher professional services expense, including in connection with the enhancements we're making to our risk management infrastructure. Even with these higher levels of investment, our core non interest expense as a percent of average assets is still top quartile among our regional bank peers. On slide 15, I'll recap the progress of the operational excellence initiatives we discussed last quarter.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

On the last call, we outlined a target of $20,000,000 of annual efficiency through a combination of fee income growth and expense savings to reinvest in our business. I'm pleased to say that as of year end, we are on track to achieve this target, most of which has already been realized. On the revenue side, as Sam mentioned, the increased treasury management fee income from clients utilizing our Cubix platform is already contributing at least $5,000,000 in annual fee income. Additionally, through the efforts undertaken across our human and technology infrastructure, we are on track to realize about $15,000,000 in annual expense savings. As we stated previously, we undertook these initiatives to provide the capacity for the investments we are and will continue to make in our franchise to position us for success both in the near term and over the long term.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

With that, I'll move to slide 16. Here you can see our tangible book value increased to $54 per share this quarter. This is up about $6.50 per share for the year, which is around 14%. This this keeps up with our 16% annual growth rate over the past 5 years. We believe TBV compounding is a key performance metric, and our results put us among the the top of our peers.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Moving to slide 17, our capital ratios across the board remain robust and provide us with substantial flexibility for organic growth opportunities. At 12%, we remain in excess of our 11.5% CET one target despite utilizing some risk based capital for loan growth in the quarter. Our TCE ratio was just 10 basis points lower in the quarter even with 4% growth in the size of our balance sheet and the securities portfolio repositioning. On slide 18, we continue to be pleased overall with our credit performance, which has been a strength of our organization. NPAs remain low at just 25 basis points.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Net charge offs declined in the quarter. And to break that down a little further, total net charge offs declined by $2,400,000 or 14% in the aggregate, which resulted in a 9 basis point decline in the NCO ratio. And our commercial net charge off rate declined to 13 basis points in the quarter. This is the 2nd consecutive decline in our net charge offs despite the continued growth in our loan portfolio. And with that, I'll pass the call back over to Sam before we open up the line for Q and A.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Thanks for that, Phil. From an external perspective, macroeconomic factors and confidence continue to point to a very positive outlook in 2025. As Phil mentioned, the upward sloping yield curve should lead to a much better environment for the banks as a whole. The new administration sentiment is also pointing to a more favorable regulatory backdrop for the industry. As we look forward to the year, we expect a resumption of disciplined growth in the balance sheet.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

On deposits, I'd point out that while we're targeting modest net growth, we expect gross originations as in the past to be higher as we continue to remix out less strategic deposits, especially in the first half of the year. On the loan side, we're seeing very good opportunities to originate franchise enhancing loans across our various verticals. But we're being very selective, and from those opportunities, we'd look for the loan portfolio to increase by about 7% to 10% or even more over the course of the year. Importantly, we will be very disciplined around deposit led loan growth. On NII, when backing out the venture accretion income in 2024, we expect NII to conservatively grow by about 7% to 10% with that adjustment.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We do have levers for upside, but it depends on deposit remix timing, but this is already at these levels at the top of the industry at the current market rate curve. Through the operational efficiency efforts, including fee income growth from the Cubix platform, we'll look to bring our efficiency ratio back down to the low to mid-50s this year and then continue that progression to our mid-40s ultimate target over the medium term as the execution of our strategic priorities take hold and as we sunset some of our outsized investments. We'll continue to operate with higher levels of capital in the near term, but with our current position and strong organic earnings potential, we are well positioned to continue to support our clients with strategic growth. Based on the industry outlook to date, achieving this guidance would put us at the top of the industry in all metrics. And while we have levers for upside, we want to be conservative as the timing of deposit generation is not as certain as loan generation.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Now to wrap up on Slide 20. With the momentum generated from our accomplishments in 2024, we believe we are incredibly well positioned to continue to increase our franchise value. The strategy we employ to transform our institution is to empower top tier talent to lead with client service, and it's really showing its power. Our deposit franchise transformation efforts will continue with the goal of even further improving both the cost and quality of our deposits. We were able to effectively leverage our client relationships and new deposit generation to significantly reduce deposit costs in 2024, and we expect to further that effort in 2025 independent of rate cuts.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

The teams we've recruited over the past few years across a focused set of diversified verticals positions us extraordinarily well to continue to win new client relationships and also take advantage of any industry expansion during the current environment. We feel confident in our ability to execute on these initiatives, and we'll be well positioned to grow our NII and experience positive operating leverages from our investments. At Customers Bancorp, we wake up in the morning to compete for our shareholders. The management team is 100% in line, as you heard from Jay, in advancing the company's goals and continuing to deliver for our shareholders. We believe we have the right team, along with a client centric culture, to allow us to continue executing on the strategy and drive franchise value in 2025 and beyond.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

With that, we'd be happy to take your questions.

Operator

Thank you. The floor is now open for questions. Thank you. Your first question comes from the line of Steve Moss with Raymond James. Your line is open.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

Hi, good morning.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Good morning, Steve.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

Just starting on the loan growth guide here. Good morning, Sam. On the loan growth guide here, maybe just talk a little bit about kind of your expectations for loan growth over the next quarter or 2. It sounds like the pipeline remains strong. And I heard you there indicate that the loan growth guide could be conservative for 2025.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yes. Hey, Steve. Good morning. So the pipelines are definitely strong. We continue to build with pipelines at least sort of in the $4,000,000 to $500,000,000 range.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

I will say, as you you normally know, q one is is usually a bit slower time. Obviously, we had a a very strong Q4, with closings that, to get done by year end. And so usually that rebuilds a bit. There's also the question of of some of the unexpected payoffs, which is actually something we've been seeing a fair amount in some of our portfolios sort of earlier in the year. So, you know, I think we we definitely feel good about it.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

As Sam mentioned, you know, there could be potential upside there, and we'll certainly continue to support clients as we see that franchise enhancing loan growth. But we do want to remain disciplined, and we're we're certainly not chasing any loan only relationships. It's it's very much holistically focused.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Yeah. And and, Phil, if I could just add to that, you know, I think that the point about payoffs is is is very important. You know, we had a number of payoffs in in 2024. To put it in perspective, we had about $1,000,000,000 of payoffs and paydowns in the Q4, which really shows that the net growth that we experienced despite that was was quite substantial. And it actually gives us good confidence in going forward.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We do anticipate that a lot of the payoffs have sunsetted mostly in 2024. Having said that, I think that as there's a stronger commercial environment, you could see some refinancing activity sort of across the portfolio, especially in some of our fund finance type private capital businesses. But I think we also added that slide on our loan growth slide, loan slide to really the chart to exemplify the really the diversification. I think that's what's really important as we have a number of levers to pull as the year progresses.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

Okay, great. I appreciate all that color. And then just in terms of the deposit growth here this quarter, a lot on the non interest bearing side. I'm assuming a lot of that is from the instant payments. I'm just kind of curious how you're thinking about that business these days.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

You've had the 15% cap in the past. Obviously, it was a good quarter for activity in that business. Maybe the dynamics there you're seeing and how you're thinking about it here along with the fees that started this quarter.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Sure. Absolutely. So firstly, I'll start with saying, Steve, your intuition is correct. Most of that non interest bearing deposit growth came from our Cubix platform customers. And after the election, our clients experienced a tremendous amount of increased market activity, which, as you can imagine, leads to higher balances, which we supported in order to serve our clients when they needed us most.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

We'll wait and see where things fully settle in. But it's worth noting at the end of the year, we had about $3,600,000,000 in spot balances there. And on the point of our limits and targets, yes, it's above 15%. But importantly, we are holding all of these balances in cash to mitigate any perception of liquidity risk. And our management team is going to continue to evaluate limits and targets and take a holistic risk based approach as we assess these levels going forward.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

So I think that's the important way that we're approaching this. At the end of the day, we want to make sure that we're there to serve our customers. You also heard me talk about the migration to our own in house platform, which is not it's not even in beta. It's 100% switchover that we've made, and it's also helped us level up in fees. We had almost $2,000,000 in fees in the Q4 related to our Cubix platform and the customers.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Now, obviously, there's increased market activity there. You also heard Phil talk about 5,000,000 plus is sort of where we're guiding to as sort of a minimum. But we'll wait and see how things settle in. September was, you know, sorry. October was slow.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

November was was was slow for the 1st week. And things have been pretty active in the 1st 2 weeks of January, as an example, were also slow. So increased client activity leads to higher balances. Higher balances leads to interest income and it also leads to higher fee income.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

Great. Appreciate that. And one last one for you and I'll step back. On the NII guide, I apologize if I missed it, but just wondering what you guys are assuming for rate cuts there,

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

if any?

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yes, Steve. Our base case had 2 rate cuts, which was which were including 1 early in the year in March. Obviously, that trajectory moves around a lot, but we look at a pretty wide range anywhere from 0 to 5 rate cuts.

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

Okay, great. Appreciate it. I'll call

Steve Moss
Steve Moss
Director - Banking & Arlington at Raymond James Financial

and I'll step back here.

Operator

The next question comes from Peter Winter with D. A. Davidson. Your line is open.

Peter Winter
Managing Director - Senior Research Analyst at D.A. Davidson

Good morning.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Good morning.

Peter Winter
Managing Director - Senior Research Analyst at D.A. Davidson

I just wanted to follow-up on just the net interest income. It's a fairly wide range of 3% to 7%. Can you just walk through maybe some of the drivers that get you to the upper end of the range versus lower end and maybe the trajectory of the margin?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Yes, sure. I'll start off and then Phil, let me know if I missed anything. As you can imagine, the 2 biggest drivers of a range would be rates and pace of loan growth. So focusing on the high end, it's actually based on the current rate curve, which is 2 cuts. And if you sort of normalize for backing out the accretion, as I walk through in the script, that really puts us at the at the about 10% or the high end of the industry.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And, you know, we do have potential levers to do better, but we're sitting in January. There's a lot of things that that can change as the year progresses, including the rate curve, which has been moving, as you know, materially on a week to week basis. So that's sort of hopefully a bit of context on the range. But I would just also sort of point you back to you know, the power of the franchise. And if you noticed, you know, on the slide we had, you know, our NII has grown by 19% annually over the last 5 years.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And, you know, we we hope to continue, obviously, not necessarily at that pace, but at an industry leading pace going forward.

Peter Winter
Managing Director - Senior Research Analyst at D.A. Davidson

So if I could just follow-up on that, Sam, if I you had a really nice growth from 3rd to 4th quarter. And if I annualize the 4th quarter net interest income and take the midpoint of the range that you're giving for 25%, it's kind of low single digit growth. And I'm just wondering why some of that momentum seems like it would slow a little bit, if I'm interpreting that correctly?

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yeah. Hey, Peter. So, again, a couple of things. 1, as Sam mentioned, we are still modestly asset sensitive. So with 2 rate cuts in there, that would have you know, would have some downward impact.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

And the other, the other level lever is also, as as Sam mentioned earlier, sort of just where some of the non interest average on interest bearing balances settling.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Yeah. And to kind

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

of put that in perspective, Peter, you know, you can see that, on our NII slide, we broke out interest income and interest expense. So you can see that our interest income only slightly declined in the quarter despite the fact that you had the full impact of September through December rate cuts. So I think that really just speaks to, as Phil mentioned, the mix shift that we had across the franchise, and those things need to sort of take time to stabilize in.

Peter Winter
Managing Director - Senior Research Analyst at D.A. Davidson

Got it. And just one last question. Just could you just provide a little bit of color on the increase in the OREO property, that $12,500,000 and that 6.6 $1,000,000 reserve build, was that related to this credit?

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yes. Hey, Peter. So I think you're referencing there was about an $8,000,000 increase in NPAs. It's it's actually not OREO. It was a it was a security that we put on NPA in the quarter, which, we're in the final stages of restructuring with the issuer and feel we're we're well reserved, but but put that on on in the quarter.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

So that's actually where that's coming from. On the the on the loan ACL side, that's really related to increase in the loan book. So if you see our our coverage ratios, there were relatively stable, but obviously the increased loan volume is going to require increased provisioning.

Peter Winter
Managing Director - Senior Research Analyst at D.A. Davidson

Got it. Thanks guys.

Operator

Next question comes from Kelly Motta with KBW. Your line is open.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Hey, good morning. Thanks for the question. Your core deposit growth was really remarkable and continues the pipeline continues to be strong and the deposit betas were probably leading in the industry. I'm wondering as you look ahead, it feels like a lot of the low hanging fruit may have been realized here with the continued roll off of broker. Just wondering how what's baked into your guidance in terms of your expectation for continuing to bring down the deposit costs with the increase of these really core deposit accounts your new teams are bringing on?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Sure. Good morning, Kelly. So I think that, first of all, you touched on a couple of things. One thing I just sort of highlight is broker deposits, we continue to reduce. And also just sort of talk about, I think we spent some time on the timing of deposit remix.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

I think last quarter, we talked about north of $500,000,000 that we were planning to remix in the Q4. That was, I believe, 4.7% or 4.8% cost of funds. Similarly, we've scheduled about $500,000,000 in the Q1, which is currently at about 4.5% to kind of put that in perspective and put the scale of the continued remix. If you look at our spot cost of deposits, I think that's a pretty good indicator of giving you a sense of how the Q1 will trend down from a cost of deposit perspective. And then I'll point you back to while the pipeline is $2,000,000,000 we talked about our goals for the year for the new teams.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And we think the new team should really be able to drive $1,500,000,000 to $2,000,000,000 or so in 2025, which is at that sort of call it about $500,000,000 or so on average a quarter. It'll be lumpy. It won't be necessarily perfectly consistent and linear. Having said that, that's sort of where we expect. Those deposits are coming in 150 to 200 basis points below our cost of funds.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

I think that sort of helps give you some perspective on how we're sort of seeing the overall remix and some of the levers and puts and pulls.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

That's super helpful. Thank you, Sam. And I'd like to ask a follow-up on the digital asset space. I appreciate the commentary that most of the NIBs or a good portion of that was related to letting those caps increase a bit. Wondering how you're viewing this competitive opportunity ahead and if you could just frame it here.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Obviously, the new administration is much more friendly to this business. But also wondering how you're thinking about potential competitors getting back in and your ability to maintain your lead in this space?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Sure. Absolutely, Kelly. And let me just address one thing on the noninterest bearing deposits. While we had a big driver from our Cubic's client customers, we still had 9 figure deposits, which would have been a highlight of the quarter across the overall bank and non interest bearing deposit growth, even with, as you know, sort of Q4 type taxes and payments that kind of go out towards the end of the year. But to get to your question, I think post November's election, I think it's really reinforced that digital assets are here to stay.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And banks are going to handle this over time, just like any other banking services that are being provided. And at Customers Bank, we have the benefit of being a 1st mover, only mover that has a network, and it's very difficult to replicate. So we're sitting in the primary seat with operating and transaction accounts with the largest and most institutional customers in the space. So obviously, there are early green shoots of clarity on regulation for our customer base, which I think is going to provide overall clarity for how banks, our customer base, which I think is going to provide overall clarity for how banks can operate, which will really benefit the overall industry. And I think we feel fortunate that we've been able to support our customers, build very long, deep relationships and also really have a superior technology service that we've been able to support and provide to our customer base and also prove to them that on our own platform now that we have the technology prowess to continue to support them in the future.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Thank you very much. I will step back.

Operator

Your next question comes from Matthew Breese with Stephens. Your line is open.

Matthew Breese
Managing Director at Stephens Inc

Hey, good morning.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Hi,

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Matt.

Matthew Breese
Managing Director at Stephens Inc

Maybe first just starting with the NIM. Can you provide the discount accretion over the last few quarters and what the expectation is for discount accretion in 2025?

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yeah. Hey, Matt. Good morning. You know, as we kind of said on the last call, it really settled into it to a spot where it's been pretty immaterial. So it was, you know, low single digit basis point impacts are really not much.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

And and again, there's we've realized essentially the vast majority of the discount accretion here now through 2024. So as Sam mentioned, it's it's not really much of a driver for for 25 as we think about that comparison point.

Matthew Breese
Managing Director at Stephens Inc

Okay. Okay. And then I was hoping you could also touch on the provisioning outlook and the reserve. The reserve as a percentage of loans has been kind of steadily declining. Where do you think that settles out and what does that imply for the 2025 provision?

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Yeah, sure. So it's a great question. And as you pointed out, it has been declining, but that's really as a result of a mix shift. If you look at our sort of corporate and sorry, commercial and consumer reserve levels, they've been stable or even on the commercial side, some slight increases. So that was really mostly mix driven.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

I think we as we kind of have the outlook looking forward, we still feel like those levels as we sit today, probably feel like the right respective, around the right respective levels. But as I mentioned earlier, with increased loan growth, you know, you could see some some increased provision. So, you know, while while we don't have a a formal guide on it, I think the directional range we've given in the past is kind of 18 to 22,000,000. You could see that probably be a bit higher, just given the higher, you know, the continued loan growth.

Matthew Breese
Managing Director at Stephens Inc

Okay. Thank you. And then just going back to the, you know, the Cubix and the crypto effort, I guess 15% used to be the old limit on crypto deposits. I think Sam, you said you were at $3,600,000,000 spot deposits today or at period ends, that's kind of 18% to 19%. I guess, what's the new cap?

Matthew Breese
Managing Director at Stephens Inc

Is there one? And then the growth that you had this quarter, was it from existing customers? Just going back to the regulatory order, I thought there were some stipulations around engaging with new third parties, and I didn't know if there was any sort of limitations on new customers. Thank you.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Yes, sure. So I'll start with the last question. First is we don't have any restrictions on new customers. I think you're referencing something about sort of third parties or payment providers. But at the end of the day, we supported existing customers And really, it was sort of increased market activity with existing customers.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And I think I touched on this before is we're holding all of this in cash. That's our that's our risk mitigant. 15% was actually something that we set you know, a couple of years ago, you know, for this vertical, you know, prior to becoming the primary, you know, banking institution, and we've held to it. And as customer activity increased, you know, we, we supported our customers. And in terms of the new, you know, a new level, it's to be determined.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

It's got to go through sort of our typical, you know, process. And we have to be thoughtful thinking about, you know, how what our customers need. We also want to see where things settle in. It's only been, you know, 60 days or so. So I think we'd like to see where things settle in.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

If you look back to to last year, it's tough to remember that in January, you had the ETFs in that were approved in the Q4. You had the election in the Q1. You know, there's additional activity. We'd like to see and get some more history of client activity and then we'll be able to sort of make much more of an informed call then.

Matthew Breese
Managing Director at Stephens Inc

Understood. And I appreciate the clarity on the 3rd parties. It was tough to interpret what they meant there. My last question is really just around overall broker deposit levels. Could you update us on where balances stand today?

Matthew Breese
Managing Director at Stephens Inc

What it's down from about a year ago? And I guess where I'm going with this is the way I kind of track it is through the call reports and the call report levels have been relatively flat the last handful of quarters and I was hoping you could kind of square the progress versus what we're seeing in the call reports. I think there's some other things that kind of get globbed in there. Thank you.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Yes, sure Matt. So I'll start and Phil, I don't have the numbers exactly in front of me, but I think we've gone down by a couple of $100,000,000 over the last couple of quarters. And I think you heard me talk about my script about another 500,000,000 or so in the Q4, which you'll see sort of filed in the near term. I'd also say that the 500,000,000 or so of deposit remix that we've scheduled you know, has a good overlap, you know, with our broker deposits. So higher costs, less strategic, you know, deposits are going to be the focus areas of our deposit remix.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

So as we bring in those deposits, you could imagine that, you know, broker deposits or deposits that have been classified as broker, I think is also an important distinction, as you think about sort of the overall FDIC rules and how that has evolved, are going to be part of our target universe.

Matthew Breese
Managing Director at Stephens Inc

Understood. Okay. I'll leave it there. Thank you.

Operator

Your next question comes from Hal Goetz with B. Riley Securities. Your line is open.

Hal Goetsch
Managing Director at B Riley Financial

Hey, congratulations guys on a great year. And my question is on how you guys come in with your punch list on working down the issues with the Federal Reserve Bank of Philly? What can you share with us on that?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Sure. Good morning, Hal. Thank you so much. As I mentioned last quarter, I think the easiest way to sort of summarize this is we're working on enhancements as you described in sort of the punch list across people, process and technology. On the people side, we had hired at that time and since hired even more senior seasoned executives, and they're helping to level up the overall risk management infrastructure and helping us build the bank of the future.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

From a process perspective, we talked about some of the 3rd party services and getting top tier firms to help us with design implementation that also have sort of a good mastery of the external environment. And from a technology perspective, we stated our goal was to transition to in house, and I'm proud to say that this was a long time coming and something we started in 2023. But as of the end of the year, we fully transitioned all of our real time payments clients to Cubix.

Hal Goetsch
Managing Director at B Riley Financial

And I have one follow-up to that. The elevated professional services costs, what's kind of like the pace of case maybe fading that expense ramp or maybe maintaining it this year? Can you give us your thoughts on how we should think about that?

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Sure. So, as I mentioned, it's a bit of a last quarter, it's a bit of a bell curve. So, I think we peaked at 5.5 to somewhere between $5,500,000 $6,000,000 in the quarter related to these efforts. December, January is the peak. It's going to taper off down a little bit from there.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

And then by the middle of the year, we'll get back to sort of typical normalized level. So we're past the 50% point, I guess, is the best way to think about it. But month to month, we'll see where we get to. But we're really have a well executed plan that we hope to put behind us in the first half of the year.

Hal Goetsch
Managing Director at B Riley Financial

Thanks.

Operator

Your final question will come from Kelly Motta with KBW. Your line is open.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Thanks so much for letting me jump back on. I just wanted to get some clarity from Phil on the securities restrictions you took, the timing of that during the quarter, the sales as well as the timing of the reinvestment of loans. Did the reinvestment happen early 2025 or was that undertaken last quarter? Thanks.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

Sure. Hey, Kelly. So, yeah, the sales did occur kind of late in late in the quarter through the halfway park and then through the halfway point, so kind of later in the quarter. And then the reinvestment was also kind of gradual. You can imagine the securities happened a little bit, earlier, but again, still, pretty late in the quarter.

Phil Watkins
Phil Watkins
EVP & CFO at Customers Bancorp

And then the loans were just kind of organically as they as they come came on. And you can probably imagine the, the majority of that loan growth always seems to come right around December 31st at the end of the year. So it tended to be a bit more more towards the tail. But generally, we sort of think about it as as probably having about 5 basis points of incremental NIM pickup in 25.

Kelly Motta
Managing Director at Keefe, Bruyette & Woods (KBW)

Got it. Thank you so much.

Operator

This concludes the question and answer session. I'll turn the call to President and CEO, Sam Stadeau, for closing remarks.

Sam Sidhu
Sam Sidhu
VC, President & CEO at Customers Bancorp

Thank you, everyone, for your continued interest in and in support of Customers Bancorp and the incredible franchise that we're building. We look forward to speaking with you next quarter. Thank you. Have a great day and a great weekend.

Operator

This concludes the question and answer session. My apologies. This concludes today's conference call. Thank you for joining. You may now disconnect.

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Analysts
    • David Patti
      Communications Director at Customers Bancorp
    • Jay Sidhu
      Executive Chairman at Customers Bancorp
    • Sam Sidhu
      VC, President & CEO at Customers Bancorp
    • Phil Watkins
      EVP & CFO at Customers Bancorp
    • Steve Moss
      Director - Banking & Arlington at Raymond James Financial
    • Peter Winter
      Managing Director - Senior Research Analyst at D.A. Davidson
    • Kelly Motta
      Managing Director at Keefe, Bruyette & Woods (KBW)
    • Matthew Breese
      Managing Director at Stephens Inc
    • Hal Goetsch
      Managing Director at B Riley Financial
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Earnings Conference Call
Community Trust Bancorp Q4 2024
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