Customers Bancorp, Inc

Ladies and gentlemen, thank you for standing by and welcome to the Customers Bancorp Inc. Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you are participating over the web, there is a Q&A box where you can type in and submit your questions. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Bob Ramsey, Head of Investor Relations for Customers Bancorp. Thank you. Please go ahead.

Thank you, Mariama, and good morning, everyone, and thank you for joining us for Customer Bancorp's second quarter 2020 earnings webcast. Our earnings release was issued this morning along with our investor presentations. Our investor presentation includes some important details that we'll be walking through on this morning's webcast, and I encourage everyone to pull up a copy. Before we begin, I 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 to differ materially from what is currently anticipated. and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 10-Q, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of Customer Bank Wars CEO, Jay Sidhu. Jay, the floor is yours.

Thank you very much, Bob, and good morning. Welcome to our second quarter call. And joining me this morning are some of my colleagues, Dick East, President of Customers Bank and CEO of Customers Bank, Sam Sidhu, the Chief Operating Officer of Customers Bank, Carla Leibel, the Chief Financial Officer of Customers Bank Corp and Customers Bank, and Andy Bowman, the Chief Credit Officer of Customers Bank. Before I start, I would like to have you all join me in saluting our team members. You know, 85% of them are working remotely and have been working remotely, and we have decided not to even think about bringing them back till after all of them have been vaccinated. They have helped Customers Bank Corp and Bank Mobile not miss a beat. They have helped us maintain our high level of service standards and help the bank serve over 100,000 small businesses during the pandemic, survive, and save at least 1 million American jobs. We feel really privileged to be working with such an awesome team. This morning, our investor presentation, I'd like to urge everybody to please participate follow that because that will help us all understand clearly. We are delighted with a strong performance of our company, and we've organized this investor presentation over the next 25 minutes to 30 minutes or so into the following sections. I will give you a brief review of the overview of the company and how it's been built over the last 10 years. We're celebrating our 10th anniversary this year. And then We'll go over our second quarter highlights. We'll discuss with you our top priorities, especially focusing on the portfolio management as well as our digital activities. And then Carla will go over the financial results, and then we'll give you some of our thoughts on the outlook. If you go to slide five, you can see from a franchise overview point of view, we've been – Over the last 10 years, I've been very pleased to report that we've built a company with $12 billion of core assets, $10.5 billion of loans, excluding PPP, $11 billion of deposits with only 15 branches, with an average of $700 million per branch. And we are reporting in the second quarter, adjusted pre-tax, pre-provision ROA of about 1.4%. And if you think about it, this management team back in late 2009, early 2010, put in about $20 million of our own money into a problem bank, and that's how we got started. Our market cap today is, however, only $380 million. And Compared to other banks of our size, their market cap is in excess of about a billion dollars. So we think there is hopefully and going to be, we should be able to deliver above average shareholder returns over the next few years. And we are among the largest shareholders. This company, Customers Bank Corp, that's been built resembles that pretty much of a regional bank. and through very strong offerings in business banking, personal banking, and way above the rest of the industry on the digital front. And hopefully that will come across to all of you. If you move to slide six, some highlights. Like I said earlier, we've built a company, high-performing company, which is really not just in the Northeast and Mid-Atlantic, but we also have four national niches that we are serving throughout the nation. First one is our mortgage warehouse business that we call Banking the Mortgage Company. Another one is our SBA lending platform, which is really thriving right now. And so that's the SBA business. Third one is our commercial finance business, which we started from scratch and now is in excess of half a billion dollars in outstanding. And then our specialty finance and healthcare business, which is also thriving and has absolutely no deformants, no delinquencies, and it has about a billion dollars in outstandings right now. So from a startup of about $250 million problem-failing bank to today what we consider to be a $12 billion in core assets, strong, high-performing bank, we are poised very much to take advantage, and we are very mindful. of the challenges that this environment and we are dealing with both the challenges as well as looking at opportunities right now. And we believe that this very experienced management team and I'd match our team with anybody and is really poised for better times ahead for our company and for the shareholders of our company. From a credit point of view, our asset quality has performed consistently better than the rest of our peer group And we believe that it's expected to remain in this fashion, both during this down market as well as whenever we return. That's because of our conservative underwriting standards, our conservative credit culture, plus our specialized lower risk niches that we are focusing on as such. And clearly, we are very much strategically focused on the longer term, We understand that we've got to manage the company for certain shareholders on a quarterly basis, but we will never get away from running the company for the longer haul. And on the longer haul, our strategy is very clear. We built it on single point of contact, and we are emphasizing continuously improving our balance sheet, very focused on capital management, and we are well positioned, in our opinion, to seek to earn about $6 per share in core earnings with a potential of delivering five to six times money for our shareholders over the next five to six years. Moving on to slide seven, something very, very significant, and I just cannot overemphasize this, that every challenge also creates opportunities. We recognize that we needed to build and a stronger team tangible common equity ratio would be good for us and good for our shareholders, and at the same time taking advantage of opportunities that are available to us to serve Americans in need, American businesses in need. That's why, unlike many of our colleagues who may have looked at the PPP or the Paycheck Protection Program as a pain in the neck, we looked at it as a huge opportunity. So Customers Bank leveraged its technology platform to partner with leading fintechs and becoming one of the top PPP loan originators in the country. While others looked at their local geographic markets, we looked at as digital national market opportunity for customers. That's a very important distinction. And Customers Bank Corp. and Bank partnered with leading fintechs as of force multiplier for PPP, and I'm so pleased to report to you that we are number six in the nation as of July the 24th in terms of numbers of loans, and we are number two in the nation in terms of serving real small businesses. And it is to be ahead of companies like Citibank, TD, Truist, PNC, Citizen, Zions, Key, Fifth Third, Huntington, M&T, It really makes us feel very proud. And this wouldn't have been possible without the rapid digitization of our back office processes. We created speed, we created efficiency in the processing, and thousands of these PPP borrowers are also being contacted by us as part of our outreach campaigns to create deeper and more permanent banking relationships with these customers. So if you look at slide eight, if you're wondering what kind of businesses were these, these were really businesses where help was needed the most. It's small contractors. It's people in the food and accommodation, lodging services. There were healthcare and social assistance, professional scientific services, folks in retail trade, and such other services. That's what made up the 100,000 businesses that we helped. We are still in this process. We've originated about three to four hundred million dollars of PPP loans in this past 30 days. And we are not going to stop doing this because it is an absolute win-win opportunity for us. And that's why it's an example that differentiates us from other banks. We are high tech high touch opportunistic bank that really focuses on risk management while doing all this so moving on to slide 10 you can see from our earnings point of view it was 19 million dollars gap earnings were up 237 percent on a core earnings basis we are up 51 percent over last year and our pre-tax, pre-provision earnings are up 94% over last year. From an asset quality point of view, we've built our reserves by over $100 million since the end of last year. Our reserves today are 2.2% of our loans, taking a conservative viewpoint, versus about 1.6% to 1.7% for our good-performing peer group. And just from a perception point of view, we've set up the reserves with 6.3% for our other consumer loans, which are home equity loans, as well as home improvement loans, as well as personal loans, as well as student refinance loans. That's what pretty much makes up our other consumer loans and such. And from a loan portfolio point of view, our total loan balances have grown about 8% over last year, if you exclude PPP. and with the greatest percentage growth in the CNI category. And at the bank, we have no subprime loans at all. And from a deposit point of view, we've grown our total deposits by 34% over last year, and our demand deposits are up almost 100% over last year. From capital ratios point of view at the bank level, our CET1 is 10.6. Our tier one risk base was 10.6. Our risk base capital totaled It's 12.3, and our Tier 1 leverage was about 9.5, 9.6%. From a book value point of view, tangible book value is about $24.62, and we have tangible equity of about $1 billion, made up of about almost $800 million in common and the rest of the $200 plus minus million in preferred. And today we are trading at less than 49% of our $6.33. 2020 tangible book, really offering an incredible opportunity for certain investors. From moving to page 11, once again, very quickly, summary, 9% growth in our bank tier one capital, adjusted PTPP was 94% growth and adjusted pre-tax, pre-provision ROA, 38 basis points growth, Adjusted pre-tax, pre-provision, return on common equity, 24.6%. And you can already comment over the loans and the deposits. Once again, I can't overemphasize the 97% growth in DDA. So proud of our teams. And yes, everybody is doing well in deposits right now. But I think our team is no exception. And we did not take full advantage of all the deposits yet from the PPP loans because a lot of these customers were other banks' customers, and we shipped deposits to other banks. And we see that as an opportunity. So our deposit growth is core and not PPP-related only. Our non-interest income was 85%, and our net interest income was up 42% over last year. Moving to slide 12. You can see our loan portfolio, like I mentioned, it's at about 8.5% CAGR over the last five years and excluding PPP. And obviously, you can see over here, we've been very mindful of the risks inherent in the commercial real estate business, as well as the possible risks from the multifamily businesses. And that's why over the last couple of years, by design, we've been shrinking those portfolios. and really focusing on what we believe to be the higher quality portfolios, shorter duration, and dealing with prime customers and building our CNI and our mortgage warehouse business. And Andy Bowman, my colleague, our chief credit officer, will talk more about that. On the deposit side, you can see our DDAs, non-interest-bearing DDAs, went up about half a billion dollars over last year. And today, About 45% of our deposits are demand deposits, both of which approximately 19% are non-interest-bearing demand deposits, and the other 25% are interest-bearing demand deposits. Our loan-to-deposit ratio of loans held for investment to deposits because of our high level of liquidity is at 66% right now. Moving to slide 13, Our tangible common equity has over the last three years been around that 7% level. And we wanted to share with you that if you take out the PPP loans and you put in our expected earnings for the second half of the year, and you adjust for the excess cash that we are sitting on, it's very possible that our tangible common equity to asset ratio by the end of the year with assuming a majority of the PPP loans are off our balance sheet, which we believe will happen because we served small businesses and 90% of all these small businesses expect their loans to be forgiven. And so unlike other banks who are expecting 25% or so of their PPP loans to remain on our books, we are only expecting between approximately 10% to remain on our books and 90% to be off our balance sheet. So we expect our tangible common equity ratio to be in that seven and a half to perhaps 8% range by sometime end of this year or first quarter of next year. Same thing from a tangible equity to tangible assets. You can see we are expecting that to be in that 11 to 11 and a half percent range and tier one leverage to be in that 10.3 and total risk-based capital to be in that 14% range. A very significant improvement in this kind of an environment And that is where we created 100 million plus of pre-tax earnings. That's like issuing somewhere between 8 to 10 million new shares. That's how much equity would have come in. And we did it ourselves through serving our customers and serving America and improving our our tangible common equity to asset ratios. Moving on to slide 14, you can see our classified loans to total loans. And even though our classified loans ratio looks like somewhat of an improvement, what I want to emphasize, these are total loans and they are GAAP presentations, so this includes PPP. So if you take out the PPP loans, still our classified loans to total loans would be about flat. And you can see from a non-performing asset, the blips that you see a little bit, we expect in the second half of this year, both those two large isolated incidents will be behind us. Moving on to slide 15, look at the tangible book value for share growth. We think the real measurement of a company's opportunity to increase shareholder value is the consistency of performance in building your tangible book value. And you can see from our point of view, we built it by about 9.1% CAGR, excluding CECL, because that's still on our balance sheet, the $100 million that we've just transferred from the equity to reserve. But even if you take that out, still it's 7.5% CAGR. And like I said earlier, with a stock price, which was $12 a share, and on June 30th, we were trading at 49% of June 30th's tangible bond. We've identified three priorities as one of the most important things the management and the board is focused on. A is our portfolio management and maintaining superior asset quality. Second one, digital businesses and digital lending. So at this time, I'd like to hand it over to Andy Bowman, the Chief Credit Officer, to discuss our portfolio management performance. Andy?