Customers Bancorp, Inc

Ladies and gentlemen, thank you for standing by and welcome to the Customers Bank Corp, Inc. Third Quarter 2020 Earnings Conference 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dave Paddy, Director of Corporate Communications. Thank you. Please go ahead.

Thank you, Raquel, and good morning, everyone. Thank you for joining us for the Customers Bank Corp. Third Quarter 2020 Earnings Webcast. Our earnings release was issued last night along with our investor presentation. Both are posted on the investor relations page of the company's website at www.customersbank.com. Our investor presentation includes important details that we will walk through on this morning's webcast, and I encourage everyone to pull up a copy. 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. Please refer to our SEC filings, including our Forms 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 our website. At this time, it's my pleasure to introduce Customers Bank Corp CEO, Jay Sidhu. Jay, the floor is yours.

Thank you very much, Dave. And good morning, ladies and gentlemen. Thank you so much for taking the time to join us for the call this morning. Joining me today, Dick East, our President and Chief Executive Officer of Customers Bank. Carla Leibold, Chief Financial Officer of Customers Bank Corp and the bank. Sam Sidhu, who is our Vice Chairman and Chief Operating Officer of Customers Bank. And Jim Collins, who is our Chief Administrative Officer of Customer Bank. And Andy Bowman, our Chief Credit Officer of Customers Bank. We are really thrilled to report another strong quarter of financial results, despite a challenging economic environment. As you know, our gap income of $47 billion million or $1.48 for diluted share is up 100% over Q3 2019. And our revenues are up 42% over last year while we held our expense growth to 10%. And this is during a time period when we faced headwinds from the Durban, application of the Durban on our interchange income. Before I open up and discuss a little bit of our results, I'd like to recognize our team members as well as our executive management team. I'm so privileged and we are also privileged to be working with an exceptional team and really want to thank them and recognize them for their absolute commitment and hard work to help produce these kind of results. Today, we will organize our presentation into these five or six subsections. First, we will discuss with you our financial highlights. Then we will talk about capital trends and as well as our strategy. to improve our capital, then a major strength of our company is our credit quality, and Andy Bowman will discuss that in detail with you. We will briefly discuss our strategic priorities, and then we will, before question and answer, discuss our outlook as well as the guidance for you for 2020, 2021, as well as the longer-term guidance. At this time, if you look at page five of our investor deck, just a very brief overview of customers, Bancorp and our franchise. So we concluded at September 30th with a $13.8 billion in core assets, $11.6 billion in loans and leases, $10.8 billion in total deposits, of which 21% were non-infrastrating demand deposits. 1.43% of adjusted pre-tax pre-provision are away. And unlike many institutions in our peer group who are trying to rationalize the branch offices, we only operate with very few of them, and we are actually shrinking 20% of the branches or the dots that you see on this page. We are a high-performing, unique organization. Community Bank, a regional bank with very strong business banking focus, as well as personal banking. And then, of course, you all know about the bank mobile technologies. And I'll talk about that a little bit later. If you look at slide six on our investor deck, Like I mentioned to you, our company today, unlike many others, has been built by organic growth into a very relationship-driven commercial bank. And we started off just about 10 years ago by this management team taking over a $250 million asset-fueling bank with 40% non-performing loans. And from that kind of a foundation, we've grown today to this $14 billion high-performing bank. And so that's why I want to really emphasize and recognize the exceptional and highly experienced management team that's running customers' banks. From a credit and a risk culture, that's been a strength of ours because we have lived with it. And we believe that credit culture is developed by having a tremendous emphasis on the credit side of the balance sheet in good times. And that is the only way you come across well during tough times like today. And I'm sure you will see that when Andy makes his presentation. From our longer-term strategy point of view, this company's strategy is built upon a single-pointer contract model. or private banking for privately held businesses. Sometimes we also call it high touch supported with high tech. We think this is a unique differentiating approach. We believe this applies both to businesses as well as to the consumer banking. And we think This is a model which, when you combine it with a digital world and a digitization that's taking place in every single industry, we think it creates a very franchise-enhancing platform. And that's why we are building and we have already built an in-house digital bank and digitizing every single operation in the company based upon this high-touch, supported by high-tech approach. But we are totally committed to continuously improving our balance sheet and capital allocation is a key component of our asset and learning generation strategy. And as you know, we are very, very committed to also at the same time, set short-term and long-term goals. We do not run this company on a quarter-to-quarter basis. We run this company for building short-term as well as long-term shareholder value. And that is why we have been consistent in sharing with you both our short-term as well as our long-term goals. And our long-term goal is $6 per share in annualized recurring EPS with improving metrics. as such, and hence increasing significant value over the coming years. If you look at slide eight on the investor deck, you can see the earnings, like I mentioned, of $1.48 and core earnings of $1.20. And like I said, Durban is expected to impact us by $7 to $10 million in the second half of 2020. And so many other institutions had to go through M&A and all that kind of stuff to overcome Durban. And we have been able to and we intend to be able to successfully deal with that and stay on course. We expect to earn, in fact, well over $100 million in pre-tax. income as a result of our PPP loans. And majority of this, we believe now, will be recognized in the first half of 2021. From an ROA point of view, I've already gone over that. But one other thing I'd like to add is our efficiency ratio was 15.7% at September 30th. And we have intentions of improving upon it over the next couple of quarters. Andy will be talking a lot about asset quality, but let me share with you, because we are so proud of it, that at 9.30, our NPAs were 34 basis points with reserves to loans in excess of 2%. And our loan loss provision, even though it was decreased a little bit in the third quarter, we actually took a more conservative approach by having 100% emphasis on on the base case scenario of Moody's, and we believe conservatism is relevant and very important in this kind of an environment. We could have justified having no reserve this quarter, but we chose to be more conservative. Our commercial criticized loans were only 2.5% of total loans, and our deferrals, which Andy will talk about, are significantly improved, and they were only 2.6%. From a loan portfolio point of view, we are continuing to improve our franchise and enhancing and having a little bit of a different composition of our loan portfolio with more diversification. Loans and leases excluding PPP increased 1.4 billion. CNI loans over the year grew by 23%. or over $400 million. And as part of our strategy, we continue to decrease the multifamily loan balances. However, they will stabilize at sort of these kind of levels. We are really, really proud to report to you our improvement in franchise value by the quality of our deposits. Our demand deposits were up 71%, and non-inclusivating demand makes up 21% of our total deposits. From a capital point of view, our bank capital ratios are expected to grow very meaningfully over the next two to three quarters. And still at 9.30, the CEP1 was a little over 10%. The total risk-based capital was over 11.5, and our tier one leverage was a little over 9%. Our tangible book value at 9.30, as you know, was about $26.00. And our tangible equity is over $100 billion because we were successful over the last few years to raise preferred equity in a very opportunistic way. And when you add our common and our preferred, we are well over $1 billion in tangible equity. And we are trading at about 43% of the September 30th book value and only at about four times 2021. and 2021 earnings if you look at slide nine talking about capital We have hit the low point of our capital, which is actually very interestingly, we did this because it is going to position us for a slingshot effect on growth of capital over the next few quarters. Our participation in the Paycheck Protection Program is going to add very significant value for our shareholders and the tangible common equity ratio is deflated right now, primarily due to the temporarily large balances tied to PPP loans, as well as temporarily inflated warehouse loans to mortgage companies. And we expect the loans to mortgage companies to be down over $1 billion within the next two to three months. And that will materially improve our capital ratios. Our TCE ratio to total assets is expected to be about 8%, and our total capital ratio organically by the end of 2021 is expected to be about 14%. And the TCE ratio, excluding TPG loans, is expected to actually reach about 7%. by the end of fourth quarter 2020, and that's up from a low of just under 6% at September 30th, 2020. And moving on to slide 10, like I mentioned, maintaining strong credit quality remains a priority for customers, Bancorp. And at this time, I'd like to, I'm so pleased to reintroduce to you Andy Bowman, our Chief Credit Officer, a colleague of ours for the last about 10 years, very, very experienced in the business, to go over some of the credit metrics with you. Andy?