Customers Bancorp, Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Customer Bancorp, Inc. 2020 Fourth Quarter and Year-End Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer question. 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 further assistance, please press star zero. It is now my pleasure to turn to call over to your speaker today, Mr. David Paddy, Communications Director. Sure, please join.

Thank you, Rain, and good morning, everyone. Thank you for joining us for the Customer Bank Corp's earnings call for the fourth quarter and full year of 2020. The presentation deck you will see during today's webcast has been posted on the Investor Relations page of the bank's website, at www.customersbank.com. You can access the deck by clicking the red button marked latest earnings presentation. Our interactive presentation includes important details that we will walk through on this morning's webcast. I encourage you to download, use, or print 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 security laws. Please refer to our SEC filings, including our Form 10-K and Form 10-Q, for a more detailed description of the risk factors that may affect your results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bank Corp Chair Jay Siddiqui. Jay, the webcast is yours.

Thank you very much, Dave. And good morning, ladies and gentlemen. Thanks so much for taking the time to join us this morning for our call. Hope you all are safe and healthy during this unprecedented times. Joining me from different locations this morning is our President and Chief Executive Officer of Customers Bank, Dick Eaves, Carla Labo, Chief Financial Officer, Sam Shadu, Chief Operating Officer of Customers Bank, Andy Bowman, Chief Credit Officer, as well as Jim Collins, our chief administrative officers. These are my colleagues who make up what we call the office of the chair at our company. And we've all worked together for many, many years, for many of us. And Sam has been a recent one year ago. So congratulations, Sam, on your first anniversary with our company. Before I comment, share with you my comments, I'd like to have you join me in saluting our team members. They have just performed beyond anybody's expectations. It's so easy for me to take this opportunity to share with you these very, very important, good results that we've achieved, but it's been the extraordinary contributions of our team. We've had situations where about 95% plus of our team members have been working remotely because we don't have branches, and they've really performed beyond anybody's expectations. So, you know, your company, your bank, customers, Bancorp rose to the challenge. At the same time, we took extraordinary steps to support our team members and their families. We took extraordinary steps to support our communities and, of course, our clients. And I think that's going to become pretty evident when we all share our results with you this morning. Another major accomplishment for us was that we provided to approximately 100,000 small businesses and nonprofits across the country and saved, in our estimate, at least a million jobs across America, while we also added approximately or would add approximately $150 million in revenues for our company at the same time. So that was in addition to our core bank expanding the NIMB as well as maintaining superior credit quality and while we watched our expenses and created positive operating leverage. Another major accomplishment which we announced in January, but we've been working on it for some time now. There was the closure of the divestiture of Bank Mobile Technologies, Inc., and we are so pleased to see that our shareholders own $75 million in stock that we were able to provide to them for a company where they saw no value in that in the past based upon the valuation of Cubby. And today that company is valued at approximately, on the New York Stock Exchange, close to $200 million. So it's been a year of tremendous amount of challenges, but also a year of tremendous amount of accomplishments. To share with you just a little bit on some of the highlights of the accomplishment, as you know, the total loans and leases increased $5.8 billion, or 57.5% year over year. And we recognize that about $4.6 billion of that was driven by PPP loans. But it was also the growth in our T&I business, as well as our commercial loans to mortgage companies, And when you combine all that up, excluding PPP loans, still we showed a 12.1% increase year-over-year in loans. On the deposit side, which is a major accomplishment of ours, we reported a 30.8% year-over-year increase in deposits, which included $2.2 billion, or about 84% increase in demand deposits in one year. And that is something which has been our relentless focus to improve our quality of our franchise. And we are very pleased with those results. From an asset quality point of view, and we'll get into some of these later on, our total deferments, they declined to about $215, $218 million. But the important thing is the deferments, which are true deferments, which is principal and interest deferments, They are only about 0.8% of our loans, excluding PPP loans. So now I'd like to draw your attention to page five. And just to give you an overview of our franchise, so excluding PPP loans, we were about $14 billion in size. Including PPP, we were about $18.5 billion in size. From a loan portfolio like I shared with you, we continue to expand that. So excluding PPP, we were $11.3 billion. We funded 100% of our loans, including loans to mortgage companies or the warehouse, all by deposits. And so our deposits were also $11.3 billion. And we are very pleased to report that our return on common equity was 24.2%. this quarter, and our adjusted pre-tax, pre-provision ROA was 1.63%. At the same time, we see tremendous opportunities for our shareholders, investors, because the market cap of the company, although we've outperformed the market in the last couple of weeks, We still think it's at 700 plus minus million market cap. We think there is huge potential because, in our opinion, we're only trading at about six and a half times last 12 months earnings and about five times our guidance for earnings for 2021. We had last year three new markets. analysts who picked us up on research coverage since this is the first time that I know all of them have joined us. I just wanted to welcome Will Curtis from Hubby, Casey here from Jefferies, and Peter Winton from Redbush, who picked up coverage on us at a very opportunistic time. And we will not disappoint you, and we will do everything possible to be totally transparent and be very focused on building shareholder value. So now we have, I think, seven or eight analysts who cover us, and we are committed to having some time in the next couple of months, Analyst Day also, where we intend to share with you a lot more details about all the opportunities that Customers Bank Corp presents to our investors. If you move to page six, It's really our key features you saw on our title page. We're calling ourselves a high-tech forward-thinking bank with high touch. What do we mean by that? We mean that we think there is a huge, absolutely huge transformational opportunities available to banks who are tech savvy and digital savvy. But at the same time, the customers expect those banks, not just to be tech savvy, but also to be relationship oriented. We are calling that high touch. So everything about our strategy, if you want to summarize it in one sentence, it is that we are a high tech forward thinking bank with a high touch culture as far as customers are concerned. So if you look at page six or slide six, you can see that we have a We started about 10, 11 years ago. We did our IPO in 2011, I think. And since from that time of $200 million, $225 million, $50 million, failing bank with 35% to 40% non-performance on a core bank, about $14 billion in size. And at the same time, we built a tech startup, one of the first fintech neobanks to be started in the United States, and that was the bank Mobile. And we are glad to see that our shareholders are now owning about half of that company, and it's trading on the New York Stock Exchange. The management team is where I'm really so privileged to be part of. This is a lot of my colleagues. I've known them for years being in this industry. And this management team averages about 30 years of banking experience. And we are very focused on the fundamentals of the business, which is outstanding credit quality, outstanding risk culture, and a focus on building a strong core deposit franchise to differentiate ourselves from other types of financial institutions that are also in the lending business. So our core deposits, which is our non-infrastructuring DDAs, are 21% of our total deposits now, and we built all that through organic growth. We are very focused on our long-term stated goals, and like I think so, we are very focused on serving the privately held companies. through private banking for them. And we are very focused on becoming an industry-leading digital bank and having digital lending platforms and primarily supporting small businesses and consumers. and continue to focus on the quality of our balance sheet and continue to focus on risk management capital. And at the same time, be very focused on delivering superior returns, which will come in measured by return on assets, return on equity. But you've got to do that by also reporting earnings. So we are giving you the guidance that we will be above $4 in core earnings in 2021 above or at $4.50 in core earnings in 2023. And we are not shying away and confirming our goal of $6 in core earnings by 2026. And we have several ways to get there. Now on slide seven, a little bit more on what we mean by this digital bank transformation. As you know, people always ask me, how many branches do you guys have? And you know my answer, 11 too many, because we got technically 12. That's how we believe is when you have ways to reach your customers that finally banks and everybody in the industry is recognizing the diminishing value of branches. We built our company based upon having no branches. And so today, even though we have 11 too many, we will keep them. And gradually, we believe we will end up with very, very few branches and less than what we have today. Our average branch size is about 950 million today. And we think you will see within the next three to four years in America, billion-dollar average branches emerge all across America among successful banks. Among the digital capabilities, we set up about 15 months ago, FinTech group that we first discussed it at the KBW conference in Florida, and people were scratching their heads. What is it? We hope it becomes clear to you that we have developed capabilities, and we've analyzed every single technology platform that's available in this universe, and how can we be a provider of value to all of them, and at the same time, they become provider of value to us. That is how we see this, because we think the technology, the distribution system, the generation of business is changing very rapidly. And yesterday's business models are not going to be relevant. And you can see that, that out of the 5,000 banks, why is it there are only three or four banks who were on the list, or two banks who were on the list of the top 10 PPP lenders in the United States? And we are again going to be, we believe, among the top 10 PPP lenders in the United States by the time this PPP round two or three, whatever one calls it, is done. That is all because of our tech-focused approach and working with FinTech partners, and we see that all as an opportunity. At the same time, we can now fully onboard commercial customers totally digitally. And we, at the same time, have been testing and utilizing market segmentation for our consumer banking, going after high-net-worth customers and whatnot, and then we've developed capabilities where every one of our bankers today is undergoing and is continuously going to be undergoing I look at are there better ways to digitize all our platforms, and we are not shy to be working with every single digital platform, which is very valuable, like Salesforce and DocuSign and ServiceNow and Snowflake and et cetera, to incorporate them. And we have no pride in building everything ourselves, but we take a tremendous pride in using what's been built and putting it to work. We've created basically in the last 12 months operating efficiencies where we've eliminated a need to add 29 jobs by coming up with 62,000 team member hour reduction through the processes. And those so far have been mainly in the back offices. But once the COVID environment is behind us, we will be accelerating that digital transformation. If you move to page Slide nine now. So if you look at our financial results very, very quickly, you all know that our earnings are up 121% quarter to quarter. They were up 83% year to year. And so we We believe that only 4% to 5% of our PPP loans have been forgiven yet so far by December 31st. And the other 85% to 90%, 90% that much are going to be forgiven this year, most of them in the first half of this year. And that's going to really accelerate the generation of capital by us this year. If you look at the asset quality, as my colleague said, and partner Andy Bowman will be discussing it. We are right now at 30 basis points, non-performing assets to total assets. Now, because just last week we sold without taking any additional losses, our largest non-performing asset on our balance sheet. And that is why we believe that our asset quality will remain very strong and above average, and we are confident about that. From a deferrals point of view, like I mentioned to you, our P&I deferrals are about 0.8. Our total deferrals, including those who are just on principal-only deferrals and are paying us interest, that is about 1.93% of our total loans, excluding PPP and such. And from our Book value point of view, we are pleased to report that we are ending the year at about $28 in intangible book value per share. And by the end of 2021, we will be in about $32 or $33 intangible book value per share. If you move to slide 10, I want to talk about capital. And we've been laser focused on generating tangible common equity at our company and doing it without issuing equity. And so you can see that, you know, we discussed last time, if our valuation is not totally reflective by the middle of this year, we will start buying back stock. And so what you've seen over here is because we are determined and we feel so confident about the future of this company, that there's no way that we will accept trading at discounts to the market. So even assuming a $15 million stock buyback in the second half of this year, you can still see it's about 7.5% to 8% tangible common equity to asset ratio achieved by us. when you take away any PPP loans that might still be on our balance sheet, because that is a liquid asset that we can always get them off our balance sheet after we recognize.