Customers Bancorp, Inc

has been posted on the investor relations page of the bank's website at customersbank.com. You can access the deck by clicking the red button marked latest earnings presentation. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to use, download, 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 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 our website. At this time, it's my pleasure to introduce Customer's Bank Corp Chair, Jay Siddiqui.

Jay, the audience is yours. Thank you, David, and good morning, ladies and gentlemen. Thank you so much for joining us for this third quarter call. I'm joined today by my colleagues, Sam Sidhu, the president of Customers Bank Corp, as well as the chief executive officer of our subsidiary bank, Customers Bank. Carla Leibold, our chief financial officer, and Andy Bowman, our chief credit officer. Andy, Carla, Sam, and I make up what we call the office of the chair at Customers Bank Corp. We are very excited to be able to report another record quarter for our company today. This quarter, we generated more income in a single quarter than we have in any previous full-time year, yearly earnings. This milestone was achieved through incredible hard work by our teammates, consistently working very hard, being very focused on priorities, being innovative, and delivering the highest quality service to our clients, which has been one of our company's of hallmarks since its founding almost 12 years ago even more exciting than our performance this quarter is where we are where we stand today as a company which we are very excited to share with you this morning and you will be pleased with our with our outlook for the future We are proud to have stepped up last year to our innovative approach and our tech capabilities to help small businesses all across America by funding approximately 350,000 PPP loans and for almost $10 billion and being number two in the nation among those who gave out the numbers of loans. This outstanding execution has generated $350 million approximately in SBA deferred origination fees, which has and will continue to significantly improve our capital levels and allow us to expedite investments in our continued growth in shareholder value. And very important and gratifying to us is that we are seeing thousands of businesses all across America who are now our clients thriving. Let me briefly share with you the results for the third quarter. Total loans outstanding, excluding PPP and mortgage warehouse, were up 10% year-to-date annualized, led by 19% year-over-year growth in CNI and 32% year-over-year growth in consumer installment loans. Total deposits grew about 57% year-over-year, and an incredible $3.1 billion during third quarter, with practically all the growth coming in non-interest-bearing demand deposits. Broad-based organic growth drove our strong performance for the quarter. Net interest income was up about 100% year-over-year, and quite importantly, tangible book value per share increased 35% over last year. The safety and soundness of the bank continues to reflect the very strong credit quality and significantly improving capital ratios. Our strong performance supports further investments in the delivery and scalability of our business model by investing in capabilities and product lines that further serve our clients' needs and provide on the ground support as we continue to build our company. Exemplary of our agility and speed is that this quarter we entered, and a few quarters before that, we entered several new businesses. So this has been a remarkable year for us. Some examples, as you can see on slide three, are everything that's in green. You can see that we've now entered the fund finance business. We've recruited teams in technology and venture capital banking. We've recruited teams in the financial institutions group. And we have embarked on CBIT, or Customers Bank Instant Token, which is our digital payment system. And we are very excited about digital asset banking and the small business sector. as well as SBA and credit card services that you can see from there. So we offer a full suite of community banking, specialty banking, digital banking, both for the consumer and also for the commercial. And we are laying the footprint to be a nationwide bank over the next couple of years. We will continue to leverage our best-in-class technology to efficiently deliver high-touch community banking services specialty banking, and digital banking services, keeping our customers at the core of everything we do. I want to thank you all for your continued support, and it's amazing to think that we are just getting started. I'll now turn it over to Sam Sidhu, President of Customers Bank, to take you through more detail. Sam?

Thank you, Jay. It has indeed been another great quarter and a very strong year so far. Our momentum has picked up pace, and we have benefited from continued growth across the company, which highlights the broad-based strength of the franchise. Let me briefly summarize our results in a little bit more detail. We recorded a record $3.36 in core EPS, which represented net income of $113.9 million, up an impressive 178% over the year-ago quarter. This translates to a core ROCE of 42%, ROA of 2.35%, and a pre-tax, pre-provision ROA of 3.36%. And our net interest margin came in at 3.24% for the quarter. Now moving to the balance sheet, we ended the quarter with $14.2 billion in core assets, excluding PPP. Our loan book was $10.6 billion at quarter end. Importantly, our loan pipeline and backlog have grown to all-time high levels across the franchise, and we expect loan growth to continue to accelerate in the fourth quarter and into 2022. As you heard from Jay, our total deposits grew by $6.1 billion, with $3.1 billion of that in the last quarter driven by our efforts on the customer's bank Instant Token, our CBIT launch, which brought in $1.5 billion of non-interest-bearing deposits as of September 30th. Strong asset quality is at the core of our franchise, and we continue to have superior credit quality to peers with NPAs of just 27 basis points and our coverage ratio now at 1.65%. And very importantly, on capital, our TCE ratio crossed 8%, ending at 8.1%, as we continue to experience tremendous capital build thanks to both strong core earnings as well as PPP revenue recognition, which was accelerated by our efforts to partner with the SBA on their direct forgiveness platform. Our book value has increased an incredible 46% in the last six quarters, which is unprecedented growth of a bank of our size. And importantly, we reach these levels and achieve this growth without any dilution to our shareholders. Flipping to slide five, let me update you on our strategic initiatives broadly across the company. This is what makes Customers Bank so unique, and this is what has and we expect will continue to drive value creation for our shareholders. Firstly, on the commercial side, as you heard from Jay, we seeded a new team in the Carolinas to be based in Wilmington. This brings this year's total to four new expansion markets to date with additional teams in the recruitment pipeline. A reminder that this recruitment is driven by a single point of contact team lift out strategy, which has proven to be a very successful part of the business model, especially in 2021, given the disruption caused by the M&A industry amplified by the great resignation. Moving to specialty lending, we've launched two new verticals, as you heard from Jay, in technology and VC banking, as well as a financial institutions group based in Dallas. As you can see, these teams are strategic fill-ins, both geographically for our footprint and new business lines in verticals that are close to our existing core competencies, enabling cross-sell to existing customers and their affiliates. We are supporting the strong demand across the franchise by continuing to add experienced senior bankers to our existing teams as well to help support the growth from that demand. Our SBA team continues to perform very well with traditional 7A loan originations in the third quarter double of what we saw in the first half of 21. On digital 7A, a reminder that many of these businesses don't have pre-existing banking relationships, and a number of them came to customers' banks with their PPP loans. This is why we created a Digital 7A product, and we believe we are the only bank that has a platform where a digitally sourced customer for loans under $350,000 can apply online, receive quick decisioning, and close in 30 days, which is unheard of and unprecedented in the SBA world. The Digital 7A pilot continues to progress well with nearly a million dollars in originations in the month of September, which we would like to scale up, as we previously stated, to three to five million of monthly originations. We achieved $4.3 million in year-to-date SBA gain on sale, well in line with our $6 million stated full-year target. In our multifamily business, we experienced faster-than-expected runoff in the current rate environment, and as such, we have put a plan in place to grow the portfolio back to our stated target of 15% of total loans. Now moving to the middle on our consumer business. Our digital direct personal loan business crossed a billion dollars in the quarter of customers, crossed a billion dollars in the quarter of customers sourced, applied, underwritten by our credit program. Customers bank direct originations. We ended up with digital personal loan portfolio of 1.3 billion, of which 70% has been sourced directly. To put this in perspective, this is compared to a portfolio of $845 million as of December 2019, of which only 15% had been sourced directly under the customer's bank banner at that time. As you can see, we've created an extremely profitable credit-led neobank within our bank with over 130,000 active, profitable personal loan, student loan, medical, dental, specialty loan customers, all sourced through digital channels and partnerships. When we add in our digital bank savings account customers and our 2020 and 2021 PPP customers, the total increases to over 450,000 active customers coming in through our digital branch. It is worth mentioning that to date, we have cross-sold additional products to less than 5% of that pool. This presents a tremendous opportunity for our data science and digital marketing teams who are advancing our data analytics capabilities to help our team to prioritize products on our roadmap and importantly create digital cross-sell journeys for these customers. Moving to our consumer gain on sale initiative, our digital team originated and created loan pools, which were sold to investors in two separate transactions in the quarter, bringing our year-to-date total to $4.5 million, already in excess of the $4 million target for the year. We have sold 140 million of loans originated for sale to date, year to date. As previously mentioned, we are also working on our first marketplace lending partnership expected to launch in 2022, which has been led by our embedded FinTech team, which was recruited and joined in the last 100 days or so. We're also working, continuing to work, as you heard from Jay, on a new credit card launch and additional consumer products in an effort to have an opportunity to earn multi-product relationships with our digital customers. Now, moving to the right side of the page, firstly, in conjunction with the anticipation of our real-time payments platform, as we mentioned, we onboarded a significant number of non-interest-bearing deposits towards the end of the quarter. To assist us in these efforts, we recruited an experienced team to help with payments product launch, business development, customer onboarding, and customer success to form the digital asset banking vertical. Moving to our digital SMB bundle, this is an advanced rollout starting with the digital 7A, which has already launched. Term loans, revolving line of credit, commercial credit card are all on the near-term roadmap. This is critical to build on our PPP success with small businesses. Finally, as previously discussed, we have engaged a leading global digital consultancy to rebrand and relaunch our omni-channel online presence, which reflects the digital maturation and institutional growth of customers' banks. This is on track to be completed by the end of the year. Moving to slide six. As you can see, our partnership with the SBA and Direct Forgiveness has proven to be an incredibly smart decision. We had a soft launch in August, and it has resulted in significant acceleration of forgiveness for our 2021 PPP originations. We have been able to process over 30% of these loans for forgiveness in just a matter of weeks. I'm proud of the team's technical agility and entrepreneurship to collaborate on such an important technology initiative that many other banks will now have the ability to take advantage of. As you can see, we still have just under 50% of our deferred origination fee still to be recognized in the coming quarters. This will further improve our capital and, more broadly, our franchise position and strength. Flipping to slide seven, Here you'll see a summary of the timeline and overview of the CBIT launch process. We launched within nine months of commencement of our comprehensive opportunity analysis, which first started with a build by partner evaluation. This summer, after selecting our partner and signing our contract, we integrated the platform into our environment and implemented compliance processes and began our business development in earnest. In late September, we began opening up DDAs in anticipation of our imminent payments platform launch. And after we completed testing and had a fully functional platform, we soft launched earlier this month. Our soft launch will include around 20 customers, plus or minus, and we expect to remain in soft launch for a few months before opening up more broadly to all commercial banking customers. With our non-interest-bearing deposit growth to date, we will be focusing on balance sheet, capital, and profitability discipline. We are taking actions on the following items, some of which are already in flight. Firstly, we paid down our PPPLF funding by $3.9 billion in the third quarter and saving an associated 35 basis points or $3.4 million per quarter. We currently have no PPPLF funding remaining. Next, we are focused on improving our deposit mix and cost of funding by reducing or running off higher-cost deposits. For example, our digital bank deposits totaled over $1.2 billion and have savings rates around 50 basis points. We also have a planned runoff by the end of 2020 of our bank mobile associated deposits, which were around $2 billion as of September 30th. In addition to further improving our deposit franchise, we are also laser-focused on interest-earning asset deployment. We increased the size of our investments portfolio by $357 million in the quarter, and we will continue to deploy cash in excess of balances necessary to fund organic lending growth in the fourth quarter and thereafter. In terms of loan growth, We have been very tactical through 2021, gearing up for the launch of our real-time payments platform by adding commercial teams in our expansion geographies and lending verticals like fund finance, technology venture capital, real estate specialty finance, and digital asset banking. These teams are hitting a stride and will be ramping up nicely in 2022. With that, I'll pass it to Carla to cover the financials in more detail.

Thanks, Sam, and good morning, everyone. I'll keep my comments focused on five key topics. First, strong organic loan growth with a favorable loan mix. Second, transformational improvement in the quality of our deposit franchise. Third, growth in net interest income and net interest margins. Fourth, significant capital accretion. And fifth, tangible book value. Turning to slide eight, I'll start with loan growth and overall loan net. You can see from this slide that since 2018, we've had a compound annual growth rate in core loans excluding PPP of 8%. Over the past year, our core C&I portfolio grew by $516 million, or 19%, and our consumer personal loan portfolio grew 32%, or $391 million. As expected, our mortgage warehouse portfolio declined $1.3 billion year-over-year and ended the third quarter at $2.6 billion. Also, as planned, our multifamily loan balances declined over the year-ago period by $563 million, ending the third quarter at $1.4 billion. When we think about the overall loan mix over time, we are still targeting previously reported ranges, with our core CNI, including specialty lending, making up about 35% to 45% of our total loan book. Multifamily, about 15% of the loan book. Investment CRE, approximately 10%. Mortgage warehouse, 15% to 20% of the loan portfolio, and the consumer personal loan portfolio, no more than 20%. As Sam mentioned, you can expect to see growth in the multifamily to hit the 15% target. The mortgage warehouse portfolio is still expected to decline, and we're expecting to end the year somewhere between $1.9 and $2.1 billion. The growth in the multifamily business, along with other lending verticals, is intended to dampen the volatility resulting from our seasonal mortgage warehouse books. As Sam mentioned, we have strong pipelines across all of our lending verticals and are on track to hit our 2021 growth targets that we communicated earlier this year. Moving on to slide nine. You can really see the transformational improvements that we've made to our deposit franchise and overall funding profile. A few items to highlight here. Since 2018, we've had a compounded annual growth rate of 37% in total deposits, Year over year, we had total deposit growth of $6.1 billion, or 57%, which included a $5.3 billion increase, or 115%, in total demand deposits. At the end of the third quarter, our DDAs accounted for 59% of our total deposit portfolio. CDs also declined $379 million, or 39% year over year, making up only 3% of total deposits at the end of the third quarter. We also continue to make significant progress on reducing our overall total cost of deposits. The average cost of deposits in third quarter 2021 dropped 25 basis points from the year-ago period. Our spot cost of deposits dropped to 32 basis points at September 30th, and we now expect our spot cost of deposits to be below 30 basis points by year-end 2021. Turning to slide 10, you can see the growth in net interest income over a rolling five quarters from the core bank, excluding PPP. I'll also make a few comments here. Net interest income of $108 million for third quarter 2021 increased 23% over the year-ago period. And second, net interest margin, again, excluding PPP for the third quarter 2021, was 3.24%. It's important to highlight here that excess cash balances that were held on our balance sheet negatively impacted our third quarter net interest margin by about 16 basis points. Absent these higher cash balances, we would have seen net interest margin expansion by about 10 basis points. Briefly turning to slide 11, a few high-level comments related to credit quality. Overall, our asset quality remains excellent, our credit reserves are strong, and our near-term credit outlook remains stable. Moving to slide 12. This slide really highlights the significant improvement in our total risk-based capital ratio over the periods presented. The estimated total risk-based capital ratio at the end of third quarter 2021 is up about 240 basis points, over the year-ago period, despite the $82.5 million preferred stock redemption on September 15th, which, on a standalone basis, decreased the total risk-based capital ratios by about 70 basis points. The significant accretion in our TCE ratio, excluding PPP, shown on the right slide, the right slide of that slide really demonstrates the slingshot effect in our capital ratios that we've been discussing all year. At September 30th, our TCE ratio was 8.1%, up 36% from the 5.9% reported a year ago. This accretion is driven by the profitability of the core bank, as well as PPP-related revenues. Lastly, moving to slide 13, you can really see the appreciation in our tangible book value over the past 12 months. At September 30th, Our tangible book value was a little north of 35. Rewind one year from September 30th, and our tangible book value was close to 26. That's a 35% increase year over year. Now, if you fully pro forma in all the expected net revenues from the PPP program, our tangible book value is at or above $40. Given where we were trading as of October 20th, our price to September 30th tangible book value was 134%. And this is where we continue to see the significant potential upside. Before turning it back to Jay to wrap up, I'll comment on our core EPS guidance excluding PPP. For full year 2021, we are projecting $4. For 2022, we're projecting between $4.75 and $5, which is about a 20% to 25% increase over 2021. And we are now projecting a core EPS of $6 sooner than the previously reported 2025. And with that, I'll turn it back to you today.

Thanks so much, Carla. Great report. Let me just summarize for you some of the key accomplishments very quickly, and then we'll open it up for questions from any of you. On the financial performance front, as you heard, We reported record earnings, $160-some million pre-tax and $110 million after-tax earnings, and that, like I mentioned, was higher than any annual performance in the company's history. On the deposit side, that's been a very high priority for us to dramatically improve the deposit franchise of the company. And we are really pleased with the growth in non-interest-bearing deposits. And even excluding CBIT-related deposits, year-to-date growth was 37%. And practically all of it came in non-interest-bearing deposits. On the shareholder value stock price performance, as you know, customers' Bancorp stock was one of the best-performing publicly traded stocks in 2021 with 160% plus appreciation. But we still believe that we are only trading at about 10 times earnings, and as Karla mentioned, about 134% of tangible book value. And just to remind you, for the last three years, I and most of our colleagues have taken 100% of our bonuses in stock, not cash. Feels pretty good now. From a technology-driven perspective, as you know, CBIT was launched, $101.5 billion in deposits already here, and we are very poised for significant additional growth. On the PPP front, as you know, we've not only helped 350,000 or so businesses, but more than 95% of these businesses we helped were all classified as real micro-businesses, and many of them being minority-owned and women-owned businesses. And we are thrilled that we were able to help them as well as make hundreds of millions of dollars simultaneously for our shareholders. From a gain-on-sale business, this is a new initiative, technology-based loan sales, and that resulted in about almost $8.8 million in gain-on-sales year-to-date in 2021. We will continue to opportunistically look at more fintech partnerships to grow our digital businesses. We think that is a huge, untapped opportunity. At the capital front, as you heard from Carla and Sam, we dramatically improved our TCE ratio, excluding PPP. We are now at over 8%, and we are only about halfway through realization of our PPP non-interest income, as well as interest income. From the capital front, we completed our redemption of the $82.5 million preferred stock, which is going to add about $13 million in our annual EPS fund rate, as well as we executed, started to execute on our common stock purchase program, where we bought back a few hundred and some thousand shares last month while we were in the quiet period. And we are committed to building shareholder value and will remain opportunistic on any weaknesses we are prepared to buy back our stock. As of October 20th, like I mentioned to you earlier, the exact number was actually 167,000 shares that we purchased. So we remain extremely optimistic about the future and the guidance that Carla has given you on EPS. That is something which we are committed to executing. So with that, operator, please open it up for questions from anybody.

Thank you, sir. As a reminder to all participants, if you have a question, please press star 1 on your telephone keypad. Again, it's star 1 on your telephone keypad. However, if your question has been answered and you wish to remove yourself from the key, please press the down key. Stand by while we compile the Q&A roster. Your first question comes from the line of Steve Moss with the Riley Securities. Your line is open.

Good morning. Morning, Steve. Morning, Sam J. And maybe just starting with the CBIT deposits here, you know, a billion and a half before the soft launch is quite impressive. Kind of curious, you know, how many customers comprise the billion and a half? And if you could maybe give us some color here on where balances are now that you're, you know, called a week or two past the soft launch.

Sure, Steve. You know, happy to provide a little bit more color. So the soft launch, as we mentioned, is somewhere between, you know, sort of 18 and low 20, around two dozen type customers, most of whom have either already funded their accounts or have opened their accounts and are in the process of funding and beginning sort of payments testing and transactions. Over a period of time, we'll continue to share more information on the composition once we have a more stabilized ecosystem. The way that the ecosystem was programmed today was to create three to five nodes of important counterparties with each other. And many of those nodes also connect through at least one counterparty so that we're starting to create the beginning of a web and a network. And over time, we'll be able to share more information on the number of customers, the average balance size, and potentially even payments volume once that ramps up.

Okay. And so just as we think about, you know, you're in soft launch mode, kind of how long do you think you'll be here and, you know, when you maybe – go to a formal launch, how many customers do you envision maybe adding on at a time? Just kind of get a feel for the potential growth here over the next couple of quarters, if you will.

Sure. So it's difficult to fully say with certainty, but I'll sort of answer it the best I can to kind of give you perspective on how we'll approach it. So firstly, from a timing perspective, We anticipate we'll remain in soft launch through the quarter. There's only 60 days left, and we need to make sure that we have all of our customer service and testing and monitoring buttoned up. And we'll continue then sort of onboarding new customers more likely in the first quarter. The way to think about it is that, as I mentioned, we'll continue to add more nodes um these three to five sort of customer type nodes common customer type nodes and then we'll add to the existing nodes um so there's going to be a combination as you think about deposit growth and and uh and customer growth there's existing growth from customers who are already on the platform or will eventually be moving over more dollars as they start to to see more of their counterparties you know on the platform Similarly, the counterparties will be bringing on deposits as well, and then we'll be continuing, you know, to add more nodes as well. So that's sort of how we think about the programming, and really we'll onboard as quickly as makes sense from a compliance and a technology monitoring perspective. Okay, that's helpful.

And then you guys hired a number of new commercial teams here, you know, Just color on the book of business you're expecting them to bring over and also, you know, your thoughts on the digital asset lending in particular. Kind of curious as to how to think about that.

Sure. So firstly on the teams, I think the better way to think about it is that there's only so many players who are actively targeting and banking the payments-based digital asset ecosystem. So over a period of time, in the medium to long term, we feel that we should have an opportunity to take our fair share of payments, transactions, as well as the associated deposit float to fund those payments.

And Okay. And from an earning asset growth point of view, overall, we are very optimistic that as a result of these teams that we've onboarded, as well as we've added, and as well as we are much more focused on earning asset growth, but maintaining our credit standards, we are looking at something like $350 to $500 million growth per quarter in earning assets.

And specifically on the digital asset lending, Steve, it's on, as you can appreciate, you know, in trying to sort of build a moat around these digital asset banking customers who are entering customers' bank and our payments ecosystem. We want to make sure these are multi-product relationships, especially for the more institutional, more keystone anchor customers. And as such, you know, we are exploring and in early stages of diligence on launching, you know, lending into that vertical as well.

Okay, that's all helpful. And then in terms of maybe just on, you know, the digital SBA initiative and the originations there, you know, a good quarter in terms of everything and loan sales, just talk about, you know, in the release you have talked about a couple quarters of gain on sale income. I mean, are you guys just thinking of putting it on balance sheet longer? Just kind of curious as to how you're thinking about the strategy on that side.

The gain on sale that we view is we are looking to make sure that we have sort of a minimum threshold of four times what we were in 2020, as an example, in 2021. And that's something that we would like to maintain from sort of a $6 million plus or minus type recurring revenue gain on sale stream. We're currently originating at a pace of about $10 million a month in our traditional 7A business. And that feels like a good number to be building off of. We're continuing to hire more individuals to join that team to have an opportunity to grow in 2022 and 2023. To date, with the 90% guarantee sort of falling off a little bit potentially this year, we have still seen our gain on sale premiums at north of 10%. We were north of 10% this quarter. We were north of 10% in the second quarter. So in a market where you're sort of in that 10% to 12% gain on sale situation, it does make sense to continue to sell the guaranteed portion of our loan book. Having said that, over time we may reevaluate this, but that's more of a long-term decision.

Okay. All right. Thank you very much. I'll step back into the queue.

Thanks, Steve.

Once again, ladies and gentlemen, if you have a question, please press star 1 now. Again, it's star 1 on your telephone keypad. Your next question is from Bill Desolam with Tyron Capital Management. Your line is open.

Thank you. I believe that you all purchased roughly $529 million of PPP loans in the quarter, and if that's correct, What was the discount that you paid on those loans, and is there any difference in timing that you would anticipate for when those will be forgiven?

sure uh good morning bill um so we we purchased those loans at approximately a one percent discount um plus the you know we have the ability for the one percent um you know interest income uh having said that we thought this is an interesting opportunity in conjunction with the launch of the spa to direct forgiveness platform um this was a global fintech who wanted to rationalize and and uh and move ppp uh you know off their books and put it behind them so they could focus on other initiatives And as such, we had an opportunity to not only acquire the loan book at a discount, but we also feel we're going to have an opportunity to forgive these loans at a faster pace than you would have seen in 2020. And as such, there's an opportunity to recognize most of that gain in the next two quarters.

And so, Sam, if we understand correctly, the benefit or gain to you all will be double the normal PPP as opposed to 1%. It will be the 1% plus the 1% discount or a total of 2%.

Well, the 1% interest income is on an annualized basis. So the discount will be realized, but the interest income will be for however many months pro rata that those are on our balance sheet.

Understood, Meyer. Thank you very much.

Thanks, Bill.

Once again, if you have a question, please press star one now. The next question is from Peter Winter with Redbush Securities. Your line is open.

Good morning. It's very helpful to give the updated EPS guidance for next year. I was wondering, could you just provide maybe some big picture details, maybe on the balance sheet income statement trends that you're thinking? And then secondly, Does that include share buybacks and potential for additional preferred stock redemption?

Yeah, let me take a stab at that, and then I'll pass it on to Carla and Sam for any additional comments. So, Peter, we are looking at, like I mentioned earlier, earning asset growth and deploying some of our excess cash. So that's going to be contributing. Then the continued non-interest income growth, continued net interest income growth, as well as continue to manage our expenses. But we've been making all the investments that are needed to make for our future growth. So I think the drivers of our revenue next year will be by maintaining our expense growth and getting the net interest income going from the earning asset generation capabilities. And we've set the stage for that. We've set the foundation for that. and we are very, very bullish that we'll be able to execute on that. Carla, anything you would wish to add?

No, Jay. I think you hit the comment on non-interest expenses and that we're remaining very diligent on managing those expenses. And as we think out longer term for 2022 and beyond, we're projecting no more expense growth than 5%.

And does that guidance, does that include any share buybacks or potential for additional preferred stock redemption?

I think we've not included any significant share buyback. That will be opportunistic because we think there might be a lot of volatility in the markets, who knows, over the next several quarters. And we are going to be prepared to execute aggressively if needed. for our share buyback. But at the same time, we see revenue growth and deploying the capital and that gives us a higher return. Then we will allocate the capital in that direction. So we really what we've done is that we positioned ourselves for capital allocation in the best possible way. And so we are very well positioned, in our opinion, to make the net income guidelines that we've given to you without sheer buyback.

And Carlo, do you want to address the part of the question on the preferreds?

Yeah, and from a preferred perspective, what we're thinking about right now is as of December 15th, our last series of preferred stock will ultimately reset and become redeemable. So as we think about that longer term, we're considering potentially refinancing them or redeeming them and refinancing them in 2022.

Okay, thanks. I hear you on credit quality, that you've got a positive outlook on credit quality. I guess I was a little bit surprised that you added $6 million to reserves. That's a little bit of an outlier versus other banks. And part of it is to support the consumer loan growth. But I'm just wondering if you could talk about the rationale for anything else, why you added to reserves, and then maybe just what the outlook is for provision expense?

So I can give a couple comments on that. First of all, during our quarter, we recorded $13 million of provision expense, and that was offset by about $7 million of charge-offs for a next $6 million increase in our ACL. And we have a very disciplined governance process surrounding the estimation of our ACL. And when we looked at mostly the consumer installment portfolio, just the change in the mix there, we had some increase in the provision expense, but nothing, no emerging trends. And the guidance that we're given is still within that $10 million to $15 million per quarter. So we felt this quarter was

right in the middle of that previously reported s great and then just my my last question um that that six 6.2 million the the make whole fee to a single high deposit cross customer can you just provide a little bit more color on that and and why it's it's transitory yeah let me take that on uh two years ago a year and a half ago when there was a very different environment

As part of our hedging strategy, we accepted a large deposit from a national company with a fixed rate for a five-year period. And we just didn't think in this kind of an environment that it made any sense to keep that on our balance sheet, plus the fact that we have a tremendous growth rate in non-interest rating deposits, and that we could get rid of it very effectively by not really effect on our income statement. So it is... It was the right move for us, and that's going to help us with our margin, and it's already helped us with our margin, and we think it's the right thing to do.

Thanks. Congratulations on a really nice quarter.

Thank you so much.

Your next question comes from the line of Frank Giraldi with Piper Sandler. The line is open. Good morning.

Morning, Frank. I just want to make sure I have the loan growth expectations right. I think in the last quarter you talked about mid- to high-single-digit loan growth, excluding PPP and warehouse. And now with some more, I guess, growth in multifamily, I'm just wondering if that still holds true. And any thoughts as we head into 2022? Yeah.

Carla, you want to take that?

Yes. Yes. So, yes, that does still hold true. As Sam and we talked about, we have record pipelines across all of our lending verticals, and we're expecting most of that to come into the fourth quarter. Maybe some of that will come into the first quarter of next year. So right now it's still on target to hit those growth expectations.

And any thoughts on 2022? I know, you know, it's still 2021. But just given the teams you've added, and everything you're doing, it seems like there could be some acceleration in those expectations.

Yeah, so at this point in time, we're waiting to see what comes through in the fourth quarter, and then as we complete our strategic planning process later this year, early next year, we'll come out with more guidance in 2022 for growth expectations.

Okay.

On our January call.

Okay, and then just lastly on efficiency, I'm wondering if there's any color you can provide. Jay, you already talked about, you know, these investments having been made for these new business lines you're entering. Wondering if you could either, you know, Carla, talk about expense growth or maybe, you know, more easily, it's more easy to talk about, you know, core efficiency level that you anticipate for the bank.

Yeah, so a couple comments there, and I think we talked about it with the addition of the new team. Some of those were added very late in the third quarter. Some will come through the fourth quarter, so not fully baked into our run rate at this point in time. But as we mentioned, we remain very diligent about managing our expenses as we strive for operational excellence. We will be very diligent in controlling those expenses in 2022 and beyond. And so as we go through that strategic planning process, again, we will continue to invest in our future and new technology with the balance of managing those expenses.

Okay. And if I could just sneak in one last one on buybacks. Jay, you mentioned You know, it sounded to me like you might be more opportunistic just given some of the volatility you think you could see in the marketplace. So is it safe to assume maybe at these levels it's more about keeping powder dry and then if there is, you know, volatility in the market being opportunistic there?

Yeah. Frank, you're right, because we are very focused and we don't want to get our eye off the fact that we want to improve and have best-in-class TCE ratios and overall capital ratios. And unlike majority in the banking industry who are really struggling to see any kind of revenue growth, we are not struggling to see revenue growth. We are sort of a very unique, very few banks like us who are seeing such opportunities. So that's why from a capital allocation process, we want to make sure that we allocate the capital in a manner that is most effective from a safety and soundness point of view, that's most effective from the shareholder value creation point of view, and that we use all types of capital to support our growth. We are not backing away from our targets for TCE ratios to be dramatically higher than where they have been. And we want to maintain those. We are conservative and we've been building our reserves like we shared with you. And we want to have a fortress balance sheet. That is much more related to shareholder value creation than constant regular buybacks to support earnings per share growth. Revenues, in our opinion, must support earnings per share growth with buybacks whenever there is an opportunity. That's our philosophy.

Great. Okay. Thank you for all the color.

Your next question comes from the line of Michael Purito with KBW. Your line is open.

Hey, good morning, everyone. Thanks for all the color thus far. Obviously, a lot of my questions have been asked and answered, but I did have a couple additional questions on the CBIT launch I wanted to drill down on, I guess. Number one, we appreciate any color around how you guys are thinking about kind of the the volatility of the deposits that come onto the platform and how that kind of impacts your ability and your appetite to deploy them, whether it be in cash, securities, or loans, you know, over time as they season. We'd love a little bit more color about how you guys are thinking about that dynamic, because I know, you know, the volatility, you know, quarter to quarter, week to week can be pretty high with some of the other banks that are doing something similar to this.

Sure, absolutely. Good morning, Mike. Happy to take the question. So I think that some of the other banks are seeing payments volatility. They're not necessarily seeing deposits volatility. They're seeing more velocity, which makes sense. As there's market volatility, there's more transactions between some of the institutional investors. So first and foremost, we have enough, you know, our loan to deposit ratio is, is almost, it's just slightly above 60% sitting where we are today, uh, XBPP. Uh, so we have a tremendous amount of cash to continue to deploy, uh, uh, to fund, uh, our, uh, even sort of, uh, you know, uh, opportunistic, uh, loan growth, uh, you know, above what one would expect, uh, in, in all of 2022. That's the first point I would make. That's just important to note as we think about the ramp up of this business. The second thing that I would say is that being a fast follower in the business, we have the luxury, the benefit of choosing some of the most institutional but also key anchor clients who have grown a lot in the last couple of years since they first started payments-based banking relationships. So we have an opportunity to be very selective, especially in the beginning as we program the beginning of the foundation of the payments platform. So I think the two of those combined should give a lot of medium-term comfort. And then from a long-term perspective, we talked about a strategy of investment securities. being on standby for loan growth. That helps our short- to medium-term profitability. And then we'll be able to disclose all of the types of statistics and disclosures that will help give you comfort that these are sticky deposits as opposed to me just telling you today that they will be sticky.

Yeah, and no, I mean, I think the question wasn't more so that whether they're sticky or not. I think it's just, you know, if there's a lot of velocity in the movement, it can just be a little trickier to deploy. I think, you know, generally speaking, the deposits, you know, seem to be pretty operational in nature, right, which should make them sticky, you know, over their lifetime, I would think.

That's right. That's right. Yep, absolutely. I think that's it. And one thing to just mention, when there's market profitability, yeah when there's market volatility uh the customers actually fund more in deposits so higher volatility actually leads to higher deposit balances which is counterintuitive when you think about it right on the digital asset side you're talking about specifically right correct correct yeah and and i apologize if you guys clarify this but the 1.5 billion of digital asset deposits

That wasn't – I was kind of – I was a little confused with the way it read. That is just kind of operational deposits that opened up with customers' bank, right? That's not necessarily funds that were opened up specifically to be on the CBIT platform, which launched post-quarter end. Is that right, or am I misinterpreting that?

No, it's actually the latter. They joined the platform in anticipation – of the real-time payments platform launch. They started opening up DDAs and funding accounts prior to the launch.

Got it. Okay. All right. And just lastly, as you – you know, I think the – obviously with the SEND and SIGNAT are very digitalized and focused, but you guys are not kind of, you know, limiting your – you know, in terms of only focusing the tacit platform there. I was just curious, though, I mean, is the digital asset space kind of likely the most nearest growth opportunity? But I was curious if you were willing to provide a little bit more color around what other use cases you think the platform could have that maybe we could see some momentum in, you know, inside the next 12 months versus, you know, kind of multi-year build-outs.

Thanks for that question. It's something we didn't cover. So firstly, there's a maritime client that's part of our soft launch to give you perspective. So we've already brought a new corporate client that was not part of customers bank already, you know, into that's a multi billion dollar, you know, customers. So there's an opportunity while the account balance is not very high today. There's a tremendous opportunity as counterparties come in. Second thing that we've done is, you know, we have about 10% of our customer base. of our deposit customer base that is already engaged and in discussions about either learning more or joining the CBIT platform. Specifically, $375 million of that is in process of integration and onboarding to eventually join the platform in the next quarter or so. So that doesn't increase our deposit, but it just talks about the engagement, and then obviously those folks will need counterparties to be joining Customers Bank as well to make the payments platform successful.

Got it. Okay. Very helpful call, Sam. Thank you, and thank you for all the other insights. Appreciate it. Thanks. Bye.

We have completed our hour. Are there any final questions? Please press star 1 now.

Well, if there are no other questions. Sorry, go ahead.

Apologies, sir. Our last question is from Steve Moss with the Riley Security.

Just a couple of follow-ups here. Just in terms of the PPP fees, just kind of curious on the disclosure of the PPP fee total, does that include the $529 million purchase, or does that exclude it?

Yes, it did. It does.

Okay. And then in terms of just the timing of the PPP fees here, as we think about realization, it looks like you had really good acceleration into quarter end. I don't think we talked necessarily about how to think about what you think could be paid down here in the upcoming quarter or two.

Sure, Steve. We unfortunately don't have a great sense. What I can say is, as you can tell, there was a big surge, 70,000 loans forgiven in just seven weeks after the soft launch of the direct forgiveness platform. Having said that, as you can appreciate, we're a couple of weeks into the quarter and the pace has definitely slowed down. But we're continuing to engage in digital marketing campaigns with those customers. understanding who has started an application, who has questions. And what's really fascinating, and this also translates into our cross-sell opportunities, is we have a 70% to 80% email open rate for these customers. So beyond forgiveness, there's an incredible upside opportunity to continue to sell products and services to these customers.

Right. And that ties in to my next question, Sam. In terms of just the digital SMB, you know, you guys highlight the pilot launch here in the first half of 22. I mean, I see the 315,000 unique customers, but kind of curious, you know, how do you think about, you know, the potential size of those customers? And if you could size it up in any way, kind of frame out how to think about the potential of that initiative.

Yeah, it's a good question. And it's something that we're going to have to share more over time, because we're also learning about the customer and customer health. And we've actually gone so far as to, to partner with third party data providers just to try to triangulate transaction data for for many of these merchants. We're also, in some cases, treating the business owner as an individual, say, for a personal loan product. But first and foremost, the demand that we think is going to be top of mind is going to be the digital 7A product, which is what we prioritize first. So over time, we'll continue to share more information. We just wanted to take this opportunity this quarter to share what the gross customer pool looks like, which is very unique of a bank of our size.

All right. Okay, great. Well, thank you very much and a great quarter.

Thanks, Steve. Thanks, everybody. Sorry.

Apologies again, Steve. And that concludes the question and answer session. I'm going to call back to JC Dewey, Chairman and CEO of Customers Bank, and Executive Chairman of Customers Bank. Thank you.

Thank you very much, everybody. Really appreciate your interest in Customer Bank Corp. If you have any further questions, please don't hesitate to call any of us. Thank you and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Stay safe and well. Have a great day.