Customers Bancorp, Inc

the 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 is my pleasure to introduce Customer's Bank Corp Chair, Jay Sidhu. Jay?

Thank you, Dave, and good morning, ladies and gentlemen. Welcome to Customer Bank Corp's third quarter 2023 earnings call. Joining me this morning are Customer's Bank President and CEO, Sam Sidhu, Customers Bank Corp CFO Carla Liebold, Customers Bank CFO Phil Watkins, and our Chief Credit Officer Andy Bowman. I really want to thank Andy for all his service to the company, and as you all know, he is retiring from the bank after exceptional service to us, and he'll be leaving us end of the year. We are pleased to share Customers Bank Corp's results with you this morning. This quarter's results demonstrate the strength of our franchise with continued positive momentum across all our top financial priorities that include deposits, margin, liquidity, profitability, and capital. All of this while maintaining our strong risk management principles. We salute our team members throughout the bank whose commitment and hard work makes our success possible. I also want to thank our clients who place their trust in Customers Bank every day as we try to execute flawlessly in serving their banking needs. Looking at slide three, we wish to again demonstrate how Customers Bank is a forward-thinking bank with strong risk management. We will cover five major topics in this morning's presentations. I'll cover a few highlights and my colleagues will cover each topic in more detail. First, in terms of quarterly performance, we delivered another strong quarter that significantly exceeded spread estimates across every metric based on strong underlying performance as measured by return on assets, return on equity, margin expansion, control of our expenses. All of these while materially improving our capital ratios. Second, we continue to create franchise value across the bank. We saw the market disruption as an opportunity to create and deepen client relationships. As an example, we are so proud of our team members in the tech and venture banking group that have not only met, but exceeded our expectations. As a result of strong deposit growth from our borrowers, the acquired tech and venture banking portfolio is already self-funded one quarter ahead of our schedule. And there is excellent momentum to build our client base, our brand, and generate attractive deposit and loan opportunities going forward. We would also like to once again welcome these fantastic new clients to our firm who are driving innovation and progress in our economy. We generated $1.3 billion of core deposit growth in the quarter. As promised, we use these deposits to improve the overall quality of our funding base by paying down high-cost wholesale deposits and redeeming some of our high-cost outstanding federal home loan bank advances. Importantly, our deposit gathering was granular and diverse across our franchise, and our non-interest-bearing deposits increased to 26% of our total deposits. Third, we significantly increased our capital levels for second quarter in a row. Carla and Sam will provide much more details, but I wanted to mention that With a controlled balance sheet, we were able to increase our TCE ratio by 50 basis points this quarter. Our CET1 ratio went up by 100 basis points this quarter to 11.3%, and our risk-based capital ratio also went up by slightly over 100 basis points to 14.3% at the end of this quarter. We are committed to maintaining or further improving these ratios. Fourth, credit quality, which is always a key focus and part of our DNA at Customers Bank, remains incredibly strong. Recent areas of focus in office as well as retail, commercial real estate, are absolutely immaterial components of our balance sheet. Our NPA ratio has remained stable and we are confident in the future performance of our loan portfolio. Finally, we remain very optimistic about our future performance. We are pleased with the quarter's results and expect to significantly exceed our 2023 full-year core EPS guidance of $6 a share and report stronger core results in 2024 and beyond. Now, turning to slide four, let me briefly reiterate our priorities which remain unchanged. We have and will continue to moderate growth and ensure we are capturing franchise enhancing full banking relationships. We will continue to fortify our balance sheet and improve our capital ratios because that is a prudent thing to do in this uncertain environment. As always, Risk management remains at the core of our bank's DNA, and we are unchanged in our commitment to our critical success factors. These critical success factors have been in place since the day we started the bank. They are, first, managing credit and interest rate risk. Secondly, maintaining robust liquidity and capital levels with strong asset liability management principles. Third, always making decisions that drive positive operating leverage. We believe our unique mix of size and sophistication creates a competitive advantage to many of our regional bank peers. We are seeing attractive new loan and deposit growth opportunities. We believe we should be able to show high single-digit to low double-digit loan growth next year, assuming stable economic environment. We have ample liquidity and strong capital to support moderate growth. Asset quality remains exceptional, like I stated earlier, with our NPA ratios remaining roughly flat at just 14 basis points. Office and retail commercial real estate each represent less than 1% of our total loans. Before I pass on the call to Sam, I want to welcome to the call Steve Moss. our new research analyst from Raymond James. Steve joins an already extremely talented group of research analysts who follow customers' Bancorp story. We are excited for the insights that Steve will add to the discussions each quarter and to his regular reports. With that, I'd like to turn it over to Sam to cover the key activities and results of the quarter in more detail.

Sam? Thanks, Jay, and good morning, everyone. We're pleased to report that our team again delivered one of our best quarters yet, especially in an uncertain macroeconomic and geopolitical environment. In the third quarter of 2023, we produced extremely strong GAAP results across all profitability metrics, earning $2.58 in GAAP EPS on net income of $83 million. Our ROA was 1.57% and ROE was 24%. We continued to buck the industry trends and increased our net interest margins significantly in the quarter to 3.7%. From a balance sheet perspective, we maintained a disciplined, roughly flat balance sheet. Total deposits were up 1% in the quarter as we continued to transform the quality of our deposit franchise, which I'll provide more detail on shortly. Credit quality remained benign. As evidenced by the NPA ratio Jay walked us through, reserve levels remained robust at 466% of NPLs. We do not see any signs of weakness in our book, but remain hyper-focused on portfolio management. Before we dive into more detail, I wanted to take a moment to put our quarterly performance into context. We grew our core earnings by 60% in the quarter. We expanded margins significantly and reported net interest income well above expectations and significantly above industry trends. We earned more than 20% return on common equity, and we achieved all of this while building our capital base by 100 basis points. We're extremely proud of what the team was able to accomplish and appreciative of all of their hard work in producing these extraordinary results. Moving to slide six, in a challenging deposit environment for the industry, we were able to grow our deposits by a net $200 million, even after significant wholesale deposit payouts. From a core deposit perspective, we had $1.3 billion of growth. I'll say that again, $1.3 billion of growth. This represents over $100 million of deposit generation per week throughout the quarter. When combined with last quarter's growth, this is over $2.1 billion in core deposit growth, which is significant growth in our core deposit franchise. I want to highlight not just the quantity but also the quality of this growth. The deposit growth we have achieved was a team effort across the franchise. For additional context, about two dozen of our deposit channels saw solid growth in the quarter, with most of them up $25 million or more, demonstrating the broad-based nature and quality of our deposit transformation. This growth was also very granular as we added over 1,000 new high-quality commercial client relationships in the quarter. This caliber of deposit growth represents true franchise value creation and continues to strengthen our deposit base. Our core deposit growth in the quarter was once again used to pay down higher cost as well as wholesale funding with the reduction of over $900 million in wholesale CD balances, which totals over $1.5 billion of pay down over the last two quarters. While the industry has been steadily losing non-interest-bearing deposit balances, the Year to date, we've increased our non-interest bearing deposits by $2.9 billion. Non-interest bearing deposits now comprise 26% of our total deposits. This is the third consecutive quarter of increasing non-interest bearing deposits, which we believe is a testament to the strengthening of our deposit franchise. As a result of these efforts, in spite of the Fed again increasing rates, our average cost of deposits increased by only 13 basis points in the quarter, which we believe is one of the lowest increases in the entire industry. Since the first quarter, our average cost of deposits declined eight basis points this year. This is in the most challenging deposit environment that the industry has seen in recent history. We can say with certainty we are the only bank in the industry to accomplish this decline. We remain deeply focused on the quality and stability of our deposits, and at the end of the quarter, 78% of our deposits were either insured or collateralized. This metric keeps us in a very strong position relative to regional bank peers. Our core deposit pipeline remains robust at over $1.5 billion, which we anticipate onboarding over the next three quarters or so. We would note that we expect the student portion of the deposits managed by BMTX of over 500 million plus to move to their new partner bank likely sometime in the month of December. We are one of the biggest beneficiaries in the industry of the significant customer and deposit disruption earlier this year. 2023 will be a transformative year for our deposit franchise and one marked by increasing the diversification, granularity, and overall strength of the franchise. Moving to slide seven, $200 million of net interest income in the quarter represents a second quarter in a row of record net interest income ex-PPP. The more than 20% increase in net interest income had roughly $27 million of outsized discount accretion from the acquired venture banking loan portfolio. Even after adjusting for the outside discount accretion, This would be a record quarterly NII XPPP, and we continue to have positive momentum for expansion off of this normalized base. While much of the industry continues to face headwinds, our net interest margin expanded to 3.7% in the quarter, benefiting from our deposit transformation, the floating rate composition of our interest earning assets, and was enhanced by the outsized accretion. Normalizing for the accretion, our NIM would have been about 3.2% versus 3.15% last quarter, and we expect this upward trajectory to continue in the fourth quarter and into 2024. Similar to the story on deposits, this is the second quarter where we had one of, if not the best, performances in the industry with sequential continued improvement. With that, I'd like to turn the call over to Carla to discuss additional highlights from the quarter.