Customers Bancorp, Inc

Hello and welcome to the Customers Bank Corp Inc. 2024 Fourth Quarter and Year-End Earnings Report. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. I would now like to turn the conference over to David Patti of Customers Bank. You may begin.

Thank you, Sarah, and good morning, everyone. Thank you for joining us for the Customer Bank Core Earnings Webcast for Q4 and the full year 2024. The presentation deck you will see during today's webcast has been posted on the investors' webpage of the bank's website at www.customersbank.com. You can scroll to Q4 and full year 2024 results and click Download Presentation. You can also download a PDF of the full press release at the spot. Our investor presentation includes important details that we will walk through in this morning's webcast. I encourage you to download and use 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 Customers Bank Corp Chair, Jay Sidhu.

Jay? Thank you, David, and good morning, ladies and gentlemen. Welcome to our 2024 Fourth Quarter Earnings Call. I hope you all had a wonderful holiday season and are off to a great start in 2025. Joining me this morning on this call are President and CEO of Customers Bank, Sam Sidhu, and Customers Bank Corp CFO, Bill Watkins. I am this morning pleased to share with you that in 2025, we'll be celebrating the 15-year anniversary of starting Customers Bank Corp. From the humble beginnings of our family and friends making a 17 million equity capital infusion to take full controlling interest in this, in what was at that time a 200 million asset new century bank, and which had only $70 million in core deposits, but also had 30% non-performing assets. From those kind of beginnings, today, Customers Bank Corp has been built into a thriving $22 billion asset bank, a high-performing bank. Please join me in congratulating and thanking our team members and our board of directors who have worked very hard to make all this happen. For those of us who made the $17 million investment in Customers Bank Corp 15 years ago, we also can celebrate because we have made about seven times our money over this 15-year period, even though we are still trading today at the low book value. We believe that the best days of Customers Bank Corp actually lie ahead. That's just one of the reasons why the entire management board or what many people call the executive and senior management team, this year has elected to take their entire 2024 bonus in stock rather than in cash. We are a future-focused bank. Through the hard work of our exceptional team, we built a franchise that is extremely ready for the future with diversified deposit and lending platforms that, in our opinion, are truly unique. We are very well positioned to continue our evolution from a small community bank to a well-diversified regional business bank with a national presence in several niche businesses and a business model that truly reflects the single point of contact for our customers. Our strong results this past quarter and over the past several quarters and years underscores this transformation and the progress we've made. Reflecting on 2024, it was truly a pivotal year for us and a year of strategic investments in our foundation for the future. We believe this will stand out as one of the most transformative periods in our company's history. And like I stated earlier, we are very excited about the future of our company. Moving now to slide three, most of you are familiar with the customer's bank franchise. For those that are newer to our story, let me briefly highlight what makes our model unique. We are not a traditional bank. We are very well positioned, diversified tech forward institution operating across community banking, corporate banking, and digital banking franchises. We believe we are building a bank of the future. Our goal is to provide clients with the breadth of products and services that you'd expect from a larger bank while delivering the personalized high touch service of a private bank. This is what we mean by single point of contact. Exceptional client service is not just a priority for us. It's the cornerstone of our culture and the key to our success. This focus is so central to who we are, it's embedded in our name. Our dozens of teams of outstanding and experienced bankers deliver for their clients through a high-touch single point of contact model supported by a high-tech platform. We have been a consistent recruiter also of top talent, and that, we believe, is a major strength of our company. While the frontline teams that I've talked about that we've added over the last several years get most of the attention, we believe we've added excellent leaders and team members across the entire organization, including credit, risk management, compliance, marketing, treasury management, human resources, and of course, technology, just to name a few. Their efforts are continuing to level up the way we operate and are fueling the next phase of our growth. With that, I'll pass the call over to Sam on slide five to add to this and share with you the highlights of the quarter and the year. Sam?

Thanks, Jay, and good morning, everyone. To the couple hundred live participants who've already joined the call, really appreciate your interest. I'm thrilled to have an opportunity to walk you through our excellent quarter in more detail, but first I wanted to take a minute to reflect on what this incredible organization and my colleagues have accomplished since I had the privilege of joining the management team, which is exactly five years ago this week. As you can see on slide five, over this time period, we have delivered exceptional franchise-enhancing deposit-led growth. The bank has essentially doubled in size over the last five years, ending 2024 with over $22 billion in assets, led by an impressive $10 billion of net deposit growth, which is 17% annually. Incredibly, we accomplished all of this while growing our capital ratio significantly, with CET1 up 400 basis points, providing us tremendous flexibility today. Slide six shows how the execution of our unique strategy has resulted in a huge increase in our earnings power and profitability. Net interest income is up 19% annually, and our core EPS is up over two and a half times over the last five years. This is even with the significant investments we've made in 2024. Our margin has also increased by 40 basis points over that time. As we've said many times before, we believe sustainable growth in revenue, EPS, and tangible book value are the key metrics for long-term performance in bank stocks. Customers has delivered an awesome annual growth of 15% revenue, 20% EPS, and 16% in book value, which is higher than the top quartile of banks between $10 and $100 billion in assets. This has resulted us in being the top performing publicly traded U.S. bank stock two of the last four years. We're proud of what the team has achieved, but even more excited about the prospects and momentum going forward in 2025. With that, I'll move to slide seven and touch on our areas of focus. The top priorities for our company and senior management in many ways look very similar to last year, which highlights the consistency of our strategy. Our clients are at the forefront of everything we do. Every decision we make is guided by the understanding that our clients are the foundation of our success. It is their trust and partnership that enable us to grow and thrive. When our clients succeed, we succeed, and we also believe what gets measured gets done, as evidenced by our best-in-class NPS. We're committed to building on this momentum, and we will continue to look for ways to enhance the client experience and deliver moments that truly make our clients say wow. Our top financial priority remains improving our deposit franchise even further, coming off of a year of incredible success. In 2024, we were opportunistic in hiring and continued to gain market share, allowing us to reduce our wholesale funding and other high-cost deposits. Our cost of funding improved in 2024, and with the tailwind of rate cuts, we have achieved an impressive total deposit beta of 64% thus far in the easing cycle. This is an amazing accomplishment, especially considering we had industry-leading loan growth of 12% over the same time period. This provides us great momentum for 25, and as a result, we think the opportunities ahead are even stronger. We'll continue to look to grow the loan portfolio as we see strong opportunities across our diversified verticals for franchise-enhancing loan growth from holistic relationships. We believe that a pro-business government agenda should lead to higher industry loan demand, though we're not counting on that in order to meet our goals. As we continue to execute on both sides of the balance sheet, we will seek to grow our net interest income above the industry average. As we've said many times before, uniquely, the easiest path for us to do so is by lowering our interest expense. 2024 was a year of investment for us. One of the key areas of investment is our risk management infrastructure as we strive to meet and exceed our own and regulatory expectations with enhancements across people, processes, and technology. If we achieve the goals we've set for ourselves, we believe risk management can be a strength and competitive advantage for customers' banks. We will continue to undertake operational excellence initiatives to increase fee income and reduce expenses in certain areas to provide the fuel to reinvest into our franchise. We will not hesitate to make investments that will position us for the long term. We are so focused on finding efficiencies across the platform, and we're privileged to be able to make those investments while still achieving positive operating leverage. We will do all this with not taking our eye off of other key risk management areas, ensuring we have we maintained strong capital liquidity and credit quality. Turning to slide eight, you'll see that the many accomplishments that delivered a strong fourth quarter are also providing great momentum for 25. We once again had a billion dollars of gross deposit inflows in the quarter, and we continued to remix out our higher cost deposits. This led to a lower deposit cost of 39 basis points. we bucked the market trend growing our loan portfolio at an industry-leading 19% annualized pace. The combination of these factors resulted in a net interest income growth in the quarter of 6% and also increased margin by five basis points. As I mentioned, we executed an operational excellence initiatives and are on track to achieve our target of $20 million, which we'll be able to reinvest into the franchise. As part of this, I'm thrilled to say that as we guided last quarter, we fully transferred all CBIT customers to our in-house developed Cubix platform, which both improves our controls and is providing a $5 million annual run rate fee income, as well as third-party technology expense reduction supporting the transition. We achieved all of this while maintaining strong credit quality. Advancing to slide nine, you'll see our gap financials, and then moving to slide 10, I'll run through the core financial highlights for the quarter and the full year. We delivered core earnings per share of $1.36 in the quarter on net income of $44 million. For the full year, this was $183 million in core net income, or 560 in EPS, which represented a full year core ROE and ROA of 11.4 and 92 basis points respectively. These results, while strong, included a year of transition and significant investment, which impacted profitability in the short term. But Q4 represents a nice jumping off point and provides great momentum as we head into 2025. As we see positive operating leverage from the benefits of investments we've been making, we expect our ROE to improve to the mid-teens and ROE north of 1% respectively over the medium term. On that note, I'll cover our deposit transformation on slide 11. We are once again thrilled with the team's efforts to improve our deposit franchise, which was firing on all cylinders. To recap some of the incredible results, total deposits increased by more than $775 million, or 4%. Non-interest-bearing deposits, led by our Cubix platform, increased to $5.6 billion, or 30% of total deposits, now standing at about the top quartile of banks between $10 and $100 billion. We reduced our broker deposits by around an estimated $500 million in the quarter, and once again brought in over a billion dollars of gross deposits. Importantly, this continues our streak since early 2023, now at seven quarters in a row, averaging at about a billion dollars in deposit inflows per quarter, which we're using for Remix. As I mentioned, by successfully running a deposit playbook, we reduced our average cost of deposits by 39 basis points in the quarter, or 64% beta so far in the down cycle. As a reminder, our deposit beta on the way up was about 60%, so we're off to a great start. And importantly, we had strong stability in deposits in connection with the repricing efforts. The teams we brought in since early 23 are doing incredible work. They manage relationships with over $1.7 billion of granular, low-cost, relationship-based deposits, approaching about 10% of our deposit base in just 18 months. The new commercial banking teams we hired last year managed about 900 million deposits at year-end and about a billion as of this week. We've increased the commercial client count of our franchise by almost 50% in the last two years, which is just exceptional. Through their efforts and across the company, we've already transformed the deposit franchise. To recap and put this in perspective, since March of 23, we've paid down $4.5 billion of wholesale CDs and borrowings. Over that same time period, we've increased our non-interest-bearing deposits by over $2 billion. And in the next phase, we've been reducing the level of higher cost and less strategic deposits at a consistent clip. With a deposit pipeline of over $2 billion led by our new teams and with contributions across the franchise, we are still in the very early innings as we walked you through last quarter. As I mentioned earlier, we believe we are well positioned to reduce our interest expense further to drive NIM and NII higher. With that, let's turn to slide 12 on the loan portfolio. The fourth quarter was another exceptional quarter of loan growth for us. We delivered $670 million of franchise enhancing loan growth, which was diversified across our platform. This quarter, the largest contributors were from Fund Finance, our new commercial banking teams, commercial real estate, healthcare, and mortgage finance. We continue to be able to step into the void in the commercial real estate lending market as we provided fulsome relationship-based loans accompanied by significant deposits. To put that in perspective, the $340 million in multifamily and commercial real estate loan book increase over the last two quarters has been more than self-funded with real estate industry-related deposits coming from high-quality institutional owners looking for a new relationship bank. As you can appreciate, this type of self-funding is really unheard of in the real estate industry and underscores the void we are filling in the market. Our lending is also very granular, with an average loan size of around $6 million originated in the quarter. Despite our modest growth, our concentration remains under 200%, which is proving to be a significant competitive advantage against our peers. For the year, we grew the entire loan book by $1.6 billion, which was about 12.3% growth and within our 10 to 15% target. This really bucked industry trends with most banks seeing very little increases in loan balances. Importantly, this growth has been well diversified, coming from the many groups and channels of our franchise. Despite this growth, our loan balances are still below where they ended in 2022. We have focused on replacing the less strategic portions of our loan book that we exited over the last two years with strategic franchise enhancing and holistic relationships. While our deposit franchise and transformation gets more focused, the franchise transformation is frankly evident on both sides of the balance sheet. We're seeing great opportunities to continue this momentum as we go into 2025. With that, I'll pass it to Phil.

Thanks. Thanks, Sam. And good morning, everyone. On slide 13, we've provided the components of our net interest income, which was $168 million in the quarter, and our net interest margin, which increased to 311. The five basis points of expansion in the quarter was driven by the liability side of the balance sheet as we lowered deposit costs and had higher levels of average non-interest-bearing deposits. You can really see this in the breakdown of the components of our 6% growth in NII. While interest income was down modestly, we were able to drive down our interest expense by about 7%. This led to the increase in NII for the quarter and also helped expand our margin. As Sam mentioned, further interest expense reduction is our strongest lever for continued margin and NII growth in 2025. In the quarter, we exited about $480 million in low yielding securities, and we reinvested about a third of the proceeds in securities with 250 basis points higher yield and the balance into loans. As most of you know, over the last few quarters, we've taken steps to gradually reduce our asset sensitivity. Even so, we feel that our modest asset sensitive profile gives us good optionality, and that's really proving out today. Generally, a higher for longer rate environment with an upward sloping yield curve should be a tailwind for customers' bank. And importantly, the organic actions on both sides of the balance sheet would be expected to more than offset any impact from potentially falling rates. As a result, we feel we are well positioned regardless of the near-term rate trajectory. On slide 14, we'll cover non-interest expenses. Core non-interest expense was $108.6 million for the quarter. This was up about $2.2 million compared to Q3, adjusted for the one-time credit in non-income taxes we had last quarter. The primary driver of the increase was higher professional services expense, including in connection with the enhancements we're making to our risk management infrastructure. Even with these higher levels of investment, our core non-interest expense as a percent of average assets is still top quartile among our regional bank peers. On slide 15, I'll recap the progress of the operational excellence initiatives we discussed last quarter. On the last call, we outlined a target of $20 million of annual efficiency through a combination of fee income growth and expense savings to reinvest in our business. I'm pleased to say that as of year end, we are on track to achieve this target, most of which has already been realized. On the revenue side, as Sam mentioned, the increased treasury management fee income from clients utilizing our Cubix platform is already contributing at least $5 million in annual fee income. Additionally, through the efforts undertaken across our human and technology infrastructure, we are on track to realize about $15 million in annual expense savings. As we stated previously, we undertook these initiatives to provide the capacity for the investments we are and will continue to make in our franchise to position us for success both in the near term and over the long term. With that, I'll move to slide 16. Here you can see our tangible book value increased to $54 per share this quarter. This is up about $6.50 per share for the year, which is around 14%. This keeps up with our 16% annual growth rate over the past five years. We believe TBV compounding is a key performance metric, and our results put us among the top of our peers. Moving to slide 17, our capital ratios across the board remain robust and provide us with substantial flexibility for organic growth opportunities. At 12%, we remain in excess of our 11.5% CET1 target, despite utilizing some risk-based capital for loan growth in the quarter. Our TCE ratio was just 10 basis points lower in the quarter, even with 4% growth in the size of our balance sheet and the securities portfolio repositioning. On slide 18, we continue to be pleased overall with our credit performance, which has been a strength of our organization. NPAs remain low at just 25 basis points. Net charge-offs declined in the quarter. And to break that down a little further, total net charge-offs declined by $2.4 million, or 14% in the aggregate, which resulted in a nine basis point decline in the NCO ratio. And our commercial net charge-off rate declined to 13 basis points in the quarter. This is the second consecutive decline in our net charge-offs despite the continued growth in our loan portfolio. And with that, I'll pass the call back over to Sam before we open up the line for Q&A.

Thanks for that, Phil. From an external perspective, macroeconomic factors and confidence continue to point to a very positive outlook in 2025. As Phil mentioned, the upward sloping yield curve should lead to a much better environment for the banks as a whole. The new administration sentiment is also pointing to a more favorable regulatory backdrop for the industry. As we look forward to the year, we expect a resumption of disciplined growth in the balance sheet. On deposits, I'd point out that while we're targeting modest net growth, we expect gross originations, as in the past, to be higher as we continue to remix out less strategic deposits, especially in the first half of the year. On the loan side, we're seeing very good opportunities to originate franchise-enhancing loans across our various verticals. But we're being very selective, and from those opportunities, we'd look for the loan portfolio to increase by about 7% to 10%, or even more over the course of the year. Importantly, we will be very disciplined around deposit-led loan growth. On NII, when backing out the venture accretion income in 24, we expect NII to conservatively grow by about 7% to 10% with that adjustment. We do have levers for upside, but it depends on deposit remix timing, but this is already at these levels at the top of the industry at the current market rate curve. Through the operational efficiency efforts, including fee income growth from the Qubix platform, we'll look to bring our efficiency ratio back down to the low to mid 50s this year. And then continue that progression to our mid 40s ultimate target over the medium term as the execution of our strategic priorities take hold and as we sunset some of our outsized investments. We'll continue to operate with higher levels of capital in the near term, but with our current position and strong organic earnings potential, we are well positioned to continue to support our clients with strategic growth. Based on the industry outlook to date, achieving this guidance would put us at the top of the industry in all metrics. And while we have levers for upside, we want to be conservative as the timing of deposit generation is not as certain as loan generation. Now to wrap up on slide 20. With the momentum generated from our accomplishments in 2024, we believe we are incredibly well positioned to continue to increase our franchise value. The strategy we employ to transform our institution is to empower top tier talent to lead with client service and it's really showing its power. Our deposit franchise transformation efforts will continue with the goal of even further improving both the cost and quality of our deposits. We were able to effectively leverage our client relationships and new deposit generation to significantly reduce deposit costs in 2024. And we expect to further that effort in 25 independent of rate cuts. The teams we've recruited over the past few years across a focused set of diversified verticals positions us extraordinarily well to continue to win new client relationships and also take advantage of any industry expansion during the current environment. We feel confident in our ability to execute on these initiatives and will be well positioned to grow our NII and experience positive operating leverages from our investments. At Customers Bancorp, we wake up in the morning to compete for our shareholders. The management team is 100% aligned, as you heard from Jay, in advancing the company's goals and continuing to deliver for our shareholders. We believe we have the right team, along with a client-centric culture, to allow us to continue executing on the strategy and drive franchise value in 2025 and beyond. With that, we'd be happy to take your questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star one again. Please ensure that your phone is not a mute when called upon. Thank you. Your first question comes from the line of Steve Moss with Raymond James. Your line is open.

Good morning. Morning, Steve. Just starting on the loan growth guide here. Morning, Sam. On the loan growth guide here, maybe just talk a little bit about kind of your expectations for loan growth over the next quarter, too. It sounds like the pipeline remains strong. And I heard you there, you know, indicate that, you know, the loan growth guide could be conservative for 2025.

Yeah. Hey, Steve, good morning. Um, yeah, so the pipelines are definitely strong. You know, we, we continue to build, you know, with the pipelines, at least sort of in the four to $500 million range. Um, I will say, as you normally know, Q1 is, is usually a bit slower time. Obviously we had a, a very strong fourth quarter, uh, with closings that, uh, to get done by year end. And so usually that rebuilds a bit. Um, There's also the question of some of the unexpected payoffs, which is actually something we've been seeing a fair amount in some of our portfolios sort of earlier in the year. So, you know, I think we definitely feel good about it. As Sam mentioned, you know, there could be potential upside there. And we'll certainly continue to support clients as we see that franchise enhancing loan growth. But we do want to remain disciplined. And we're certainly not chasing any loan only relationships. It's very much holistically focused.

Yeah, and Phil, if I could just add to that, I think that the point about payoffs is very important. We had a number of payoffs in 2024. To put it in perspective, we had about a billion dollars of payoffs and paydowns in the fourth quarter, which really shows that the net growth that we experienced despite that was – was quite substantial and it actually gives us good confidence, you know, in going forward. We do anticipate that a lot of the payoffs have sunsetted mostly in 24. Having said that, you know, I think that as there's a stronger commercial environment, you could see some refinancing activity, you know, sort of across the portfolio, especially in some of our fund finance type private capital businesses. But I think we also added that slide on our loan growth slide, loan slide. to really the chart to exemplify really the diversification. I think that's what's really important is we have a number of levers to pull as the year progresses.

Okay, great. I appreciate all that color. And then just in terms of the deposit growth here this quarter, you know, a lot on the non-transparency side, you know, I'm assuming a lot of that is from the instant payment side. Just kind of curious, you know, how you're thinking about that business these days. You've had the 15% cap in the past. Obviously, it was a good quarter for activity in that business. But maybe the dynamics there you're seeing and how you're thinking about it here, along with the fees that started this quarter.

Sure, absolutely. So, you know, firstly, I'll start with saying, you know, Steve, your intuition is correct. You know, most of that non-interest-bearing deposit growth, you know, came from our Qubics platform customers. And after the election, you know, our clients experienced a tremendous amount of increased market activity, which, as you can imagine, leads to higher balances, which we supported in order to serve our clients when they needed us most. You know, we'll wait and see where things, you know, fully settle in. But it's worth noting at the end of the year, we had about $3.6 billion in spot balances there. And, you know, on the point of our limits and targets, yes, it's above 15%. But importantly, we are holding all of these balances in cash to mitigate any perception of liquidity risk. And our management team is going to continue to evaluate limits and targets and take a holistic risk-based approach as we assess these levels going forward. So I think that's the important way that we're approaching this. At the end of the day, we want to make sure that we're there to serve our customers. You also heard me talk about the migration to our own in-house platform, which is not even in beta. It's 100% switchover. And it's also helped us, you know, level up in fees. You know, we had almost $2 million in fees in the fourth quarter related to our Cubix platform and the customers. Now, obviously, there's increased market activity there. You also heard Phil talk about $5 million, you know, plus is sort of where we're guiding to as sort of a minimum. But we'll wait and see how things unfold. settle in. October was slow. November was slow for the first week, and things have been pretty active. And the first two weeks of January, as an example, were also slow. So increased client activity leads to higher balances. Higher balances leads to interest income, and it also leads to higher fee income.

Great. Appreciate that. And one last one for you, and I'll step back. On the NIA guide, I apologize if I missed it, but just wondering what you guys are assuming for rate cuts there.

Yeah, Steve, our base case had two rate cuts, which were including one early in the year in March. Obviously, that trajectory moves around a lot, but we look at a pretty wide range, anywhere from zero to five rate cuts. Okay, great.

I appreciate all the power, and I'll step back here.

The next question comes from Peter Winter with DA Davidson. Your line is open.

Good morning. I just wanted to follow up on morning, just that interest income. It's a fairly wide range of 3% to 7%. Can you just walk through maybe some of the drivers that get you to the upper end of the range versus lower end and maybe the trajectory of the margins?

Yeah, sure. I'll start off and then, Phil, let me know if I missed anything. As you can imagine, the two biggest drivers of a range would be rates and pace of loan growth. So focusing on the high end, it's actually based on the current – rate curve, which is two cuts. And if you sort of normalize for backing out the accretion as I walk through in the script, that really puts us at about 10% or the high end of the industry. And we do have potential levers to do better, but we're sitting in January. There's a lot of things that... That can change as the year progresses, including the rate curve, which has been moving, as you know, materially, you know, on a week to week basis. So that's sort of hopefully a bit of context on the range. But I would just also sort of point you back to, you know, the power of the franchise. And if you noticed, you know, on the slide we had, you know, our NII has grown by 19% annually over the last five years. And, you know, we hope to continue, obviously, not necessarily at that pace, but at an industry leading pace going forward.

So if I just follow up on that, Sam, you had a really nice growth from third to fourth quarter. And if I annualize the fourth quarter net interest income and take the midpoint of the range that you're giving for 25, it's kind of low single-digit growth. And I'm just wondering why some of that momentum seems like it would slow a little bit, if I'm interpreting that correctly.

Yeah. Hey, Peter. So again, a couple of things. One, as Sam mentioned, we are still modestly asset sensitive. So with two rate cuts in there, that would have some downward impact. And the other lever is also, as Sam mentioned earlier, sort of just where some of the average non-interest bearing balance is settling.

Yeah. And To kind of put that in perspective, Peter, you can see that on our NII slide, we broke out interest income and interest expense. So you can see that our interest income only slightly declined in the quarter, despite the fact that you had the full impact of September through December rate cuts. So I think that really just speaks to, as Phil mentioned, the mixed shift that we had across the franchise. And those things need to sort of take time to stabilize in.

And just one last question. Could you just provide a little bit of color on the increase in the Oriel property, that $12.5 million and that $6.6 million reserve bill? Was that related to this credit?

Yeah. Hey, Peter. So I think you're referencing there was about an $8 million increase in NPAs. It's actually not Oreo. It was a security that we put on NPA in the quarter, which we're in the final stages of restructuring with the issuer and feel we're well-reserved. But yeah. but put that on in the quarter. So that's actually where that's coming from. On the loan ACL side, that's really related to increasing the loan book. So if you see our coverage ratios there, we're relatively stable, but obviously the increased loan volume is going to require increased provisioning.

Got it. Thanks, guys.

Next question comes from Kelly Mota with KBW. Your line is open.

Hey, good morning. Thanks for the question. Your core deposit growth was really remarkable and continues. The pipeline continues to be strong and the deposit betas were probably leading in the industry. I'm wondering as you look ahead, it feels like a lot of the low-hanging fruit may have been realized here with the continued roll-off of broker. Just wondering what's baked into your guidance in terms of your expectations for continuing to bring down the deposit costs with the increase of these really core deposit accounts your new teams are bringing on?

Sure. Good morning, Kelly. So, you know, I think that, you know, first of all, you touched on a couple of things. One thing I just sort of highlight is, you know, broker deposits, you know, we continue to reduce and also just sort of talk about I think we spent some time on the timing of deposit remix. I think last quarter we talked about about a north of 500 million that we were planning to remix in the fourth quarter. That was, I believe, for seven or four, eight percent cost of funds. Similarly, we've scheduled about $500 million in the first quarter, which is currently at about $4.5 million, to kind of put that in perspective and put the scale of the continued remix. If you look at our spot cost of deposits, I think that's a pretty good indicator of giving you a sense of how the first quarter will trend down from a cost of $1. And then I'll point you back to while the pipeline is 2 billion, we talked about our goals for the year for the new teams. And we think the new teams should really be able to drive one and a half to $2 billion or so in 2025, which is at that sort of call it about 500 million or so on average a quarter. It'll be lumpy. It won't be necessarily perfectly consistent and linear. Having said that, that's sort of where we expect. those deposits are coming in 150 to 200 basis points below our cost of funds. I think that sort of helps give you some perspective on how we're sort of seeing the overall remix and some of the levers and puts and pulls.

That's super helpful. Thank you, Sam. And I'd like to ask a follow-up on the digital asset space. I appreciate the commentary that Most of the NIDs or a good portion of that was related to letting those caps increase a bit. I'm wondering how you're viewing this competitive opportunity ahead, and if you could just frame it here. Obviously, the new administration is much more friendly to this business, but also I'm wondering how you're thinking about potential competitors getting back in and your ability to maintain your lead in this space?

Sure, absolutely, Kelly. And let me just address one thing on the non-interest-bearing deposits. You know, while we had a big driver from our Cubix, you know, client customers, we still had nine-figure deposits, which would have been a highlight of the quarter, you know, across the overall bank and non-interest-bearing, you know, deposit growth, even with, as you know, sort of Q4-type taxes and payments that kind of go out, you know, towards the end of the year. But to get to your question, you know, I think, you know, Post, you know, November's election, I think it's really reinforced that digital assets are here to stay, you know, and banks are going to handle this over time, just like any other banking services that are being provided. And at Customers Bank, we have the benefit of being a first mover only mover that has a network and it's very difficult to replicate. So we're sitting in the primary seat with operating and transaction accounts with the largest and most institutional customers in the space. So obviously there are early green shoots of clarity on regulation for our customer base, which I think is going to provide overall clarity for how banks can operate, which will really benefit the overall industry. And I think we feel fortunate that we've been able to support our customers, build very long, deep relationships, and also really have a superior technology service that we've been able to support and provide to our customer base and also prove to them that on our own platform now that we have the technology prowess to continue to support them in the future.

Thank you very much. I will step back.

Once again, ladies and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from Matthew Brees with Stevens. Your line is open.

Hey, good morning. Maybe first just starting with the NIM. Can you provide the discount accretion over the last few quarters and what the expectation is for discount accretion in 2025?

Yeah. Hey, Matt. Good morning. You know, as we kind of said on the last call, it really settled into a spot where it's been pretty immaterial. So it was, you know, low single digit basis point impacts are really not much. And again, we've realized essentially the vast majority of the discount accretion here now through 2024. So as Sam mentioned, it's not really much of a driver for 25 as we think about that comparison point.

Okay. Okay. And then I was hoping you could also touch on the provisioning outlook and the reserve. You know, the reserve as a percentage of loans has been kind of steadily declining. Where do you think that settles out and what does that imply for the 2025 provision?

Yeah, sure. So, you know, it's a great question. And as you pointed out, it has been declining, but that's really as a result of a mix shift. If you look at our sort of corporate and commercial and consumer markets, reserve levels, they've been stable or even on the commercial side, some slight increases. So that was really mostly mixed driven. I think as we kind of have the outlook looking forward, we still feel like those levels as we sit today, probably feel like the right respective, around the right respective levels. But as I mentioned earlier, with increased loan growth, you could see some increased provision. So you know, while we don't have a formal guide on it, I think the directional range we've given in the past is kind of 18 to 22 million. You could see that probably be a bit higher just given the higher, you know, the continued loan growth.

Okay, thank you. And then just going back to the, you know, the QBICs and the crypto effort, you know, I guess 15% used to be the old limit on crypto deposits. I think, Sam, you said you were at 3.6 billion in spot deposits today or at period ends. That's kind of 18% to 19%. I guess what's the new cap? Is there one? And then the growth that you had this quarter, was it from existing customers? Just going back to the regulatory order, I thought there were some stipulations around engaging with new third parties, and I didn't know if there was any sort of limitations on new customers. Thank you.

Yeah, sure. So, you know, I'll start with the last question. You know, first is, you know, we don't have any restrictions on new customers. I think you're referencing something about sort of third parties or payment providers. But at the end of the day, we supported existing customers. And really, it was sort of increased market activity, you know, with existing customers. And I think I touched on this, you know, before is we're holding all of this in cash. That's our risk mitigation. You know, 15% was actually something that we set, you know, a couple of years ago, you know, for this vertical investment. prior to becoming the primary banking institution and we've held to it. And as customer activity increased, we supported our customers. And in terms of a new level, it's to be determined. It's got to go through sort of our typical process and we have to be thoughtful thinking about what our customers need. We also want to see where things settle in. It's only been 60 days or so. So I think we'd like to see where things settle in. If you look back to To last year, it's tough to remember that in January you had the ETFs that were approved. In the fourth quarter, you had the election. The first quarter, you know, there's additional activity. So we'd like to see, you know, and get some more, you know, history of client activity. And then, you know, we'll be able to sort of make much more of an informed call then.

Understood. And I appreciate the clarity on the third parties. It was tough to interpret what they meant there. My last question is really just around overall broker deposit levels. Could you update us on where balances stand today, what it's down from about a year ago? And I guess where I'm going with this is the way I kind of track it is through the call reports. And the call report levels have been relatively flat the last handful of quarters. And I was hoping you could kind of square the progress versus what we're seeing in the call reports. I think there's some other things that kind of get globbed in there. Thank you.

Yeah, sure, Matt. So I'll start and Phil, I don't have the numbers exactly in front of me, but I think we've gone down by a couple hundred million dollars over the last couple quarters. And I think you heard me talk about my script about another 500 million or so in the fourth quarter, which you'll see sort of filed in the near term. I'd also say that the 500 million or so of deposit remix that we've scheduled has a good overlap with our broker deposits. So Higher costs, less strategic, you know, deposits are going to be the focus areas of our deposit remix. So as we bring in those deposits, you could imagine that, you know, broker deposits or deposits, you know, that have been classified as broker, I think is also an important distinction. You know, as you think about sort of the overall FDIC rules and how that has evolved are going to be part of our target universe.

Understood. Okay. I'll leave it there. Thank you.

Again, ladies and gentlemen, it is star one to ask a question. Your next question comes from Hal Goach with B. Riley Securities. Your line is open.

Hey, congratulations, guys, on a great year. And my question is on how you guys come in with your punch list on working down the issues with the Federal Reserve Bank of Philly. What can you share with us on that? Thanks.

Sure. Good morning, Hal. Thank you so much. As I mentioned last quarter, I think the easiest way to sort of summarize this is we're working on enhancements, as you described, and sort of the punch list across people. uh, process and technology. Um, you know, on the people's side, you know, we had had hired at that time and since hired even more, you know, senior scene seasoned, um, executives and, uh, they're helping to level up the overall risk management infrastructure and helping us build the bank of the future. Um, from a process perspective, we talked about some of the third party services, um, and getting top tier firms to help us with design implementation that also have sort of a good mastery, uh, of the external environment. Um, And from technology perspective, we stated our goal was to transition to in-house, and I'm proud to say that this was a long time coming. It's something we started in 2023. But as of the end of the year, we fully transitioned all of our real-time payments clients to Cubics.

And I have one follow-up to that. You know, the elevated professional services costs, you know, one – What's kind of like a basic case, maybe fading that expense ramp or maybe maintaining it this year? Can you give us your thoughts on how we should think about that?

Sure. So as I mentioned, it's a bit of a last quarter. It's a bit of a bell curve. So I think we peaked at, you know, five and a half to somewhere between five and a half to six million dollars in the quarter related to these efforts. December, January is the peak. It's going to taper off, you know, down a little bit from there. And then and then, you know, by the by the middle of the year, we'll get back to sort of typical, you know, normalized level. So, you know, we're we're past the 50 percent point, I guess, is the best way to think about it. But month to month, we'll see where we get to, but we really have a well-executed plan that we hope to put behind us in the first half of the year.

Thanks. Your final question will come from Kelly Mota with KBW. Your line is open.

Thanks so much for letting me jump back on. I just wanted to get some clarity from Phil on the securities restrictions you took, the timing of that during the quarter, the sales as well as the timing of the reinvestment of loans. Did the reinvestment happen early 2025 or was that undertaken last quarter? Thanks.

Sure. Hey, Kelly. So Yeah, the sales did occur kind of late in the quarter through the halfway point, so kind of later in the quarter. And then the reinvestment was also kind of gradual. You can imagine the securities happened a little bit earlier, but again, still gradual. pretty late in the quarter. And then the loans were just kind of organically as they came on. And you can probably imagine the majority of that loan growth always seems to come right around December 31st at the end of the year. So it tended to be a bit more towards the tail. But generally, we sort of think about it as probably having about five basis points of incremental NIM pickup in 2015.

Got it. Thank you so much.

This concludes the question and answer session. I'll turn the call to President and CEO Sam Stede for closing remarks.

Thank you, everyone, for your continued interest in and in support of Customers Bank Corp and the incredible franchise that we're building. We look forward to speaking with you next quarter. Thank you. Have a great day and a great weekend.

This concludes the question and answer session. Oh, my apologies. This concludes today's conference call. Thank you for joining. You may now disconnect.