Customers Bancorp, Inc. Q3 FY2021 Earnings Call

Thank you, Paul, and good morning, everyone. Thank you for joining us for the Customer Bancorp's earnings call for the third quarter of 2021. The presentation deck you will see today has been posted on the Investor Relations page of the bank's website at customersbank.com. You can access the deck by clicking a 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 Form 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 Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thanks. 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 Bancorp 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 Bancorp. We are very excited to be able to report another record quarter for our company. This quarter, we generated more income in a single quarter than we have in any previous full-time year. This milestone was achieved through incredible hard work by our teammates, consistently working very hard, being focused on priorities, being innovative and delivering the highest quality service to our clients, which has been one of our company's 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, and we are very excited to share with you this morning; you will be pleased with our outlook for the future. We are proud to have stepped up last year through our innovative approach and our tech capabilities to help small businesses all across America by funding approximately 350,000 PPP loans, approximately $10 billion and being number two in the nation among those who gave out the numbers of loans. This outstanding execution has generated approximately $350 million 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. We are gratified that we are seeing thousands of businesses all across America, who are now our clients thriving. Let me briefly share 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 C&I 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 the 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 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. This quarter, we entered several new businesses. Some examples, as you can see on Slide 3, are everything that's in green, you can see that we now entered the fund finance business. We've included 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 payments system. And we are very excited about digital asset banking and small business services, as well as SBA and credit card services that you can see from there. 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, 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 details. 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%. Our net interest margin came in at 3.24% for the quarter. 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 Customers Bank Instant Token or CBIT launch, which brought in $1.5 billion of non-interest bearing deposits as of September 30. 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%. 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 is 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 for a bank of our size. Importantly, we reached these levels and achieved this growth without any dilution to our shareholders. Flipping to Slide 5, let me update you on our strategic initiatives broadly across the company. This is what makes Customers Bank so unique and what has driven value creation for our shareholders. Firstly, on the commercial side, as you heard from Jay, we seated a new team in the Carolinas to be based in Bloomington. 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 that 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 and technology and VC banking, as well as the financial institutions group based in Dallas. These teams are strategic fill-ins, both geographically or 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 2021. On digital 7A, many of these businesses don’t have pre-existing banking relationships. A number of them came to Customers Bank with their PPP loan. 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 unprecedented in the SBA world. The digital 7A pilot continues to progress well with nearly $1 million in originations in the month of September, which we would like to scale to $3 million to $5 million of monthly originations. We achieved $4.3 million in year-to-date SBA gain on sale, 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. As such, we have put a plan in place to grow the portfolio back to our stated target of 15% of total loans. Moving to the consumer business, our digital direct personal loan business crossed $1 billion in the quarter. Customers Bank direct originations ended up with a digital personal loan portfolio of $1.3 billion, of which 70% has been sourced directly. This is compared to a portfolio of $845 million as of December 2019, of which only 15% was sourced directly. We’ve created an extremely profitable credit-led neobank within our bank with over 130,000 active profitable personal loans, student loan, medical, dental, and 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, that total increases to over 450,000 active customers coming 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 prioritize products in 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 our $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 continuing to work, as you heard from Jay, on a new credit card launch and additional consumer products to earn multi-product relationships with our digital customers. In conjunction with the anticipation of our real-time payments platform, 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 lines of credit, and a commercial credit card are all in the near-term roadmap. This is critical to build on our PPP 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 Bank. This is on track to be completed by the end of the year. Moving to Slide 6, our partnership with the SBA and direct forgiveness has proven to be an incredibly smart decision. We had a soft launch in August, resulting 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. 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 7, you’ll see a summary of the timeline and overview of the CBIT launch process. We launched nine months ago, starting with our comprehensive opportunity analysis, which first involved partner evaluation. This summer, after selecting our partner and signing our contract, we integrated the platform into our environment, implemented compliance processes, and began our business development in earnest. In late September, we began opening up PDAs in anticipation of our imminent payments platform launch. After completing testing and having a fully functional platform, we soft launched earlier this month. Our soft launch will include around 20 customers, 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 group today, 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. We paid down our PPP LS funding by $3.9 billion in the third quarter, saving an associated 35 basis points or $3.4 million per quarter. Currently, we have no PPP LS funding remaining. 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 total 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 associates deposits, totaling around $2 billion as of September 30. In addition to 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. 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 in 2021 gearing up for the launch of our real-time payments platform by adding commercial teams and our expansion geographies and lending verticals like fund finance, technology, venture capital, real estate, specialty finance, and digital asset banking. These teams are hitting their stride and we’ll 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 improvements in the quality of our deposit franchise. Third, growth in net interest income and net interest margin; fourth, significant capital accretion, and fifth tangible book value. Turning to Slide 8. I’ll start with loan growth and overall loan mix. 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 C&I, including specialty lending, making up about 35% to 45% of our total loan book, multifamily about 15% of the loan book, investment grades approximately 10%, mortgage warehouse 15% to 20% of the loan portfolio, and consumer personal loan portfolio no more than 20%. As Sam mentioned, you can expect to see growth in the multifamily book to hit the 15% target. The mortgage warehouse portfolio is still expected to put our clients’ positions, and we're expecting to end the year somewhere between $1.9 million and $2.1 million. 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 9, you can see the transformational improvements that we've made towards the positive 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 GDAs 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 continue to make significant progress on reducing our overall total cost of deposits. The average cost of deposits in the third quarter 2021 dropped 25 basis points from the year-ago period. Our spot costs of deposits dropped to 32 basis points at September 30. We now expect our cost of these 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. First, net interest income of $108 million for the third quarter 2021 increased 23% over the year-ago period. Secondly, 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 margins by about 16 basis points. Absent these higher cash balances, we would have seen 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 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 the third quarter 2021 is up about 240 basis points over the year-ago period, despite the $82.5 million preferred stock redemption on September 15, which on a standalone basis decreased the total risk-based capital ratio by about 70 basis points. The significant accretion in our TCE ratio, excluding PPP shown on the right side of that slide really demonstrates the slingshot effect in our capital ratios that we've been discussing all year. At September 30, 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 see the appreciation in our tangible book value over the past 12 months. At September 30, our tangible book value was a little over 35, compared to close to 26 one year prior. That's a 35% increase year-over-year. If you fully pro forma 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 20 before September 30. Tangible book value was 134%. We continue to see the significant upside potential. Before turning it back to Jay to wrap up, I’ll comment on our core EPS guidance, excluding PPP. For the full year 2021, we are projecting $4, and for 2022, we’re projecting between $4.75 and $5, which is about a 20% to 25% increase over 2021. 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, Jay.

Thanks so much, Carla, a 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 of $167 million pre-tax and $110 million after tax. 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. 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 Bank Corp 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. As Carla mentioned, about 134% of tangible book value. Just to remind you, for the last few years, I and most of our colleagues have taken 100% of our bonuses in stock, not cash. It's pretty good now from a technology-driven perspective. As you know, CBIT was launched with $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 approximately 350,000 businesses, but more than 95% of these businesses we helped were classified as real micro businesses, and many of them are 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. On the gain on sale business, this is a new, technology-based initiative that resulted in about $8.8 million in gain on sales year-to-date in 2021. We will continue to opportunistically look at more FinTech partnerships to grow digital businesses. We think that it's 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 over 8% and only about halfway through the realization of our PPP non-interest income as well as interest income. We completed our redemption of the $82.5 million preferred stock, which is going to add about $13 million in our annual DPS run rate. Additionally, we started to execute on our common stock purchase program, wherein we bought back a few hundred thousand shares last month while we were in the quiet period, and we are committed to building shareholder value and remain opportunistic. As of October 20, the exact number was 167,000 shares that we purchased. We remain extremely optimistic about the future and the guidance that Carla has given you on EPS – that is something we are committed to executing. So with that operator, please open it up for questions from anybody.

Thank you. Your first question comes from Steve Moss with B. Riley Securities. Your line is open.

Good morning.

Good morning, Steve.

Good morning, Sam and Jay. And maybe just starting with the CBIT deposits here, $1.5 billion before the soft launch is quite impressive. I am kind of curious, how many customers comprised $1.5 billion? And if you could maybe give us some color here on equipment balances are now that you're, call it, a week or two past the soft launch.

Sure, Steve. Happy to provide a little bit more color. So the soft launch, as we mentioned, is somewhere between approximately 18 to low 20 customers around 2,000 in type. Most of whom have either already funded their accounts or are in process of funding and beginning sort of payments testing and transactions. Over a period of time, we will 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. Many of those nodes also connect through at least one counterparty, creating the beginning of a web and a network. Over time, we will be able to share more information on the number of customers, average balance size, and potentially even payments volume once that ramps up.

Okay. And so just as we think about you're here in soft launch mode, kind of how long do you think you'll be here? And when you maybe go to a formal launch, how many customers do you envision 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 give you perspective on how we'll approach it. Firstly, from a timing perspective, we anticipate remaining in soft launch through the quarter; there are only 60 days left. We need to make sure that we have all of our customer service and testing and monitoring buttoned up. We’ll continue to onboard new customers more likely in the first quarter. The way to think about it is, as I mentioned, we’ll continue to add more nodes – these three to five sort of customer-type nodes, and then we'll add to the existing nodes. This means that there's going to be a combination of deposit growth and customer growth. There is existing growth from customers already on the platform who will eventually be moving over more dollars as they start to see more of their counterparties on the platform. Similarly, the counterparty is a little bit bringing on deposits, and we will continue 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 technology monitoring perspective.

Okay, that's helpful. And then you guys hired a number of commercial teams here, just color on the book of business you're expecting to bring over and also 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 that the better way to think about it is that there's only so many players who are actively targeting in banking, the payment space, and digital asset ecosystem. Over a period of time in the medium to long-term, we feel 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 Steve, from an earning asset growth point of view overall, we are very optimistic that as a result of these teams that we have onboarded, and we are much more focused on earning asset growth while maintaining our credit standards. We are looking at something like $350 million to $500 million growth per quarter in earning assets.

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

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

The gain on sale that we view as a way 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 – some sort of $6 million plus or minus type recurring revenue gain on sale stream. We are currently originating at a pace of about $10 million a month in our traditional 7(a) business. That feels like a good number to build off. We will continue to hire more individuals to join that team for an opportunity to grow in 2022 and 2023. Today, with the 90% guarantees 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 and in the second quarter. So in a market where you're 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. Alright. Thank you very much. I'll step back into the queue.

Thanks, Steve.

Your next question is from Bill Dezellem of Tieton Capital Management. Your line is open.

Thank you. I believe that you all purchased roughly $529 million of PPP loans in the quarter. 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. Good morning, Bill. So we repurchased those loans at approximately a 1% discount plus we have the ability to put 1% interest income. Having said that, we thought this was an interesting opportunity in conjunction with the launch of the SBA direct forgiveness platform. This was a global fintech who wanted to rationalize and move PPP off their books and put it behind them to focus on other initiatives. 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 is 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, so 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 our balance sheet.

I understood. Thank you very much.

Thanks, Bill.

Your next question is from Peter Winter with Wedbush Securities. Your line is open.

Hi, good morning. I want to – 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?

Yes, let me take a stab at that. Then I’ll pass it onto Carla and Sam for any additional comments. So, Peter, we are looking at, like I mentioned earlier, owning assets and deploying some of our excess cash, which will contribute to continued growth in non-interest income and net income growth as we manage expenses. We've been making investments for our future growth. The drivers of our revenue next year will be supported by maintaining our expense growth, and we'll get the net interest income going from burning asset generation capabilities. Carla, anything you would wish to add?

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

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

I think we’ve not included any significant share buyback. That’ll be opportunistic, because we think there might be a lot of volatility in the markets over the next several quarters. We are going to be prepared to execute aggressively if needed for our share buyback. At the same time, if we see revenue growth and deploying the capital provides a higher return, we will allocate capital in that direction. We've positioned ourselves for capital allocation in the best possible way, and we are well-positioned to meet the net income guidelines you've given us without share buyback. Carla, do you want to address that part of the question on the preferred?

Yes. From a preferred perspective, what we’re thinking about right now is as of December 15, 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 or redeeming 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 surprised that you added $6 million to reserves that's a little bit of an outlier versus other banks. Part of it is to support consumer loan growth, but I’m just wondering if you could talk about the rationale for the – anything else, why you added to reserves, and then maybe just what the outlook is for provision expense?

I can give a couple comments on that. First of all, during the quarter, we recorded $13 million of provision expense, offset by about $7 million of charge-offs for a net $6 million increase in our ACL. We have a very disciplined governance process surrounding the estimation of our ACL. We looked primarily at the consumer installment portfolio, and saw a change in mix, which led to an increase in provision expense without any emerging trends. The guidance we’re providing is still within that $10 million to $15 million per quarter range. We felt this quarter was right in the middle of that previously reported range.

Great. And then just my last question. That $6.2 million to make whole feed to a single high deposit growth customer, can you just provide a little bit more color on that and why it’s transitory?

Yes, let me take that on. About 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 at a fixed rate for a five-year period. We didn’t think in this kind of environment that it made sense to keep that on our balance sheet, plus the fact that we have a tremendous culture in non-interest-bearing deposits, and we could get rid of it effectively without much effect on our income statement. It was the right move for us, and that’s going to help us with our margin.

Thanks. Congratulations on a really nice quarter.

Thank you so much.

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

Good morning.

Good morning, Frank.

I wonder if I just want to make sure I have the loan growth expectations right. I think in the last quarter you talked about mid-single 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 for as we head into 2022?

Yes, that does still hold true. As we talked about, we have record pipelines across all of our lending verticals, and we're expecting most of that to come through in the fourth quarter. Some of that will flow into the first quarter of next year, so right now we're on target to hit those growth expectations.

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

At this point in time, we’re waiting to see what comes through in the fourth quarter. 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 on our January call.

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

Yes, a couple of comments there. With the addition of the new teams, some of those were added very late in the third quarter, and will partially flow into the fourth quarter, so they're not fully baked into our run rate at this point in time. But as we mentioned, we remain diligent in controlling those expenses in 2022 and beyond as we go through our strategic planning process. We will continue to balance technology investments with managing those expenses.

Okay. And if I could just sneak in one last one on buybacks. Jay, you mentioned, 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 perhaps at these levels it's more about keeping powder dry, and then if there's volatility in the market, being opportunistic there?

Frank, you’re right, because we are very focused and we don’t want to lose sight of the need to improve and have best-in-class TCE ratios and overall capital ratios. Unlike the majority in the banking industry who are struggling to see any kind of revenue growth, we are seeing opportunities. So that's why, from a capital allocation process, we want to allocate capital in a manner that's most effective for safety and soundness and shareholder value creation. We are conservative and have been building our reserves, and we want a strong balance sheet, which is more related to shareholder value creation than constant regular buybacks, which simply support earnings per share growth. Revenues must support earnings per share growth, with buybacks whenever there is an opportunity; that's our philosophy.

Alright. Thank you for all the color.

Your next question comes from the line of Michael Perito 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 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, over time as they season. I’d love a little bit more color about how you’re thinking about that dynamic.

Sure, absolutely. Good morning, Mike, happy to take the question. So I think that some of the other banks are seeing payments volatility but not necessarily seeing deposits and volatility. They're seeing more velocity, which makes sense as there's market volatility. So first and foremost, our loan to deposit ratio is slightly above 60%, ex-PPP, so we have a tremendous amount of cash to continue to deploy and fund even sort of opportunistic loan growth above what one would expect in all of 2022. That’s the first point I would make. As for the ramp-up of this business, we have the luxury of choosing some of the most institutional and key anchor clients who have grown a lot in the last couple of years since they first started payments data-based banking relationships. We will have the opportunity to be very selective, especially in the beginning, as we program the foundation of the payments platform. I think the two of those combined offer a lot of medium-term comfort. From a long-term perspective, we are looking at a strategy of investment in securities being available for standby for loan growth; that helps our short- to medium-term profitability. We will be able to disclose all types of statistics and disclosures that will help give you comfort that these are sticky deposits.

Yes. 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, 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. Alright and just lastly, I think the, obviously with the digital focus, you're talking about specifically, right?

Correct.

Correct. Yes, and I apologize if you guys clarify this, but the digital asset space is likely to be 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, inside the next 12 months versus, kind of a multi-year build-out.

Thanks for that question. It's something we didn't cover. Firstly, there's a maritime client that's part of our soft launch to give you perspective. We've already brought a new corporate client that was not part of the Customers Bank into the platform, and that's a multi-billion dollar customer. There’s an opportunity to grow as other parties come in. Secondly, 10% of our customer deposit base is already engaged 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. That doesn’t increase our deposit, but it just tells about the engagement. Those folks will need counterparties to join Customers Bank as well to make the payments platform successful.

Got it. Okay, very helpful color. Sam, thank you and thank you for all the other insights. Appreciate it.

Thanks, Mike.

We have completed our hour.

Sorry, go ahead.

Apologies, sir. Our last question is from Steve Moss with B. Riley Securities.

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

Yes, it does.

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

Unfortunately, we don’t have a great sense of that. What I can say is there was a big surge of 70,000 loans forgiven in just seven weeks after the soft launch of the direct forgiveness platform. The pace has definitely slowed down, but we're continuing to engage in digital marketing campaigns and data with those customers. Understanding who has started an application, who has questions, and what's really fascinating is this translates into our cross-sell opportunities. We have a 70% to 80% email open rate for these customers, so beyond the 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 guys highlight the pilot launch here in the first half of 2022. Just kind of, I mean, I see the 315,000 unique customers, but I’m kind of curious, how do you think about the potential size of those customers and if you could size it up in any way, frame out how to think about the potential of that initiative?

Yes, 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 customer health, and we've actually gone so far as to partner with third-party data providers, just to triangulate transaction data for many of these merchants. We're also, in some cases, treating the business owner as an individual, say for a personal loan product. The top demand that we think will be key is the Digital 7(a) product, which we prioritize for us. Going forward, we'll continue to share more information. We wanted to take the opportunity this quarter to share what the gross customer pool looks like, which is very unique for a bank of our size.

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

Thanks, Steve.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.