Customers Bancorp, Inc. Q4 FY2021 Earnings Call

Good day. Thank you for standing by and welcome to the Customers Bank 2021 Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, please follow the instructions provided. Please be advised that today's conference is being recorded. Thank you. I would now like to hand the conference over to your speaker today, Mr. David Patti, Director for Customers Bank. Sir, please go ahead.

Thank you. Good morning, everyone. Thank you for joining us for the Customer Bancorp's Earnings Call for the Fourth Quarter and year-end of 2021. The presentation deck you will see during today's webcast has been posted on the Investor Relations page, the bank's website at www.customersbank.com. You can access the deck by hovering over and clicking on the line 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 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. Now at this time it's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you very much, Dave, and good morning, ladies and gentlemen. Thank you so much for joining us today this morning for the year 2021, as well as Q4 2021 investor call. 2021 in our opinion, was a remarkable year for the company. Please join me in saluting our team members for their unwavering commitment, dedication, and hard work in helping Customers Bank make significant achievements. We're so proud of our team, and as you will see later in the presentation today, we also had the privilege of attracting talent this past year from several well-known high-performing institutions. Now on to our presentation, joining me this morning is Sam Sidhu, Chief Executive Officer of Customers Bank, Carla Leibold, the Chief Financial Officer of Customers Bancorp, as well as Andy Gorman, the Chief Credit Officer of Customers Bank. In 2021, we achieved record quarter earnings for the full year of $343.6 million or $10.20 per share, up 187% over full year 2020. And Q4 2021, core earnings were $100 million or $2.92 per share, up 83% over Q4 '20. Core EPS excluding PPP for the full year was $4.41 per share, up 90% over full-year 2020 and well above our guidance of $4 for the year 2021. Our vision for growth has remained a part of our story since the beginning. As you can see in Slide 4, we became involved with Customers Bank back in 2010 by making 4 small investments of $17 million in this company, which was a problem institution at that time. In a span of 12 years, Customers Bank has grown from this $250 million problem bank into a digital-first, technology-driven financial institution, with assets of approximately $20 billion, which puts us as a top 100 bank in the United States. We divested BankMobile, which became BMTX and we're pleased that we were able to provide a special distribution of BMTX stock to our shareholders valued at approximately $75 million in Q1 2021. We are now also preparing for the exploration of the deposit servicing agreement with BMTX by the end of this year. We expect these explorations will be accretive to our net income by about $60 million pre-tax in 2023 and beyond. In 2021, we funded about 256,000 PPP loans totaling $5.2 billion, bringing the total PPP loans funded to over $10 billion and to over 350,000 small businesses across America. We earned close to $350 million of deferred fees from SBA through the PPP loans, which is significantly accretive to our earnings and capital levels as these loans are now being forgiven by the government. This initiative not only helped save over 1 million American jobs, but would have added approximately $300 million to our common tangible equity by the middle of this year. In October 2021, we launched a blockchain-based instant payment token that immediately began serving our growing array of B2B clients who want the benefit of instant payments and generated close to $2 billion of low or no-cost deposits in only 90 days. Now moving onto the financial highlights. From the earnings perspective, I'll focus on the current quarter earnings Slide 6. We earned a record $2.92 in core earnings, which represented a net income of $100 million, as I shared with you earlier, and that's up 83%. This translates to a common equity of 33.7% return on average assets of 2.11 and pre-tax, pre-provision ROA of 2.67. Our net interest margin was 3.12% for the quarter. Our total deposits this past year grew by $5.5 billion year-on-year, driven by efforts from our commercial teams, amplified by our digital bank team's success. Demand deposits are up 131%. Our non-interest bearing deposits were up 90%. Strong asset quality is at the core of our franchise and we continue to have superior credit quality compared to previous periods with NPAs at just 25 basis points and reserves to NPLs of about 278%. I want to thank you for all your continued support and it's amazing to think that we are just a young company and getting started in the next phase of our growth. I will now turn it over to Sam Sidhu, the President and CEO of Customers Bank to take you through more details. Sam?

Thank you, Jay. Another incredible quarter wrapping up a record year for our company. Flipping to Slide 7, let me update you on our strategic priorities. Both the incredible accomplishments in 2021, as well as our ambitious roadmap for 2022, which we are hyper-focused on delivering. This helps explain what makes Customers Bank so unique and what has driven incredible value creation for our shareholders. In 2021, CUBI was the number 1 bank stock in the country and we expect that our innovation and unique business model will continue to drive strong returns for our shareholders. In 2021, we recruited several new teams covering new geographies in Texas, Florida, the Carolinas, and the Pennsylvania capital region, plus a reboot of our Chicago office. We also added several new relationship managers and executives to our existing teams. Our community verticals are expected to grow by about 10% or more. While SBA is expected to grow by over 50%, albeit from a lower base. Moving to specialty lending, we expanded our next verticals and launched 3 new lines last year. Fund finance, technology, and venture capital banking, as well as the financial institutions group. In 2022, in specialty lending, we will continue recruiting lending teams to support future growth in our existing verticals and evaluate new verticals, including digital asset lending. We have established ourselves as a leader in technology and innovation in the digital banking and FinTech space. In 2021, we completed a tech reorganization and re-branding, which has been very well received. We achieved crossing over half a million customers acquired through our digital banking platform. We're advancing our data analytics to help prioritize products on the roadmap. As we look forward to 2022, we will be seeking to add a number of digital-first consumer and SMB products to our portfolio. Lastly, we expect over $5 million of run-rate revenue in 2022 as a result of our banking as-a-service efforts, which we expect to increase to $15 to $20 million in revenue in 2023.

Thank you, Sam. And good morning, everyone. I'll keep my comments focused on five key topics. The first is strong growth in net interest income generated by the core bank. Number two, ample liquidity resulting in significant investment portfolio growth and the ability to fund future organic loan growth. Third, asset sensitivity and being well-positioned for future rate hikes. Fourth, exceptional credit quality. And fifth, significant accretion in capital and tangible book value. Turning to slide 13, we'll start with coordinated interest income and net interest margin, excluding PPP. This slide shows the increasing net interest income over the past five quarters, largely driven by strong growth in core C&I and consumer loans. Compared to the year-ago quarter, fourth quarter 2021, net interest income increased 18%. Additionally, there has been a significant increase in the percentage of deposits that are non-interest-bearing year-over-year, as well as a decline in the cost of interest-bearing deposits. Moving on to Slide 14. You can see tremendous growth in our liquidity position. Our investments portfolio has more than tripled year-over-year. Our overall strategy remains unchanged in that excess cash is first used to pay down any higher costs or wholesale funding before it is deployed in investment securities and then ultimately used to fund organic loan growth. Our asset quality remains exceptional, and our credit reserves are strong and our near-term credit outlook remains stable.

Thank you very much, Carla. As you can see, we are really proud of these remarkable achievements of our team and we are very upbeat about the future prospects of our company. We expect strong core above-average, double-digit growth in loans as well as low-cost core deposits, while maintaining our above-industry-average credit quality. The financial benefits of PPP aside, we project our recurring core earnings power to be in that $4.75 to $5 range in 2022, and well above $6 per share in 2023, approximately 2 to 3 years ahead of our previous guidance. We believe our stock is attractively valued and creating about 1.5 times the yield on the current adjusted tangible book value, which we estimate to be about $40 a share. I'm also pleased to share with you that 100% of our team members at the end of year 2021 were shareholders of the bank. With that, I would like the Operator to please open it up for Q&A.

Thank you, and as a reminder, please follow the instructions provided for questions. One moment, please, for our first question. Our first question comes from the line of Casey Haire from Jefferies. Your line is open.

Good morning, everyone. I wanted to start by discussing loan growth. There has been a significant increase in the fourth quarter. If I understood you correctly, Jay, pipelines are at an all-time high. I appreciate the strong pace of loan growth, but could you provide more context? We're coming off a 28% link-quarter annualized level, and 10% seems like a fairly low target.

Sure. Good morning, Casey. As we think about 2021, it was a slower first half for many banks. As we look forward to 2022, we will be building off the momentum that we created in the fourth quarter. Specifically, the loan growth was led by our specialty businesses: Fund finance grew by about $250 million in the quarter. Our lender finance business grew by nearly $300 million in the quarter. We're targeting closer to an average of $500 million per quarter in 2022.

Gotcha. Thank you. Just switching to the deposits, CBIT deposit growth is still positive, just a little bit lower than what we saw in a very strong start in the third quarter. Could you provide some color as to what drove that moderation and what you expect going forward? It sounds like you're pretty upbeat on the growth prospects there.

Sure. Absolutely. As we laid out at the launch of the platform, we said 20-25 customers for a soft launch, which is what we stuck to. There was no real customer increase in the fourth quarter. It was really just customers adding to their existing deposit bases. As we move into this year, we expect to begin to grow the customer base as the network strengthens.

Casey, I can take that one. First, I just want to comment that expense management is always a focus for us at Customers Bank. Quick walking through them, in the fourth quarter, we had about $9 million in non-recurring expense items that I think it's important to understand. Many of these expenses were linked to the strong performance we achieved in 2021.

Okay. Great. Thanks, Carla. I appreciate that. Just last one for me. Regarding the '23 EPS guide of well over $6, just want to make sure I'm thinking about this right. Assuming you get to that high $4 number in '22 and then you have the BankMobile deposit service agreement lapsing, which is about $1.35, that puts you around $6.25. And that doesn't factor in anything from growth or any benefit from rates on an asset-sensitive balance sheet, correct?

Yes, that's correct.

Your next question comes from the line of Peter Winter from Wedbush Securities. Your line is open.

Good morning. You reconfirm EPS guidance this year of $4.75 to $5 and you had given that guidance in October, but the interest rate environment is more favorable and I'm just wondering, at one point Jay, you mentioned that your model assumes three rate hikes, but is that included in the guidance of $4.75 to $5?

Yes, Peter, generally speaking, we give overall gentle guidance, not a precise number on the models we are running the company at. Yes, we are asset sensitive. We have factored those in for our guidance.

Right. If I can ask one different way. For every 25 basis point rate hike, can you talk about what the impact to net interest income is?

Yes, we can give some guidance to that. I think internal modeling indicates that in an up-100 basis point scenario, you should expect to see NII increase somewhere between 5% to 10%.

Certainly, the way to think about our soft launch was tactical. It was to pressure test the technology, the infrastructure, processes on boarding payments. However, we will begin increasing our customer base significantly this year as we strengthen the network.

Hey, good morning, everybody. Thanks for taking my questions. Just wanted to clarify a few items. Sam, to stick on the CBIT platform for a second year. It seems the pilot is working about growing customers but I was wondering if you could talk about the sales process going forward as you ramp up customer acquisition?

Absolutely. We will be adding more customers with API connectivity and expanding the relative networks for future network growth. We may also add cutting-edge products and services for the digital asset banking coverage over the course of the year.

It expires anyway, but BMTX is taking steps to maintain their objectives. We expect this to be a win-win outcome for both institutions.

Good morning. Just wanted to ask on the 2023 guide. Any sort of ROAA expectations that you need to hit to get to that $6 plus?

I think we are factoring all those in, so it will be the ROAA in that 1.21% to 1.25% range. Our priorities are both balance sheet optimization as well as growth. We will evaluate the best opportunities for capital allocation to drive shareholder value.

On the TCE ratio, overall, it will be around that 7.5% range.

Thanks everyone for participating in today's earnings call. If you have any follow-up questions, please reach out to us. Thank you and have a good day.

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