Q4 2024 Customers Bancorp Inc Earnings Call
Hello and welcome to the Customers Bank Corp Inc. 2024 4th Quarter and Year-End Earnings Report. All lines have been placed on mute to prevent any background noise.
Speaker Change: 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's pad. I would now like to turn the conference over to David Patti of Customers Bank. You may begin.
David Patti: Thank you, Sarah, and good morning, everyone. Thank you for joining us for the Customer Bank Core Earnings Webcast for Q4 in the full year 2024.
David Patti: The presentation deck you will see during today's webcast has been posted on the investors web page of the bank's website at www.customersbank.com. You can scroll to Q4 and full year 24 results and click download presentation.
David Patti: You can also download a PDF of the full press release at this spot.
David Patti: Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document.
David Patti: 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.
David Patti: 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.
David Patti: 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.
David Patti: Copies may be obtained from the FCC or by visiting the Investor Relations section of our website.
Speaker Change: At this time, it's my pleasure to introduce Customers Bank Core Chair, Jay Sidhu. Jay.
Jay Sidhu: 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.
Speaker Change: Joining me this morning on this call are President and CEO of Customers Bank, Sam Sidhu, and Customers Bank Corp CFO, Phil Watkins.
Speaker Change: 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.
Speaker Change: from the humble beginnings of our family and friends making a 17 million equity capital infusion to take full controlling interest
Speaker Change: in this, in what was at that time a 200 million asset new century bank and which had only 70 million dollars in core deposits but also had 30% non-performing assets.
Speaker Change: From those kind of beginnings, today, Customers Bank Corp. has been built into a thriving $22 billion asset bank.
a high-performing bank.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: We believe that the best days of Customers Bank Corp. actually lie ahead.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: with a national presence in several niche businesses and a business model that truly reflects the single point of contact for our customers.
Speaker Change: Our strong results this past quarter and over the past several quarters and years underscores this transformation and the progress we've made.
Speaker Change: Reflecting on 2024, it was truly a pivotal year for us and a year of strategic investments in our foundation for the future.
Speaker Change: We believe this will stand out as one of the most transformative periods in our company's history.
Speaker Change: And like I stated earlier, we are very excited about the future of our company.
Speaker Change: Moving now to slide three, most of you are familiar with the customer's bank franchise.
Speaker Change: For those that are newer to our story, let me briefly highlight what makes our model unique.
Speaker Change: We are not a traditional bank. We are very well positioned.
Speaker Change: diversified, tech-forward institution operating across community banking, corporate banking, and digital banking franchises.
We believe we are building a bank of the future.
Speaker Change: 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.
Speaker Change: Exceptional client service is not just a priority for us, it's the cornerstone of our culture and the key to our success.
Speaker Change: The focus, this focus, is so central to who we are, it's embedded in our name.
Speaker Change: are 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.
Speaker Change: We have been a consistent recruiter also of top talent and that we believe is a major strength of our company.
Speaker Change: While the frontline teams that I've talked about, that we've added over the last several years, get most of the attention.
Speaker Change: 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.
Speaker Change: 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 5 to add to this and share with you the highlights of the quarter and the year. Sam?
Sam: Thanks Jay and good morning everyone to the couple hundred live participants who've already joined the call really appreciate your interest.
Sam: 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 of my colleagues have accomplished since I had the privilege of joining the management team, which is exactly five years ago this week.
Sam: As you can see on slide five, over this time period, we have delivered exceptional franchise enhancing deposit-led growth.
Sam: 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.
Sam: Incredibly, we accomplished all of this while growing our capital ratio significantly.
Sam: with CET1 up 400 basis points, providing us tremendous flexibility today.
Thank you.
Sam: Slide 6 shows how the execution of our unique strategy has resulted in a huge increase in our earnings power and profitability.
Sam: Net interest income is up 19% annually and our core EPS is up over two and a half times over the last five years.
Sam: This is even with the significant investments we've made in 2024.
Sam: Our margin has also increased by 40 basis points over that time.
Sam: 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.
Sam: Customers have 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.
Sam: This has resulted us in being the top performing publicly traded U.S. bank stock two of the last four years.
Sam: We're proud of what the team has achieved, but even more excited about the prospects and momentum going forward in 2025.
Sam: With that, I'll move to slide seven and touch on our areas of focus.
Sam: 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.
Sam: 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.
Sam: It is their trust and partnership that enable us to grow and thrive.
Sam: When our clients succeed, we succeed, and we also believe what gets measured, gets done, as evidenced by our best-in-class NPS.
Sam: 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.
Sam: Next, our top financial priority remains improving our deposit franchise even further coming off of a year of incredible success.
Sam: 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.
Sam: 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.
Sam: This is an amazing accomplishment, especially considering we had industry-leading loan growth of 12% over the same time period.
Sam: This provides us great momentum for 25, and as a result, we think the opportunities ahead are even stronger.
Sam: 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.
Sam: 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.
Thank you. Bye.
Sam: 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.
Sam: As we've said many times before, uniquely, the easiest path for us to do so is by lowering our interest expense.
Sam: 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.
Sam: If we achieve the goals we've set for ourselves, we believe risk management can be a strength and competitive advantage for customers back.
Thank you.
Sam: 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.
Sam: 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.
Sam: and we're privileged to be able to make those investments while still achieving positive operating leverage.
Sam: We will do all this with not taking our eye off of other key risk management areas, ensuring we maintain strong capital liquidity and credit quality.
Thank you.
Sam: Turning to slide 8, you'll see that the many accomplishments that delivered a strong fourth quarter are also providing great momentum for 25.
Sam: We once again had a billion dollars of gross deposit inflows in the quarter, and we continued to remix out our higher cost deposits.
Sam: This led to a lower deposit cost of 39 basis points.
Sam: We bucked the market trend growing our loan portfolio at an industry-leading 19% annualized pace.
Sam: The combination of these factors resulted in a net interest income growth in the quarter of six percent and also increased margin by five basis points.
Sam: We, 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.
Sam: 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 Qubix 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.
Sam: Advancing to slide 9, 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.
Sam: We delivered core earnings per share of $1.36 in the quarter on net income of $44 million.
Sam: For the full year, this was $183 million in core net income, or $560 million in EPS.
Sam: which represented a full year core ROE and ROA of 11.4 and 92 basis points respectively.
Sam: With the team's efforts to improve our deposit franchise, which was firing on all cylinders.
Sam: To recap some of the incredible results total deposits increased by more than $775 million or 4% non.
Sam: Noninterest bearing deposits led by our Cubic's 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.
Sam: We reduced our broker deposits by around an estimated $500 million in the quarter and once again brought in over $1 billion of gross deposits.
Sam: Importantly, this continues our streak since early 2023 now at seven quarters in a row, averaging at about $1 billion in deposit inflows per quarter, which we're using for remix.
Sam: 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 downcycle.
Sam: As a reminder, our deposit beta on the way up was about 60%. So we're off to a great start.
Sam: And importantly, we had strong stability in deposits in connection with the repricing efforts.
Sam: The teams we brought in since early 'twenty three 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.
Sam: The new commercial banking teams, we hired last year managed about 900 million deposits at year end and about 1 billion as of this week.
Sam: We've increased the commercial client count of our franchise by almost 50% in the last two years, which is just exceptional.
Sam: Through their efforts and across the company, we've already transformed the deposit franchise.
Sam: To recap and put this in perspective since March of 'twenty, three we paid down $4 $5 billion of wholesale Cds and borrowings.
Sam: Over that same time period, we've increased our noninterest bearing deposits by over $2 billion.
Sam: And in the next phase, we've been reducing the level of higher cost and less strategic deposits at a consistent clip.
Sam: With the deposit pipeline of over $2 billion led by our new teams and with contributions across the franchise. We are still in very early in the very early innings as we walked you through last quarter.
Sam: 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.
Sam: 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.
Sam: This quarter the largest contributors were from fund finance, our new commercial banking teams commercial real estate healthcare and mortgage finance.
Sam: 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 multi in multifamily and commercial real estate loan book increase over the last two quarters has been more than self funded with the real estate industry.
Sam: <unk> deposits.
Sam: Coming from high quality institutional owners looking for a new relationship bank.
Sam: As you can appreciate this type of self funding is really unheard of in the real estate industry and underscores the void, we're feeling in the market.
Sam: Our lending is also very granular.
Sam: With an average loan size of around $6 million originated in the quarter.
Sam: Despite our modest growth our concentration remained under 200%, which has proven to be a significant competitive advantage against our peers.
Sam: For the year, we grew the entire loan book by $1.6 billion, which was about 12, 3% growth in within our 10% to 15% target.
Sam: This really bucked the industry trends with most banks seen very little increases in loan balances importantly, this growth has been well diversified coming from the many groups and channels of our franchise.
Sam: Despite this growth our loan balances are still below where they ended in 2022.
Sam: 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.
Sam: While our deposit franchise and transformation gets more focus the franchise transformation is frankly evident on both sides of the balance sheet.
Sam: We're seeing great opportunities to continue this momentum as we get go into 2025 with that I'll pass it to Phil.
Sam: Okay.
Phil: 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.
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 noninterest bearing deposits.
Phil: You can really see this in the breakdown in the components of our 6% growth in NII.
Phil: 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.
Phil: As Sam mentioned further interest expense reduction is our strongest lever for continued margin and NII growth in 2025.
Phil: 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.
Phil: As most of you know over the last few quarters, we've taken steps to gradually reduce our asset sensitivity.
Phil: Even so we feel that our modest asset sensitive profile gives us good optionality optionality and Thats really proving out today.
Phil: Generally are higher for longer rate environment, with an upward sloping yield curve should be a tailwind for customers bank and.
Phil: 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.
Phil: As a result, we feel we are well positioned regardless of the near term rate trajectory.
Phil: On slide 14, we'll cover noninterest expenses core noninterest 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.
Phil: 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.
Phil: Even with these higher levels of investment our core noninterest expense as a percent of average assets is still top quartile among our regional bank peers.
Phil: On slide 15, I'll recap the progress of the operational excellence initiatives, we discussed last quarter.
Phil: Yeah.
Phil: 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 am pleased to say that as of year end. We are on track to achieve this target most of which has already been realized.
Phil: On the revenue side as Sam mentioned, the increased Treasury management fee income from clients utilizing our cubic's platform is already contributing at least $5 million in annual fee income.
Phil: Additionally, through the efforts undertaken across our human and technology infrastructure. We are on track to realize about $15 million in annual expense savings.
Phil: 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.
Phil: With that I'll move to slide 16.
Phil: 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%.
Phil: This this keeps up with our 16% annual growth rate over the past five years.
Phil: We believe T. B V. Compounding is a key performance metric and our results put us among the top of our peers.
Phil: Moving to slide 17, our capital ratios across the board remain robust and provide us with substantial flexibility for organic growth opportunities.
Phil: At 12%, we remain in excess of our 11, 5% CET one target despite utilizing some risk based capital for loan growth in the quarter.
Phil: 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.
Phil: Okay.
Phil: On slide 18, we continue to be pleased overall with our credit performance, which has been a strength of our organization.
Phil: N P. As remained low at just 25 basis points.
Phil: Net charge offs declined in the quarter.
Phil: 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 NCL ratio.
Phil: 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.
Sam: And with that I'll pass the call back over to Sam before we open up the line for Q&A.
Sam: Thanks for that Phil.
Sam: 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.
Sam: 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.
Sam: On deposits I would 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.
Sam: 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.
Sam: Importantly, we will be very disciplined around deposit led loan growth.
Sam: On NII when backing out the venture accretion income in 'twenty, four we expect NII to conservatively grow by about 7% to 10% without adjustment.
Sam: 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.
Sam: Through the operational efficiency efforts, including fee income growth from the Cubic's platform, we'll look to bring our efficiency ratio back down to the low to mid fifties this year.
Sam: And then continue that progression to our mid forties ultimate target over the medium term as the execution of our strategic priorities take hold and as we sunset some of our outsized investments.
Sam: We will 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.
Sam: Based on the industry outlook to date, achieving this guidance would put us at the top of the industry in all metrics.
Sam: While we have levers for upside we want to be conservative as the timing of deposit generation is not as certain as loan generation.
Sam: Now to wrap up on slide 20.
Sam: With the momentum generated from our accomplishments in 2024, we believe we are incredibly well positioned to continue to increase our franchise value.
Sam: 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.
Sam: Our deposit franchise transformation efforts will continue.
Sam: With the goal of even further improving both the cost and quality of our deposits.
Sam: 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 and twenty-five independent of rate cuts.
Sam: The teams we've recruited over the past few years across a focused set of the.
Sam: 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 we'll be well positioned to grow our NII and experienced positive operating leverages from our investments.
Jay Sidhu: At customers Bancorp, we wake up in the morning to compete for our shareholders. The management team is 100% in line as you heard from Jay and advancing the company's goals and continuing to deliver for our shareholders. We believe we have the right team along with our client centric culture to allow us to continue executing on this strategy and drive franchise value in 2025.
Sam: And beyond with that we'd be happy to take your questions.
Sam: Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
Sam: These ensure that your phone is not on mute when called upon thank you.
Speaker Change: Your first question comes from the line of Steve Moss with Raymond James Your line is open.
Steve Moss: Hi, good morning.
Speaker Change: Good morning, Dave just starting on the loan growth guide here mourning Sam on the loan growth guide here, maybe you could just talk a little bit about kind of your expectations for loan growth over the next quarter or two it sounds like the pipeline remains strong.
Speaker Change: And I heard you there indicate that loan growth that could be conservative for 2025.
Steve Moss: Yeah, Hey, Steve Good morning.
Steve Moss: So the pipelines are definitely strong we continue to build with the pipelines at least sort of in the $4 million to $500 million range I will say as you you'd normally know Q1 is usually a bit slower time, obviously, we had a very strong fourth quarter with closings that debt to get done by year end and so usually that rebuild Tibet.
Steve Moss: There's also the question of 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 I think we definitely feel good about it as Sam mentioned, 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 we're certainly not chasing any loan only relationships. It's a it's very much a holistically focused.
Steve Moss: Yes.
Speaker Change: Phil if I could just add to that I think that the point about payoffs is very important.
Speaker Change: We had a number of pay offs.
Speaker Change: In 2020 for to put it in perspective, we had about $1 billion 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 in going forward, we do anticipate that a lot of the.
The payoffs have sunset it mostly in 'twenty four having said that I think that as theres a stronger.
Speaker Change: Commercial environment, you could see some some refinancing activity 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 the on our loan growth side loan slide two.
Speaker Change: Really the chart to exemplify the really the diversification I think that's what's really important is we have a number of levers to pull as the year progresses.
Speaker Change: Okay, Great I appreciate all that color and then just in terms of the deposit growth here this quarter a lot on the noninterest bearing side.
Speaker Change: I'm, assuming a lot of that is from the instant payments I just kind of curious.
Speaker Change: No.
Speaker Change: How youre thinking about that business. These days you have had the 15% cap in the past.
Speaker Change: Obviously it was.
Speaker Change: It was a good quarter for productivity in that business, but maybe the dynamics, there youre seeing and how youre thinking about it here along with that the fees that started this quarter.
Sure absolutely so firstly I'll start with the with saying Steve Your your intuition is correct, but most of that noninterest bearing deposit growth.
Speaker Change: <unk> from our cubic's platform customers and after the election.
Speaker Change: And our clients experienced a tremendous amount of increased market activity, which as you can imagine leads to higher balances, which.
Which we supported in order to serve our clients when they needed us most.
Speaker Change: Well, we'll wait and see where things fully settle in but it's worth noting at the end of the year, we had about $3 $6 billion and spot balances there.
Speaker Change: And you know on the point of.
Speaker Change: Of of our our limits and targets I guess, it's about 15%, but importantly, we are holding all of these balances and 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.
Speaker Change: Risk based approach as we assess these 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.
Speaker Change: Our own in house platform, which is not necessary, it's not even in beta at a 100% switchover that we've made and it's also helped us level up in fees, we had almost $2 million in fees and in.
Speaker Change: In the fourth quarter related to our cubic's platform and the customers now obviously theres increased market activity. There you also heard Phil talk about <unk>.
Speaker Change: $5 million.
Speaker Change: Plus is sort of where we're guiding to a sort of a minimum but we'll wait and see how things settle in September was sorry, I'm sorry October was slow in November was was it was slow for the first week and things have been pretty active in the first two weeks of January as an example, we're also slow so so increased client activity leads to higher balances.
Speaker Change: Higher balances leads to interest income and it also leads to.
Speaker Change: Higher fee income.
Speaker Change: Okay, Great appreciate that and one last one for me and I'll step back.
Speaker Change: On the NII again, I apologize if I missed it but just wondering.
Speaker Change: What you guys are assuming for rate cuts there.
Bonnie: Hey, Bonnie.
Bonnie: Yes, Steve.
Steve Moss: Our base case had two rate cuts, which was which were including one early in the year in March obviously that that trajectory moves around a lot, but we look at a pretty wide range anywhere from zero to five rate cuts.
Steve Moss: Okay, Great I appreciate all color and I'll step back here.
Steve Moss: The next question comes from Peter Winter with da Davidson. Your line is open.
Peter Winter: Good morning, Good morning, I, just wanted to follow up on.
Speaker Change: Good morning, just net 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.
Peter Winter: Lower end and maybe the trajectory of the margin.
Speaker Change: Yes, sure I'll start off and then Phil Let me know if I if I missed anything as you can imagine the two biggest drivers of the of our range would be.
Speaker Change: Rates and pace of loan growth so focusing on the high end, it's actually based on.
Speaker Change: The current.
Speaker Change: Rate curve, which has two cuts.
Speaker Change: And if you sort of normalize for backing out the accretion as I walked through in the script that really puts us at at the at the at about 10% or the high end of the industry.
Speaker Change: We do have potential levers to do better, but we're sitting in January.
Speaker Change: There's a lot of things that.
Speaker Change: That can change as the year progresses, including the rate curve, which has been moving as you know materially on a week to week basis.
Speaker Change: So that sort of hopefully a bit of context on the the range, but I would just also sort of point you back to.
Speaker Change: The power of the franchise and if you noticed on the slide we had in our NII has grown by 19% annually over the last five years.
Speaker Change: We hope to continue obviously not necessarily at that pace, but at an industry leading pace going forward.
Speaker Change: So if I can just follow up on the Sam If I you had 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.
Speaker Change: Low single digit growth.
Speaker Change: Just wondering why some of that momentum it seems like it would slow a little bit.
Speaker Change: I'm interpreting that correctly.
Peter Winter: Yeah, Hey, Peter So you know again, a couple of things one as as Sam mentioned, we are we are still modestly asset sensitive so with two two rate cuts in there that would have.
Speaker Change: Would have some downward impact.
Speaker Change: And the other the other level lever is also as Sam mentioned earlier sort of just where some of the noninterest average non interest bearing balances settlement.
Speaker Change: Yes.
Peter Winter: To kind of put that in perspective, Peter you know you can see that.
Jay Sidhu: On our NII slide we broke out interest income and interest expense. So you can see that our interest income only slightly declined.
Peter Winter: Declined.
Speaker Change: In the quarter. Despite the fact that you had the full impact of <unk> of September through December in a rate cut. So I think that really just speaks to as Phil mentioned a mix shift that we have.
Speaker Change: Across the across the franchise in those things need to sort of take time to stabilize it.
Speaker Change: Got it and just one last question just.
Speaker Change: Could you just provide a little bit of color on the increase.
Speaker Change: Oreo property that $12 5 million and six $6 6 million Reserve Bill.
Speaker Change: Was that related to this credit.
Speaker Change: Yeah, Hey, Hey, Peter So I think you're referencing there was about an 8 million dollar increase in in N P. A's.
Speaker Change: It's actually not Oreo was a it was a security that we put on NPA in the quarter.
Which we're in the final stages over a restructuring with the issuer and feel we're well reserved but.
Speaker Change: But put that on on in the quarter. So that's actually where that's coming from on the convert on the.
Speaker Change: Loan ACL side, that's really related to increase in the loan book. So if you see our coverage ratios there were relatively stable.
Speaker Change: But.
Speaker Change: But obviously the increased loan volume is going to require increased provisioning.
Speaker Change: Alright.
Speaker Change: Thanks, guys.
Speaker Change: Next question comes from Kelly Motta with <unk>. Your line is open.
Speaker Change: Oh good morning, Thanks for the question.
Speaker Change: Core deposit growth was really remarkable.
Speaker Change: I will continue with wrong in that.
Speaker Change: Deposit betas were probably doing in the industry I'm wondering as you look ahead it feels like a lot of the low hanging fruit.
Speaker Change: <unk> realized here with the continued rollout of broker just wondering.
Speaker Change: How.
Speaker Change: Hi.
Speaker Change: What's baked into your guidance in terms of your expectation for continuing to bring down deposit costs will be equal of blue really core deposit aufhauser.
Speaker Change: Yeah.
Speaker Change: Sure.
Speaker Change: Good morning, Kelly, So I think that.
Speaker Change: First of all you touched on a couple of things one thing I, just sort of highlight as broker deposits, where 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 re remix in the fourth quarter that was I believe four seven or four 8% cost of funds.
Speaker Change: <unk>, we've scheduled about $500 million in the first quarter, which is currently at about four and a half to kind of put that in perspective and put the scale of.
Speaker Change: 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 you know from a cost of deposit perspective, and then I'll point you back to while the pipeline is $2 billion.
Speaker Change: We talked.
Speaker Change: About our goals for the year for the for the new teams.
Speaker Change: And we think the new teams should really be able to drive one and a half to $2 billion or so.
Speaker Change: In 2025.
Speaker Change: 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 a 150 to 200 basis points.
Speaker Change: Below.
Speaker Change: Our cost of funds. So I think that sort of helps give you some perspective on how we're sort of seeing the overall remix and some of the some of the levers and puts and calls.
Speaker Change: That's super helpful. Thank you.
Speaker Change: I'd love to ask a follow up on <unk>.
And can you say what the commentary that.
Speaker Change: Most of that at <unk> for a good portion of that was related to.
Speaker Change: Letting the capital piece of that.
Speaker Change: What how you're viewing the competitive operational or hard and if you could just frame.
Speaker Change: <unk> here.
Speaker Change: Obviously, the new administration is much more friendly to this business.
Speaker Change: But also wondering how youre thinking about potential competitor getting back in and your ability to.
Speaker Change: Maintain your lead in this space.
Speaker Change: Sure Absolutely Kelly, let me just address one thing on an interest bearing deposits in a while we had a big driver from.
Speaker Change: From a R cubic's.
Speaker Change: Client customers, we still had nine figure deposits, which would have been a highlight of the quarter.
Speaker Change: Across the overall bank in noninterest bearing.
Speaker Change: Deposit growth, even with as you know sort of Q4 type taxes and payments that kind of go out.
Speaker Change: Towards the end of the year.
Speaker Change: But to get to your question you know I think.
Speaker Change: Post <unk>.
Speaker Change: November's election, I think it's really reinforced that digital assets are here to stay and banks are going to handle.
Speaker Change: This over time, just like any other banking services.
Speaker Change: That are being provided and at customers Bank, we have the benefit of.
Speaker Change: Being a first mover only mover that has a network and it's very difficult to replicate so we're sitting in a primary seat with operating and transaction accounts with the largest and most institutional.
Speaker Change: Customers in this space so obviously.
Speaker Change: 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.
Speaker Change: Feel fortunate that we've been able to.
Speaker Change: Support our customers build very long deep relationships and also.
Speaker Change: Really have a superior technology service that we've been able to <unk>.
Speaker Change: Support and provide.
Speaker Change: To our to our customer base and also prove to them.
Speaker Change: That.
Speaker Change: That on our own platform now.
Speaker Change: That we have the technology prowess to continue to support them in the future.
Speaker Change: Yeah.
Speaker Change: Thank you very much I'll step back.
Speaker Change: Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.
Speaker Change: Your next question comes from Matthew Breese with Stephens. Your line is open.
Matthew Breese: Hey, good morning.
Speaker Change: Maybe first just starting with the NIM can.
Speaker Change: Can you provide the discount accretion over the last few quarters and what the expectation is for discount accretion in 2025.
Speaker Change: Yeah, Hey, Matt good morning.
As we kind of said on the last call it really settled into it to a spot where it's been pretty immaterial. So it was.
Speaker Change: Low single digit basis point impacts are really not much in and again, there's we've realized essentially the vast majority of the discount accretion here now through 2024, so as Sam mentioned it. It's it's not really much of a driver for for 25, as we think about that comparison point.
Speaker Change: Okay. Okay, and then I was hoping you could also touch on the provisioning outlook and the reserve.
Speaker Change: 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 yes.
Yeah sure so it's.
Speaker Change: It's.
Speaker Change: 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 <unk> and Ken sorry, commercial and consumer reserve levels, they've been stable or even on the commercial side. Some slight increases so that was really mostly mix driven.
Speaker Change: I think we 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.
Speaker Change: Around the rate respective levels, but as I mentioned earlier with increased loan growth you could see some some increased provision so well, while we don't have a formal guide on it I think the directional range. We've given in the past as kind of $18 million to $22 million you could see that probably be a bit higher just given the <unk>.
Speaker Change: You know that.
Speaker Change: Loan growth.
Speaker Change: Okay. Thank you and then just going back to the cubic crypto effort.
Speaker Change: I guess, 15% used to be the old limit on crypto deposits.
Speaker Change: I think Sam you said you were at 336 billion spot deposit.
Speaker Change: Today or at period ends at kind of 18% to 19% I guess, what's the new cap is there one.
Speaker Change: And then the growth that you had this quarter was it from existing customers.
Speaker Change: Just going back to the regulatory order I thought there was some stipulations around engaging with new third parties and I didn't know if there was any sort of limitations on new customers.
Speaker Change: Yeah sure. So I'll start with the last question first as you know we don't have any restrictions on new customers I think youre 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 with.
Speaker Change: With existing customers and I think I touched on this before.
Speaker Change: Before is we're holding all of this in cash that's our that's our risk, but again, 15% was actually something that we set.
Speaker Change: A couple of years ago.
Speaker Change: For this vertical.
Speaker Change: Higher to becoming the primary in a banking institution and we've held to it and as customer activity increased.
Speaker Change: We we supported our customers and in terms of the new.
Speaker Change: New level, it's to be determined it's got to go through sort of our typical <unk>.
Speaker Change: <unk> and we have to be thoughtful thinking about.
Speaker Change: You know how what our customers need we also want to see where things settle and it's only been.
Speaker Change: 60 days or so.
Speaker Change: So I think we'd like to see where things settle in if you look back to last year, it's tough to remember that in January you had the etfs in that.
Speaker Change: That were approved.
Speaker Change: In the fourth quarter, you had the election in the first quarter, you know theres additional activity so we'd like to see it get some more.
Speaker Change: History.
Speaker Change: Of client activity, and then we'll be able to sort of make much more of a.
Speaker Change: Informed call then.
Speaker Change: Understood and I appreciate the clarity on that the third party issues cut to interpret what they meant there.
Speaker Change: My last question is really just around overall broker deposits levels 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 through the call reports and the coal import levels have been relatively flat 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 are some smaller things that kind of get clubbed in there. Thank you.
Speaker Change: Yeah sure, Matt So I'll start and Phil.
Speaker Change: I don't have the numbers exactly in front of me, but I think we've gone down by a couple of hundred million dollars over the last couple of quarters and I think you heard me talk about my script of 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 deposit so higher cost less strategic.
<unk> are going to be the focus areas of our deposit remix so as we bring in those deposits you could imagine that broker deposits or deposits that had been classified as broker I think is also an important distinction.
Speaker Change: 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.
Thank you, ladies and gentlemen star one to ask a question.
Speaker Change: Next question comes from <unk> <unk> with B Riley Securities. Your line is open.
Speaker Change: Okay.
Speaker Change: Hey, congratulations guys on a great year and my.
Speaker Change: My question is on <unk>.
Speaker Change:
Speaker Change: How do you guys kind of like your punch list on.
Speaker Change: Working down the issues with the Budweiser. Thanks, Kelly, what can you share with us on that thanks.
Speaker Change: Sure Good morning al. Thank you so much.
Speaker Change: As I mentioned last quarter, I think the easiest way to sort of summarize this as we're working on enhancements as he described and sort of the punch list across people process and technology.
Speaker Change: The people side, we had had hired at that time and since hired even more seniors seen seasoned.
Speaker Change: <unk> and they're helping to level up to your risk management infrastructure.
Speaker Change: Let's build the bank of the future.
Speaker Change: From a process perspective, we talked about some other third party services.
Speaker Change: And getting top tier firms to help us with design implementation that also have sort of a good mastery.
Speaker Change: Of the external environment.
Speaker Change: And from a 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.
Speaker Change: But as of the end of the year, we fully transitioned all of our real time payments clients too.
Speaker Change: Cubic's.
Speaker Change: And then one follow up to that.
Speaker Change: Yes.
Speaker Change: Elevated professional services costs.
Speaker Change: What's kind of like the pace may.
Speaker Change: Failing that.
Speaker Change: Hence ramp or.
Speaker Change: Maybe maintaining it this year can you give us your thoughts on how we should think about that.
Speaker Change: 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 five and a half to somewhere between five and a half of $6 million in the quarter related to these efforts.
Speaker Change: December January is the peak, it's going to taper off down a little bit from there and then and then by the by the middle of the year, we will get back to sort of typical normalized level. So you know where we're at we're past the 50% point I guess is the best way to think about it.
Speaker Change: But you know month to month, we'll we'll see where we get to but where we're really.
Have a well executed plan that we hope to put behind us in the first half of the year.
Speaker Change: Thanks.
Speaker Change: Your final question will come from Kelly Motta with <unk>. Your line is open.
Speaker Change: Thanks, so much for letting me jump back on.
I just wanted to get some clarity from Dell on.
Speaker Change: Charity for Jackson.
Speaker Change: The timing of that during the quarter.
The sales as well as.
Speaker Change: The timing of the room.
Speaker Change: If that doesn't happen early.
Speaker Change: 2025 or was that.
Speaker Change:
Speaker Change: Andrew.
Speaker Change: Thanks.
Sure, Hey, Hey, Kelly and so yes.
Speaker Change: The the sales data occur kind of late in late in the quarter through the through the halfway Park and then through the halfway point until kind of later in the quarter and then the reinvestment was also a kind of gradual you can imagine the securities happened a little bit earlier, but again still.
Speaker Change: Pretty late in the quarter and then the loans were just kind of organically as they as they come came on and you can probably imagine the the majority of that loan growth always seems to come up right around December 31st at the end of the year, so tended to be a bit more to.
Speaker Change: More towards the tail, but generally we sort of think about it as probably having about five basis points of incremental NIM pick up in 'twenty five.
Speaker Change: Got it thank you so much.
Frank: This concludes the question and answer session I'll turn the call to President and CEO Frank <unk>.
Speaker Change: For closing remarks.
Speaker Change: Thank you everyone for your continued interest in and in support of customers Bancorp 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.
Speaker Change: This concludes the question and answer session.
Speaker Change: This concludes today's conference call. Thank you for joining you may now disconnect.