Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Customers Bancorp Inc (CUBI, Financial) delivered strong earnings per share, exceeding consensus estimates on both GAAP and core basis.
- The company generated high-quality loan growth at an 11% annualized pace, contrasting with industry trends.
- Net interest margin expanded by 19 basis points, with expectations for continued expansion by year-end.
- Tangible book value per share exceeded $50, with a 13% annualized growth in the first half of 2024.
- The company achieved its 7.5% tangible common equity to tangible asset target within the first two quarters of 2024.
Negative Points
- Core non-interest expenses increased to $101 million in the second quarter, driven by new team hires and other factors.
- Total deposits were down modestly due to a timing lag of remixing, despite strong commercial deposit inflows.
- Non-interest bearing spot deposits were down modestly, although average balances were up slightly.
- The company experienced a modest uptick in non-performing assets (NPAs), although still below industry peers.
- Efficiency ratio remains temporarily elevated due to investments in new teams, with a target to return to mid-40s over the medium term.
Q & A Highlights
Q: It was nice to see loan growth after 5 quarters of the loans declining. Can you just talk about the loan composition and kind of drivers to loan growth going forward?
A: Yes. Peter, yes, I know our team members across the organization were excited as we talked about last quarter to really be able to restart a lot of that franchise relationship-based loan growth. As you saw in the materials, in the quarter, it was really driven in large part by our corporate and specialized verticals, so really seeing good activity across that organization but the largest components coming from fund finance which is both lender finance and capital call, equipment finance, healthcare but we really saw some contributions across that portfolio. And then when we look forward, candidly, it's probably more of the same. We're seeing good opportunities across that entire franchise. Sam mentioned, we could look for some of our strongest relationships for a little bit of commercial real estate in the back half of the year. And then I'd say the one change from the second quarter looking forward is obviously the new teams that were onboarded while, again, they're predominantly deposit focus, there are obviously credit needs for holistic relationships and instances as well. So we will look for them to contribute to some of that growth in the second half of the year.
Q: And just on the 10 banking teams, could you talk about do you need any additional products or services to meet the customer needs. And with the new teams supposed to break even by the end of the first quarter next year, what type of deposit growth do you need to achieve that?
A: Peter, this is Sam. And I apologize if I missed part of the question, please let me know at the end. We had a little bit of a break in our at least on our side here. But I believe you asked about breakeven of the new deposit teams. And just to sort of recap, we've over 1,000 accounts, just a small amount are funded with material balances and we continue to be adding significant account growth as well as unfunded deposit accounts being funded and new accounts being opened at a faster pace than even that. Last quarter, if you recall, we shared a little bit of a matrix which had sort of deposits on the left side and cost deposit savings on the right side. I think that gives you a really good sense. It's conservative from the perspective that it's really just focusing on interest expense reduction as a driver of revenue growth as opposed to also including, as you heard from Phil, there's a little bit of interest income as well that's coming. I think as an example, we had about $30 million or so just in the second quarter that came from new relationships associated with the new teams. So long way of saying that the breakeven is expected to be closer to the top right end of that matrix which is lower on the deposit range because we are currently seeing, based upon the information we have, both on what has been booked as well as the pipeline, about 30% of deposits being non-interest bearing and the blended cost being at or around 3%.
Q: Just going back to the deposits here. Sam, just curious, if you just talk a little bit about well, maybe just start first with the potential for interest rate cuts here. Just curious how you guys are thinking about your deposit beta if we get some cuts going forward?
A: Sure. I'd be happy to take that. So Steve, I think our cumulative deposit beta blending to especially some of the positive mix shifts we've seen over the last year really peaked somewhere in that 55% to 60% range. We'd expect something similar on the way down from a deposit perspective. The X factor is the continued mix shift that we're also seeing. So independent of a rate cut, we're actually seeing our deposit costs go down. In fact, we've seen our interest expense reduced 3 quarters in a row as an example.
Q: And then in terms of just the ongoing remixing, just curious about where your broker deposit levels are these days, Sam. I mean just kind of how you're thinking about the goal as the year progresses.
A: Sure. So Steve, as I walked through, as we look forward, we talked about from a remix perspective, our primary focus is reducing deposits that are higher cost and also in some case, classified as brokered. So our desire is to remix these deposits as the in the coming quarters in addition to sort of the higher cost and more concentrated deposits that we talked about before. At the end of the day, what we're seeing is a 30% non-interest bearing mix within the new customers that are being onboarded and they're being used to remix 100% interest-bearing deposits, as an example which includes our broker deposits. Our broker deposits are expected to increase slightly this quarter but they will they have peaked and they will be and plateaued and we'll be reducing them significantly in the coming quarters. That's our expectation.
Q: I was hoping just given the prepayment income commentary you could give us just a little more sense for the NIM cadence through year-end. It sounds like from now until year-end, we'll see some expansion but the third quarter, I can use some help with the third quarter and where you expect that exit into BS?
A: Yes, sure. Matt, it's Phil. Yes. So I think we tried to sort of reset if you take that prepayment income down sort of reset that baseline basically would have been sort of closer to $325 million. in the second quarter. And then I think we've said that we'd look to get above the to the higher end of our range by Q4 with, obviously, Q4 now being a bit impacted by that hedging, so I think most folks maybe yourself included, were somewhat sort of linearly stepping up like that. So yes, I think you could see kind of less in the third quarter and then more of a boost stuff back in the fourth quarter.
Q: And then I was hoping you could talk a little bit about the deposits coming in balance sheet size expectations. And then as you fund loan growth, there's still excess of cash, securities rolling off. So I would love a few different guard rails, one being expectations around cash to assets, securities to assets and an overall balance sheet size over 3 year-end and maybe in 2025?
A: Yes. Matt, so I think we're I think we said sort of we were well above 30% last quarter. I think we moved down to around 30%, we sort of said anywhere in that 25% to 30% range feels like a reasonable spot. Obviously, we'll continue to monitor that. But as you highlighted, there's there is some extra room there but we do want to continue to maintain higher levels of liquidity. As far as balance sheet size, as Sam mentioned, majority of this, we'd look to continue to remix as well on the deposit side. though you could see we've talked about
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
