Customers Bancorp (CUBI) Q3 2024 earnings call transcript

Thank you, Brianna, and good morning, everyone. Thank you for joining us for the customer bank course, earnings webcast for Q3 2024. The presentation deck you will see during today's webcast has been posted on the investor's web page of the bank's website at www. customersbank. com. You can scroll to Q3 2024 results and click download presentation.

You can also download a PDF of the full press release at the spot. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risk 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 10K and 10Q 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 Bank Corps Chair, Jay Sedu.

Thank you, Dave, and good morning, ladies and gentlemen, and welcome to the Customers Bank Corps 2024 third-quarter earnings call. Joining me this morning are President and CEO of the Bank, Sam Sedu, and Customers Bank Corps CFO Phil Watkins. I will first provide a brief description about where the company stands at this time, followed by a detailed discussion by Sam and Phil.

Customers Bank Corps is a future-focused bank, and we are well positioned to evolve from a regional community bank to a high-performing specialized commercial and business bank with a national presence in selected markets. Our deposit and loan generation model is very customer-centric and not dependent on a traditional branch network. At the same time, we have developed technology solutions for our clients that resemble what clients would normally find at the largest banks in the nation, hence differentiating customers from traditional community banks.

By the middle to end of 2025, we will have completed the base transformation of this bank into what we are calling a forward-thinking bank model with an ability to also show above-average levels of profitability. We are confident in our ability to manage through these uncertain times that we are experiencing right now and remain highly focused on executing our unique strategy.

On the financial front, over the past year, we have reduced our asset sensitivity, significantly increased our capital levels, maintained robust liquidity, and always remained laser-focused on the credit quality, which is a strength of this organization.

2024 has been a transitional year for customers bank as we made investments in our future. First, in hiring a A-plus deposit-focused team, our various teams, early in the year, and more recently with a significant investment in technology and product improvement and our risk management infrastructure, we expect these investments to pay off in the coming quarters, giving us optimism about a strong trajectory in 2025 and beyond.

Supported by revenue growth and Nim expansion tailwinds. With that, I'll pass the call over to Sam on slide three, where he will start by providing some key highlights of the quarter, Ben.

Thank you, Jay, and good morning, everyone. We continue to distinguish ourselves in the financial services industry. Our unique and differentiated business model, particularly our dedication to customer success through a single point of contact approach, is contributing to our increase in holistic and strategic relationships. These relationships, combined with our entrepreneurial mindset, are fueling strong deposit and loan pipelines, contributing to our optimistic outlook for the remainder of this year and into next.

The company's deposit transformation remains our top financial priority. Healthy, high-quality commercial deposit growth in the quarter enabled us to run off less strategic commercial and consumer deposits. These deposit inflows demonstrate the positive momentum we have in fully transforming our deposit franchise.

Against the trends that most banks are experiencing right now, we once again generated strong, high-quality, diversified loan growth at a 16% annualized pace. While our reported net interest margin declined in the quarter, which Phil will walk through with a bridge later in the presentation, it's important to note that our base Nim was mostly stable and we remain well positioned for net interest margin expansion over the medium term as a result of our strong net interest income growth expected next year.

Our deposit transformation will be a key driver of this expansion. From an operational excellence perspective, while our core non-interest expense remains among the top quartile of our regional banks peers, we did experience an increase in the quarter. The increase was driven by our continued investment in our people and talent, as well as costs associated with further improving our risk and compliance platform.

But as we always have, we remain highly focused on operating efficiency. Moving to tangible book value, we reached nearly $53 per share after generating an 18% annualized growth in the quarter, which continues to be one of the best in the industry over the past several years. Our capital levels have grown and remain robust as we opportunistically utilized a portion of our share repurchase authorization in the quarter at times in our share price was trading below tangible book value. And you should expect us to continue to do so if this persists.

We also deployed capital into organic growth. Our liquidity metrics continue to be very strong. Credit quality remained a strong point for customers bank. We saw improvements across most credit metrics including our NPA ratio improving to just 22 basis points and special mention and substandard loans declined once again.

Finally, we remain very optimistic about our future with strong deposit and loan pipelines. We're in a unique position to continue to take commercial market share on a national scale. Our new banking teams are off to an excellent start and will serve to further accelerate and enhance these prospects.

Now let's turn to slide five, where I'll recap what makes customers bank a unique franchise. Here I'd like to reemphasize the importance of having a unique and differentiated business model. In a highly competitive and at times commoditized industry. Exceptional client service is the cornerstone of our culture and the key to our success. Where our goal every day is to make our clients say well.

Our service model is driven by exceptional colleagues who are empowered to serve their clients needs. The current environment has allowed us to attract top talent across the organization. In addition to the new client facing team members we've invested in, we've also attracted new leaders and team members in such areas as credit, risk management, marketing, technology and operations to name a few.

Our focus is on providing a sophisticated product offering delivered by exceptional bankers with deep industry expertise. This focus allows us to provide our clients with the products and services typical of a larger bank but with the service level of a private bank. We firmly believe this focus will allow us to be a top five competitor across all of our verticals. I'll give you an example of this later in the presentation when we walk through the amazing progress we've made in our venture banking business in a very short period of time.

Our strategy is anchored by a single point of contact service delivery model which drives organic growth one relationship at a time. Our strong relationships drive growth through a flywheel of repeat business and referrals.

We have the scale required to meet the needs of our clients but the entrepreneurial culture to adapt for them and deliver customized solutions. Additionally, our branch light model allows us to invest in the people and technology necessary to meet our clients where they are both now and in the future. We remain focused on executing these areas which differentiate us from our peers and we believe providing a truly exceptional service sophisticated product offerings through a single point of contact delivery model will drive strategic organic growth.

Let's turn to slide six on financial highlights. Here you can see we delivered core earnings per share of $1.34 and a quarter on net income of $43.8 million. Our ROCE and ROAA were 10.7% and 89 basis points respectively. We generated strong growth in both loans and deposits.

As I mentioned, 16% on loans and deposits increased by 9% annualized. Most importantly, the credit quality remains stable as evidenced by our NPA, NPL and reserve levels as you can see here. While many other banks are experiencing some credit challenges, our strong credit culture and business model is shining through in the quarter. These results also represent a transition period for us.

While we face some headwinds in the quarter in terms of reported net interest margin and temporary elevated non-interest expenses, these are transitory. And we have a strong fundamental base and improved trajectory and profitability moving forward. Additionally, you will notice in our press release that our pre-tax pre-provision income was impacted by transactions and our equipment finance vertical with corresponding dollar for dollar beneficial tax attributes that we closed on in the quarter.

We are highly focused on and confident in returning to our ROE and ROA into the mid-teens and north of 1% respectively. As our new banking teams break even and become profitable early next year and we taper our elevated risk management investments, achieving this would have the benefit of generating EPS growth of 30% or more in 2025 off of a low base this year burdened by these investments.

We are not short-sighted and we know that long-term investments may at times put pressure on short-term reported results. We have and will continue to mitigate these and we're focused on long-term value creation for our shareholders.

Moving to slide seven. As I mentioned, our top financial priority remains to continue to execute on the next leg of our deposit transformation. This involves replacing less strategic and higher cost deposits with higher quality deposits.

By quality, we mean a focus on a combination of primacy of relationship, cost and granularity. We are thrilled with our deposit gathering performance in the quarter. We had gross deposit inflows of $1.1 billion, almost exclusively from our commercial client franchise. We utilize these deposits to pay down approximately $700 million in higher costs, less strategic deposits, mostly in our commercial franchise.

A large driver, about half of these inflows came from our new banking teams. These inflows were once again broad-based with more than 25 deposit channels producing growth in the quarter. More than 70% of these channels experience growth of $25 million or more. Since the first quarter of 2023, newly hired banking teams have generated approximately $1.3 billion in granular, low-cost, holistic relationship-based deposits.

This is approaching a 10% remix of our deposit base just from these new teams alone. Importantly going forward, we anticipate these teams will hit their stride and we will continue to generate approximately $500 million or more of deposit growth per quarter, providing tremendous lift to our franchise. The quality of the transformation we are experiencing can also really be seen in the number of commercial accounts at our bank.

In the last year, we've added close to 4,000 net new accounts, which is more than a 25% increase in the deposit base, all within a flatish balance sheet. This is truly remarkable and really contextualizes the improvements in our franchise value I highlighted before.

It is understandable that this franchise value creation is not yet reflected in our share price, but as the investment fully pays off in the coming quarters, we expect a significant uptick in our profitability in the first half of 2025.

The deposit remix we are undertaking is substantial, and as such, there are often timing differences between when new deposits enter the bank and when existing deposits exit the bank. Since the regional banking crisis, we've averaged about a billion dollars in deposit inflows per quarter. Let me repeat that, over six quarters, we've averaged about a billion dollars of deposit inflows per quarter.

The result of this transformation is a remix of our deposit base by more than 30%. We believe this high quality granular, organic deposit growth is number one in the industry.

Finally, we continue to focus on the stability of the deposit franchise as insured, collateralized and affiliate deposits end of the quarter at 75% of total deposits. This remains at the high end of the industry.

Moving to slide eight, I wanna take a minute to show the incredible success we've had in our venture banking vertical, which demonstrates the power of our team lift out capabilities and adds to our success stories. We entered the venture banking space close to three years ago with a local team lift out in Boston. The team was quickly successful in achieving deposit growth of nearly 100 million and loan growth of about 500 million by the first quarter of 2023.

In June of last year, we took the business to the next level when we acquired a loan portfolio from the FDIC and brought in 30 new bankers to add to our existing team. We turned that local franchise, mostly focused on late stage and growth companies into a national player with a presence in San Francisco, Los Angeles, Austin, Denver, Chicago, Raleigh, Washington DC, New York and Boston and importantly from early stage to late stage with a top five market position already today.

This vertical is now nearly a billion dollar business for us which gives us the scale to compete, invest and deliver attractive returns for our shareholders. As of this quarter, the platform is essentially self-funded and is working towards a two to one deposit to loan ratio over time. We believe we will soon become a top three national competitor with this incredible team we've assembled led by Ken Fugate. Keep in mind, Ken's team had more than two billion dollars in deposits at their prior institution.

We are confident that they'll be able to replicate that model at our bank. This mirrors the track record we've had with teams that have joined customers bank over the last decade and we are similarly confident we will continue the success with the new commercial banking teams that joined us just six months ago, which I'll cover on the next slide.

Our new commercial banking teams have demonstrated impressive results in a very short period of time. They've generated about 370 million dollars of relationship based deposits growth in the quarter alone bringing total deposits gathered to about 535 million at around a 2.9% blended deposit cost, importantly with about 30% of these being non-interest bearing. In the quarter, an additional 2,000 new accounts were opened by these teams.

Similar to last quarter, only 20% of these accounts are materially funded today. Because of the operational nature of these accounts, we are often experiencing at least a 30 to 90 day period between the account opening and when they are meaningfully funded and operational. The pace of account openings is now approximately 150 accounts per week and we believe this will continue for the foreseeable future.

I'm proud to update you that as of this week's, the teams crossed 750 million dollars in deposits managed while maintaining a similar rate and mix, which is really exciting and shows the strength of the deposit franchise we've assembled.

Despite tremendous growth, the deposit pipeline for our commercial banking teams has now grown as well and stands in excess of two billion dollars. We will look to convert our pipeline as we have consistently done so over the past few quarters.

Over the last six quarters, as you know, we have always been able to convert over a two to three quarter period, our deposit pipeline and replenish it as well. Further, we have the confidence that we will continue to achieve about $500 million per quarter or more next year from these new deposit teams.

Finally, we remain on track for these banking teams to break even by the end of the first quarter of 2025 and expect to grow into their full deposit base from their prior institution over the next three years.

On slide 10, you can see that we had about $520 million of high quality held for investment loan growth in the quarter. That's an additional $160 million increase from the $360 million of growth we had in the second quarter.

Annualized loan growth, as I mentioned, was 16%. The loan growth in the quarter was granular and demonstrated by over 175 new lending relationships we established. To put that in perspective, going back to franchise value, that's about a 4% increase across the franchise in just one quarter. In addition to the 175 new relationships, about 40 existing relationships originated in funded loans in the quarter.

Production was broad based. Our largest contributors were mortgage finance, geographic CNI, led by our new commercial banking teams, commercial real estate, and equipment finance.

Mortgage finance is experiencing green shoots from the market expectations of lower rates, and the MBA is expecting to see about a 30% increased activity in 2025. Customers Bank has a well-oiled machine with deep longstanding relationships in this vertical that will look to take advantage of this opportunity if it arises.

Given the high, CRE concentration of our competitors in the industry are relative low CRE concentration below 190% is proving to be a significant competitive advantage. With the pullback of competitors, we've had an opportunity to be very selective in growing our book with strong long-term owners and in many cases, multi-generational family businesses with significant expertise in commercial real estate. We are reserving this commercial real estate capacity where it drives value to the franchise and supports deposit growth, and we're seeing incredible results for the franchise.

The loans themselves are also being executed at attractive terms given the lower competitive environment. The new commercial real estate production this quarter is highly granular with an average loan size of approximately $7 million. Importantly, deposits gathered thus far from the investment-free vertical exceeded the collective loan growth of about $180 million in the quarter. This is very atypical for CRE and a testament to the relationship-based market share we are acquiring and bucking industry trends.

You should expect similar deposit and loan growth in the vertical in the fourth quarter, which given the typical fixed rate nature of this vertical will also have the added benefit of further reducing our asset sensitivities.

Our corporate and specialized verticals continue to deliver highly attractive risk-adjusted yields targeting about sofa plus 275 to 300 basis points all in. Our loan pipelines remain strong with expected contributions from many of our lending verticals in the fourth quarter of 24 and into 2025.

We are on track to achieve our full year loan growth of 10 to 15%, which translates to approximately $400 to $500 million of loan growth in the fourth quarter. That said, importantly, we continue to be very disciplined and focus on franchise enhancing safe organic loan growth. While our loan pipelines have only been enhanced by our new banking teams, they also provide highly granular credit facilities with average balances of roughly just two to $3 million per relationship.

With that, I'd like to return to call over to fill to provide some additional detail.

And good morning, everyone. On slide 11, we have provided the components of our net interest income, which was $159 million in the quarter and our net interest margin, which was 3.06. While the reduction in net interest margin may appear larger, it was primarily driven by two key components.

First, approximately 12 basis points was related to lower discount accretion from our acquired loan portfolio and lower prepayment income in the quarter compared to Q2 levels. While the accretion income has always been lumpy and a bit difficult to predict, we saw a notable slowdown in the accelerated accretion in Q3. And now expect that trend will continue going forward.

Therefore, a majority of them remaining accretion will likely come in 25 and beyond. Second, approximately seven basis points was due to proactive measures we took on the balance sheet including a consumer loan sale, resulting in lower average loan balances, and the securities portfolio repositioning we completed in Q2, which reduced asset sensitivity and increased high quality liquid assets.

These two components accounted for more than 80% of the net interest margin impact in the quarter. Further, our interest expense and cost of deposits increased as a result of strong deposit growth, specifically in the interest-bearing category. Having said that, with the timing impacts we have with the remixing of deposits and a declining rate environment, we should have more flexibility on interest-bearing funding costs in the future.

It's also worth noting that in a down rate environment, like other banks, our loan yields will likely reprice faster than deposits. So there will be a slight lag in our ability to recapture net interest margin on the liability side of the balance sheet.

In Q4, we're looking for margin to be roughly flatish and then would look for expansion in 25 as the effects of the continued deposit remixed take hold and with the benefit of higher loan balances. Importantly, these efforts will add to our franchise value given the relationship-based activity on both the loan and deposit front.

Moving to slide 12, we have provided perspectives on some of the unique positive drivers for NII and M going forward. Over the last 12 months, we have taken a number of actions to meaningfully reduce our asset sensitivity position, bringing us closer to neutral, though we do remain modestly asset sensitive, which is a headwind in the current environment.

We continue to believe the majority of the opportunity for us will come from the liability side of our balance sheet, but we also see opportunities on the asset side. The easiest way to drive margin growth in high rate environment is through reduction in deposit costs. We'll look to accomplish this as our deposit remixed gains momentum as we bring in lower cost granular deposits to replace higher cost and more concentrated balances.

Second is the opportunity to reprice time deposits, lower with $680 million maturing in 2025 and another $500 million opportunity in 26. Third is the proactive hedging strategy we implemented starting in Q2 that will begin to benefit us as we likely enter a lower rate environment. And finally, we have the opportunity to reprice maturing fixed rate loans and originate the new high quality loan growth that Sam mentioned. Generally, we target about a 275 to 300 basis point spread on new originations.

Let's turn to slide 13 to discuss non-interest expenses. Corn on interest expense increased by about $3 million in the quarter. Compensation and outside services were the main drivers of the increase. The compensation increases were primarily related to new hires, including a full quarter for some of the newest team members we onboarded in Q2. Our annual mid-year salary increases and some higher incentives.

As Sam mentioned, we are operating with about eight to $10 million of expenses associated with our new teams. However, the rent of the new benefits are only starting to impact our income statement. With the excellent progress we have seen from these teams in just the past few months, we are confident in their ability to break even within a year and then drive improved profitability in 25.

Even with these higher levels of non-interest expenses, our core non-interest expense as a percent of average assets is still top quartile among our regional bank peers. Going forward, we expect some increase in Q4, driven in large part from the additional outside services we mentioned as we work to expeditiously enhance our risk management infrastructure. These expenses will remain somewhat elevated for the next two quarters and then would be expected to normalize.

Moving on to slide 14. We do have numerous revenue and expense levers at our disposal that we will target to ensure we continue to deliver for our shareholders and allow us to importantly reinvest in our business.

First, we see real opportunities to generate additional fee income, including from clients using our instant payments platform, as well as other products across the bank. We also see opportunities to create expense savings across areas like consolidation in our tech stack, some application rationalization, and through some strategic realignment we're evaluating across the organization.

Finally, at the end of this year, expenses associated with the new teams we mentioned will transition to a performance-based model with expenses tied to revenue generation as the business continues to mature. In total, we will look for these revenue enhancements and expense savings to provide the resources to make these important investments in our future and position us for success, not just in the near term, but over the long term.

With that, I'll move on to slide 15. Our tangible book value increased to about $53 per share this quarter. This is up more than $2.25 per share, reflecting the nearly 18% annualized growth rate Sam mentioned. This is the sixth consecutive quarter since the beginning of 2023 of a double-digit increase.

Moving to slide 16, our capital ratios across the board remain robust and provide us with substantial flexibility for organic growth opportunities. At 12.5%, we remain in excess of our 11.5% CET1 target and at 7.7% above our 7.5% TCE to TA target. Our TCE ratio was relatively flat in the quarter and increased by approximately 120 basis points over the last year.

We maintain this ratio while spending approximately $18 million of our organically generated capital to repurchase shares below tangible book value and with an increase in the size of our balance sheet. As planned, we deployed about 30 basis points of risk-based capital into strategic franchise enhancing loan growth. We continue to believe this is the most valuable form of capital deployment for the bank.

However, we will not hesitate to utilize the remaining share repurchase authorization, especially if it results in tangible book value and EPS accretion, which we view as two critical performance metrics.

Moving on to slide 17, we remain focused on maintaining robust levels of liquidity as the environment remains uncertain. Our coverage of immediately available liquidity to uninsured deposits remains extremely strong at 183%. Our HFI loan to deposit ratio continues to provide us with funding flexibility at only 76% compared to peers at 88%.

Moving on to slide 18, I'll cover the credit trends in the quarter. As most of you know, a strong credit culture has always been a hallmark of our organization. The net result of the focus and concentrated efforts by the team, both at initial underwriting and through active portfolio management, really comes through in our credit performance statistics. As Sam mentioned, our NPA ratio declined just 22 basis points in the quarter.

Net charge-offs also declined to break that down a little further. Total net charge-offs declined by about $1.7 million, or 9% in the aggregate, which was about six basis points.

Our commercial net charge-off rate declined to 24 basis points in the quarter, and consumer net charge-offs also decreased, bringing the consumer NCO ratio down to 2.51%. This is the second consecutive quarter that consumer NCOs have declined, which gives us additional confidence in the trend for the portfolio.

The forward-looking trends were also positive in the quarter. Special mention and substandard loans decreased by about 10%. This is the third consecutive quarterly decline in this level, despite our growing commercial loan portfolio. We also saw improvements in 30 to 89 day delinquencies. And with that, I'll pass the call back over to Sam before we open up the line for Q&A.

Thanks, Phil. Not a wrap-up on slide 19. First, we remain committed to the transformation of our deposit franchise in terms of funding cost and quality of deposits, and are pleased with this quarter's deposit gathering activity. The $1.1 billion in deposit inflows have allowed us to remix $700 million of less strategic deposits, providing future profitability left. Our new banking teams and verticals across the franchise are driving steady momentum and deposit generation, and we anticipate similar amounts of remixing in the future. In fact, in the fourth quarter, we've already scheduled our remix opportunity.

Pipelines from our new banking teams has exceeded $2 billion, and those are rebuilding steadily, despite deposits being onboarded. Fourth quarter, 24 and beyond will be a tremendous period for customers' bank as we enhance our commercial banking franchise.

Second, we delivered industry leading loan growth in the quarter, outpacing other banks that are struggling to deliver at this pace in the current environment. Our focused corporate and specialized banking verticals offer multiple avenues for loan growth, allowing us to capitalize on the most robust opportunities with the most attractive pricing. As highlighted earlier, our new commercial banking teams, mortgage finance, commercial real estate, and equipment finance divisions were key drivers of our success in the quarter.

Next, Phil discussed some of the specific drivers expecting Nim in the quarter, and more importantly, walked through the positive that interest income and Nim drivers and tailwinds we have in 2025. We are uniquely positioned as we have opportunities to enhance margin, both through continued deposit remix and robust loan pipelines, which will drive NII growth next year.

Finally, as previously stated, we believe tangible book value growth is a metric that is well aligned with creating long-term shareholder value. We generate 18% book value growth in the quarter and strive to continue generating similar returns over time. To put this in perspective, our 15% compounded annual book value growth rate over the past five years is about double the performance of top quartile banks with $100 billion in assets.

While we continue to be investment mode, it will taper and we expect to realize the payoffs in 2025 and beyond. We look forward to providing you with our full management outlook for 2025 on our next earnings call in January and remain very optimistic about the future prospects of our company.

With that, we'd be happy to take your questions. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one again. If you have dialed in and are listening via a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Our first question comes from the line of Steve Moss with Raymond James. Please go ahead.

Sure. Hey, good morning, Steve. So, you know, I'd say there's there's two components to it. Some is on the organic side of the balance sheet. You've seen us in increased fixed rate lending a bit here, but the major driver was going back in Q2. We highlighted that we put on some forward, forward starting swap hedges that are taking effect here in Q4 on the liability side converting fixed to floating.

And then I was, we also mentioned that the securities portfolio repositioning was really trading out some floating rate, floating rate securities there for longer duration, fixed rate, high quality liquid assets, which both had the effect of increasing liquidity value, but also reducing asset sensitivity there.

And Steve, I'll just jump in firstly, sorry about Halloween yesterday with your young kids as a fellow father. I empathize that the unfortunate where the last Thursday fell this year. But just to add, you also touched on deposit pricing. You know, I think that, you know, to kind of give you a little bit of color of the remix scene, and I'm sure we're happy to touch on this a little bit later, as we sort of just talk about sort of the trajectory. What's important is, is that, you know, the 1.1 billion came in at sort of the low threes on a blended basis. We talked about the team component of that, the new team component of that was below three, and also had sort of the non-interest brand component component as well.

The 700 million that we remixed to put this in perspective was at 5.25%. I also talked about, you know, that we've scheduled in the queue for us. It's at least 500 million that we've scheduled with, you know, with larger, higher cost, and in some cases, brokered customers to be able to remix. That is at today's rates, about 4.7%. So to kind of put this in perspective, it really gives some context to this tremendous remix that's going on. The timing's not perfect, like I said. We're scheduling the fourth quarter based on third quarter, you know, deposit generation.

Yeah, sure, Steve. I'm happy to, you know, provide a little bit of color. I don't have the exact average size, but you can kind of get a sense of how many accounts have been funded relative to the, you know, 300 and I believe it's 360 million plus or minus that was added in the quarter that was on an earlier slide. So you get a sense of what the average size is through that and we're happy to sort of give a little bit of a follow up, but it's extremely granular and continues to remain at that 30%. You know, non-interest bearing ratio. And what's interesting about this is that, you know, a lot of these smaller accounts, which is, you know, somewhere in that sort of couple hundred thousand-ish type range, we do have some, you know, customers that have, you know, five to ten million dollars of DDA, typically folks that have expenses or payroll kind of in that, you know, $40 million range or years are sort of thinking about one to two months of operating accounts that sit with us.

But these are highly granular. They're typically geographically focused in sort of the top tier markets that we're focused on, especially with this team recruiting. So think of it as sort of New York City Metro, as well as our West Coast teams. And, you know, we were thrilled about the commercial real estate opportunities that we're seeing here as well.

Sure. Hey, good morning, Kelly. And thanks for the question. Yeah, I think there's there's a couple of components there. So one definitely the as Sam, you know, highlighted some of the timing of the remix. So if you look, we, we actually had about a, you know, over $400 million increase in our average interest bearing deposit accounts. And so obviously that's, you know, overall helping while, while creating great long term value. You know, it doesn't immediately doesn't immediately sort of drag down the interest expense there. And then, you know, I think there is an element as well. Some of these new accounts that are on boarded.

You can imagine that in a, if they're very, very recently on boarded, makes it a bit more difficult to, you know, immediately drop them with a rate cut, but gives us more of that opportunity, you know, opportunity going forward. And then, you know, there are some of these that are coming from, you know, in organizations, organizations that are are paying higher rates. And so while we don't pay to that rate, you know, sometimes there's a bit of a customer acquisition cost associated, but drives incredible long term franchise value.

And I would, I would just add to that, Kelly, you know, just to sort of to really just simplify, you also, you know, I think you touched on funding cost to kind of complete the picture, you know, from a margin perspective, I think, well, our loans were significantly higher on a spot basis. You know, if you actually look at our average loan balances, you can probably see that given sort of Q three August being slow. A lot of these loans came in in the month of September from a growth perspective.

In fact, we were actually lower in the month of July on an average loan basis with some payoffs that were, you know, unexpected and sort of we caught up. So that's the other side of the story that's important, you know, to contextualize as well.

Sure. Yeah. So, Kelly, I think, you know, there is a component of it, which we highlighted there, which we highlighted regarding the accelerated discount accretion. So you did see our, you know, loan yields, you know, come down meaningfully. And what we have been experiencing that portfolio just given the high touch nature of these types of credits was more recent sort of more consistent sort of activity where it would need either a refinance or some type of capital event that caused that to accelerate. You know, we really saw that and we were expecting more of that to continue into to Q three and Q four, but we've seen it now, you know, settle into a, you know, to a much more, you know, much more normalized level.

And then obviously we, you know, mentioned some of the proactive actions that we decided to take that we think are the right, you know, right for the business long term, but do come with some of the expense on the short term side. You know, and I guess what I would say kind of looking, you know, looking forward, you know, as you said, there's a number of levers on on both sides of the balance sheet. So a lot of moving pieces, but I think it's really again going to continue to be driven by the what we're seeing on the deposit side and the opportunity, you know, the opportunities there that that, including what Sam already walked through.

If I could also jump in, you know, Kelly, I think that just as a reminder to come to go back, you know, over the past less than two years in a rising rate environment we we've increased our name from a low point of 2.8 plus or minus, you know, to north of three with more tailwinds to go. And I think that's the really what the purpose of the slide is obviously it's a little bit early in our strategic planning process. We're giving a little bit of a preview. I think it was important. As Phil mentioned, we had expected the bridge on the, you know, accretion to continue through the remainder of this year, as though as that and I had left really, you know, started to ramp up in 2025.

Sure. Absolutely. Good morning, Frank. I'd be happy to take that. So, so first part of your question, you know, sort of addressing sort of what we're seeing today and continue to see. It's at it's at the same levels relative to to fed funds. So we were, you know, around three and now we're sort of below three on a blended basis.

We are seeing a little bit of customer acquisition cost or, you know, as an example, we're not reducing costs on folks that entered the bank in September 1st, September 15th, you know, within weeks of, you know, one, two, three weeks or even one, two, three months necessarily immediately, because we've in some cases made some very short term commitments. And at the end of the day, those will sort of help us with a higher beta from a catch up perspective as the quarter, you know, progresses and we get into as we get into next year.

You know, I think that what's also important about these, you know, these relationships is is that that non interest bearing component continues to remain at those levels. And I think what, you know, as you sort of think about that, as it picks up pace at this $500 million per quarter, you know, sort of guidance that we're providing, which is going to sort of be, you know, beginning this quarter and into next, you know, is really going to help us actually, you know, provide a tailwind on, on if there is, as other banks are seeing continued negative and non interest bearing makeshift, we actually have positive non interest bearing sort of makeshift, you know, headwinds as we are replacing 100% interest bearing deposits, you know, with these new deposits that are coming on.

So hopefully I covered everything that you'd asked, but let me know if I missed anything.

Great. Yep, that's right. So, so kind of looking at the interest bearing component, which is 70% of that you can sort of gross it up. It shows that we're sort of in the mid to high threes on an interest bearing component of those deposits. That sort of relative spread to fed funds is what you should expect on the on the way down and these these customers, you know, expect that over time at the end of the day, you have to remember the non interest bearing component and just the general relationship component of these deposits is high service, primary holistic relationship deposits. And it's because of the service that we're providing because the breadth of our products and services that we're providing because of the technology that we're providing that earns us those non interest bearing deposits and the interest bearing deposits are quote unquote our, you know, whatever we determined from a competitive market standpoint as, but as these customers continue to stay at the bank longer, they blend to the rest of our platforms, interest bearing costs at the deposit costs.

Thanks Frank so good question and what I would say is it's the, it's the latter so I'll start with that it's it's what we're going to continue to remix for a couple of quarters. That gives you a sense of the gross inflows, you know, on slide 12 or 13 whichever that sort of NII slide was. It gives you perspective on the, on the remix lift that we're getting as those deposits come in. And then eventually you're absolutely right, you're going to see, you know, balance sheet increase once we're complete with our deposit remakes will be able to give you a little bit more color and in January as to how we're thinking about that for 2025.

But just for a moment, take a look at the absolute numbers, you know, billion dollars of deposit growth in the quarter, 500 million dollar roughly of loan growth in the quarter. That is the power of this franchise as we continue on going forward as our deposits are growing at a faster pace than even best in class industry, you know, loan growth.

Yeah. Hey, Frank. So, yeah, I think we, we'd expect it, you know, obviously you can sort of in some ways think of it a little bit like a bell curve so a little bit lighter early on, we'd expect it to, you know, step up this quarter. And then into next quarter before we look for it to sort of normalize, come back, you know, start to come back down the other side of the bell curve.

And if I could just, you know, add to that, you know, Frank, you know, I think that these are, as you heard me say, I want to reemphasize this. These are, you know, franchise enhancing investments, you know, that we're making across the board, whether it's the new teams, whether it's the investment in sort of risk and compliance and technology. And, you know, from Phil's comments, you're going to see slightly elevated in the fourth quarter, taper off in the in the first quarter, given that sort of bell curve.

And then you're going to see our knowledge expenses drop in the second quarter. We'll provide more color on this, you know, in January as to how to think about this as, but, you know, it's important to think about sort of the our efficiency ratio targets that we provided. Yes, this has slowed us down, you know, these, these investments, but we're committed to the, to those targets of first getting to, you know, 50% or below, and then, you know, the mid 40s type efficiency ratio and being a branch like bank and being in businesses with high operating leverage and and deposit focus teams, you know, really helps us achieve those goals.

Hey, hey, Dave. Good morning. Yeah, I think, you know, it's, it's now, you know, now does sort of fully, fully capture that. I guess the only thing I'd, I'd mentioned kind of going into next year we did, you know, mention the shift, then eventually towards the, the shift towards the profit based plan for, you know, from an incentive standpoint. So, you know, obviously those, you know, those have impacts as well, but, but, but yeah, reasonable starting point for now.

And if I could just add, you know, in the, you know, I don't want to, I want to underscore actually the slide that Phil ran through an operational excellence. I think that's really important. That's what should give you comfort in addition to the guidance that we're providing on the outside services. That should give you the comfort and some of the things that we've guided towards in the past about sort of, you know, moving to signing bonuses really sunsetting, but most importantly, the discipline to operational excellence and as well as sort of the expense initiatives as well as some of the you know, perspective and more importantly, it's actually going to be the opposite. We expect those to be tailwinds, you know, beginning the second quarter of next year.

So, yes, Dave's I think that that is absolutely correct. I would just sort of highlight the comment I made to Frank earlier first, you know, focusing on deposit remix. You know, but as you can see sort of we're reaching levels of our loan book, getting back to really where it was two years ago so to your point last year, in addition to the deposit and this year in addition to the deposit remix last year we actually were focused on deposit remix capital building and also reduction part of the capital bill is reduction risk-weighted assets and selling of non core loans, right enough, you know, non core loans, exiting participation, all of that really strong strategic work that we did to focus on holistic, you know, franchise enhancing relationship.

So, you know, we'll provide more color in January, but you know, like I said, we feel, you know, excellent and, you know, feel very grateful that we've assembled a platform, a bank that has sort of the safety and soundness which customers are looking for after March of last year, it has the financial performance, it has the teams, it has a single point of contact model, it has more teams that are looking to join us and it also has the incentive compensation model, all which drive behavior and are allowing us to grow our deposits at the moment significantly faster than even we would want to grow our loan book.

Yeah. Hey, Dave, thanks for the question. That's exactly right. So, we basically have reduced the sensitivity, reduce the floating rate portion of the AFS book, now down to about 30%. And if you kind of remember back to the actions we took in 2022, really, again, getting ahead, we think of many of our peers where we did multiple securities portfolio repositionings, two of them across 2022, which positioned us much more floating on the way up, and then really kind of well timed as we started to see those opportunities, as we started to see the curve flatten in Q2 to go in the other direction. And so that was, again, comes with a bit of the effect of an impact on short term margin, but to your point, really reduces the asset sensitivity and really came with other benefits as well in terms of, as I mentioned, increasing the HQLA portion of the book.

Yep, absolutely, Kelly. Happy to answer that. So, you know, I think that importantly, you know, as it relates to digital asset business and, and see, but as we've, as we've coined it, it's really a payments business. And, you know, generally, you know, folks think of banks being in the deposit lending business, but we're also sort of in the transaction business and the payments business.

But most importantly, all of this is done, you know, as sort of our business model is, is inherently anchored on being in the risk management business. So, we are, you know, continuing to serve these customers in an exceptional way. You know, we've talked about this before, we beginning last summer or so, we began building a proprietary payments platform. This is going to have a tremendous sort of risk and compliance benefits to us as we go into next year.

And, you know, from a business perspective, we're going to be able to consolidate a number of technology solutions into our treasury management platform, as well as instant payments, which is going to help customers outside of the digital asset space as well. You know, right now we've also instituted, as you may have seen on the page, and we've worked with our customer base here to begin adding some fee income to the business. You should expect that to be about a couple hundred thousand or so a month, you know, which I think is going to be a nice, a nice lift. And it really shows the two way partnership with our customer base.

But importantly, you know, we want to make sure that we are investing in the risk and risk management compliance platform. Once we do that, it is our belief and hope that we actually can provide a regulatory mode around this business, which is going to help us in the medium to long term.

Yeah, sure, absolutely. So, you know, as there's obviously the benefit of the agreement is out there. It's out there, you know, publicly, you know, having said that we can't speak to specifics. But what I would say what's important is is that it's not that we weren't doing, we need to enhance and we will enhance. And what's important to think about that is our bar, you know, is needs to be higher than our regulatory partners bar. And sometimes that bar evolves over time, but we'll also adapt and evolve over time. So, you know, I think that what's important is is we're super committed to complying, you know, with timelines. We're super committed to improving the risk management infrastructure, and we will.

And we're going to get there. And, you know, we, once we do so, we think we're going to be a much stronger organization that and specifically in this vertical that has a mode around the business.

That's right, Kelly, you know, organic growth is always going to be our top priority at customers bank. But as you saw in this quarter buybacks below book value are creative and, you know, we should and always should consider those, you know, if we, if we ever do continue to stay at, at a level below that. So, you know, I think that the important thing, as I mentioned before, is our deposit growth is exceeding our gross deposit growth is exceeding our, our loan growth opportunities. And I think that's really what's going to help, you know, drive that high quality balance sheet growth once we're, you know, complete with the remix.

Yeah, Dave, I think it's public. And as you rightfully said, there aren't limitations on anything outside the digital asset strategy. There are typical notifications. But what's important is, is that if you have a, you know, good communicative regulatory partnership, those things are done informally as well as, you know, can be done formally.

So, you know, I think that the typical way to think about this is that, you know, we have a tremendous amount of work to do over the next couple of months, which I've said we've really committed to. It cuts down and then you kind of have to move into sustainability. And then typically these orders, I think the we've run a screen typically, you know, are at least in that two year type timeframe until until they're lifted.

But the important thing is, is that we expect that most of the work would be, you know, completed within the first year.

People, processes, technology, you know, so from a people perspective, like you said, we hired a, you know, a couple of really, you know, senior season high quality executives. They're helping to sort of lead and upgrade our platform, you know, from a process perspective, that's a lot of the outside services, you know, just to make sure that the teas are crossed and the eyes are dotted and we also give you a sense of how that's going to crest, which would hopefully give you a sense of how we view, you know, that type of work. And the last is technology. And I think we talked about the technology initiatives that we had, you know, begun to build internally, you know, last year.

And, and that we should expect that that handoff to happen this quarter.

Thank you again to everyone for your continued interest in and importantly, support of customers, bank Corp and the incredible franchise that we're building. We really look forward to speaking with you next quarter and talking about our strategic plan. Thank you and have a great day and a great weekend.