Customers Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 10 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Customer Bancorp's Second Quarter 2023 Earnings Call. Joining me this morning are President and CEO of our bank, Sam Sidhu Customers Bancorp's CFO, Carla Leibold Chief Credit Officer, Andy Bowman and our bank CFO and Head of Corporate Development, Phil Watkins. We are very pleased with our 2nd quarter results as we executed seamlessly on our strategic priorities and delivered 1 of the Power's strongest quarters to date. Despite all of the challenges banks are facing this year, we are pleased that we are not only delivering on our promises to our clients and to our investors, but finding opportunities in these challenging times.

Operator

Please join me in thanking all of our team members across the bank will continue to work tirelessly every single day on executing superbly on our short term as well as our long term priorities. Beginning on Slide 3, as you can see, we believe our presentation today will once again demonstrate why we believe we are truly a forward thinking bank with strong risk management capabilities. We will cover 6 key topics today. I will provide you with the highlights and my colleagues will cover them in more detail. First, in terms of quarterly performance, we are again comfortably beating Street estimates on our core basis.

Operator

While our industry is facing margin headwinds, we demonstrated our ability to improve net interest margin while expanded by 19 basis points to 3.15% during the quarter. Hence our net interest income was up 10% during the quarter on a smaller loan base. We are well positioned to achieve the full year net interest margin guidance we previously provided to you. Second, we executed on several strategic transactions in the quarter to accelerate our financial and strategic priorities. The Venture Banking Portfolio acquisition from the FDIC represented once in a cycle opportunity to recruit a phenomenal team and will serve as another avenue to continue to improve our deposit franchise.

Operator

We followed through on the commitment we communicated to you last quarter to exit non strategic relationships and to continue to de risk the balance sheet by executing on 2 non core loan sale transactions during the quarter. Sam will provide more detail on each of these transactions later on in the presentation. 3rd, we have a high quality, diversified, loyal customer base and are laser focused on continuing to improve on deposit base in 2023 beyond. Evidence of the continued success of the efforts can be seen in the $1,000,000,000 are 29% quarter over quarter increase in our non interest bearing deposits. We reduced our average cost of deposits in the quarter by 21 basis points despite an increase in interest rates and significant deposit pressures experienced by the entire 4th, our liquidity and capital position remain best in class.

Operator

We continue to maintain immediately available liquidity of more than 200% of our uninsured deposits in recognition of the uncertain times that remain for the industry, we also significantly improved our common Equity Tier 1 ratio by 70 basis points during the quarter and have a clear path towards the 11% plus target we stated to you last quarter. Lastly, and perhaps most important is credit quality. This is always a key focus at Customers Bank. We were well ahead of is in tempering balance sheet growth, which we discussed with you on our Q4 2022 earnings call. Recent areas of credit focus in office and retail commercial real estate are absolutely de minimis components of our loan portfolio.

Operator

This was obviously intentional and will pay dividends going forward. We are pleased with what we've accomplished this quarter, but even more excited about what we can do going forward. Turning to Slide 4, let me briefly share with you again our priorities, which remain unchanged. We have and will continue to moderate growth, build a stronger balance sheet during this time period because of the uncertain environment and to assure ourselves that we are actually capturing holistic banking relationships and continuing to build our franchise. We will continue to fortify our balance sheet and then bring our capital ratios and then maintain those capital ratios above tier levels.

Operator

As always, risk management remains at the core of the bank's DNA and we are unchanged in our commitment to what we call are critical success factors. These are that we will never take our eye off the credit risk, we will always focus on superior interest rate risk management. We will continue to monitor liquidity daily and maintain robust liquidity under stress scenarios, we will have above average peer capital ratios and we will always ensure our growth initiatives will generate positive operating leverage. With that, I'd like to turn it over to Sam to cover the key activity and results for the quarter in much more detail. Sam?

Speaker 1

Thank you, Jay, and good morning, everyone. I want to echo Jay's sentiment. We are so proud of our team's efforts in delivering one of our best overall quarters yet, especially under such a challenging backdrop for the industry. In the Q2 of 2023, we earned $1.39 in GAAP EPS on net income of $44,000,000 On a core basis, we earned $1.65 in EPS and our core earnings were $52,200,000 Our core ROA was over 1% and our core ROE was 15.7%. Our improvement in net interest margin to 3.15 percent was a function of best in industry improved deposit costs supported by the repricing of our interest earning assets, which as you know, are largely floating rate.

Speaker 1

From a balance sheet perspective, deposits were up a net $227,000,000 but this does not fully reflect the significant improvement in our deposit mix and cost, which I'll discuss further in a few minutes. Loan balances were tactically reduced as we actively exited non strategic credits in the quarter to free up balance sheet capacity for franchise enhancing deposit led lending opportunities. Credit quality remained benign with NPAs declining by 2 basis points 13 basis points of total assets and NPLs declined by 12% to $28,000,000 Reserve levels remained robust at nearly 500% of NPLs, and we continue to closely monitor the portfolio for any signs of weakness given the uncertain macroeconomic backdrop. Turning to Slide 6. I'll provide some more detail here on the Venture Banking FDIC transaction completed in the quarter.

Speaker 1

Firstly, let me start off by saying that we are thrilled to welcome our new team members and clients to Customers Bank. This acquisition was a perfect addition to our existing venture banking vertical. The recruited team comes with an exceptional 20 year track record in the space And is widely regarded as one of the top performing teams in the industry. I know that the team and the clients are extremely excited to get back to working together, doing what they do best, which is driving their respective businesses forward, and we're so happy to be able to support them. Customers Bank is now immediately being recognized as a leading bank partner for venture backed companies serving customers from early stage all the way to IPO.

Speaker 1

Our nationwide presence and customized best in class technology platform will provide truly unique service and experience for those innovation and technology companies. Our acquisition of the FDIC portfolio and the parallel recruitment of team will bring significant near and medium term deposits to our franchise. We expect that the new portfolio will be self funded this year and a reminder that historically these clients have deposit balances that are generally 2 times their loan balances. We expect that this will provide tailwinds to our already robust deposit gathering momentum. Finally, the transaction is immediately accretive to both tangible book value and earnings per share, and we expect it to be at least 5% accretive to earnings in 2024, lending to the meaningful approximately $95,000,000 discount.

Speaker 1

Moving to Slide 7. In an effort to maintain our deposit remix goals and capital target commitment to our stakeholders and shareholders, we successfully executed on 2 loan sales at the end of the quarter to free up balance sheet capacity for the FDIC deal announced on June 15 late in the quarter. First, we fully exited the non bilateral portion of our capital call fund finance credits. These did not have any meaningful deposit relationships and are with very large fund managers and reminder this is a one time event. We remain highly committed to the direct capital call line lending vertical and are seeing incredible bilateral opportunities and are excited to add clients to the portfolio that bring full deposit operating account relationships.

Speaker 1

It is worth noting that we have already added about $100,000,000 in very granular non interest bearing operating accounts in the vertical over the past few months with a Big Pipeline being onboarded as we speak. Additionally, we sold about $550,000,000 of consumer installment loans at a slight premium and ahead of plan. This transaction validates our strategy to increase the velocity of assets in our digital lending business and generate fee and fee like income with limited to no credit risk. The combination of these two transactions will provide us balance sheet capacity to grow our partnership with strategic clients with primary banking relationships that support our funding and liquidity goals of the bank, all while continuing to meet the targeted increase in our capital levels. Moving to Slide 8.

Speaker 1

This was clearly a fantastic quarter for Customers Bank for many reasons, but we're most proud of our deposit successes. These wins are a true testament to the strength of the relationship based banking supported by best in class technology product and solutions that we are delivering to our customers. In an environment where many banks are struggling to attract deposits, let alone low cost deposit gathering, Customers Bank on boarded over $900,000,000 of net core deposits in the quarter, while increasing the level of non interest bearing deposit mix by another $1,000,000,000 bringing the total to now 25% of total deposits. This already, as of today, makes up for the late 2022 negative mix shift that both we and the industry as a whole experienced. I'm extremely pleased to report that our average cost of deposits declined by 21 basis points and our spot cost of deposits also declined by 1 basis point.

Speaker 1

These declines were despite the rate increase and importantly highlights our unique ability to add low cost and non interest bearing deposits used to remix our high cost and wholesale deposits. We have been able to achieve this in one of the most challenging and competitive deposit gathering environments in modern banking history. We remain deeply focused on the quality of our deposits and at the end of the quarter, 77% of our deposits were either insured or collateralized. This metric keeps us in a very strong position relative to our regional bank peers. We are a beneficiary are the significant customer disruption and frustration in the industry, and we hope to look back on 2023 as a year of growing, diversifying and forming our deposit base with high quality, low cost, sticky and granular franchise enhancing deposits.

Speaker 1

Moving to Slide 9. As we discussed earlier, the strength of our deposit franchise drove record net interest income in the quarter of $160,000,000 ex PPP. Will be a repeat record NII with the lowering of quarter over quarter interest expense being the main driver. As mentioned, our net interest margin increased significantly to 3 This continued improvement on deposit franchise and the strength of our interest earning asset positions us to perform best in class despite are the headwinds facing the industry. With that, I'd like to turn the call over to Carla to discuss additional highlights from the quarter.

Speaker 2

Thank you, Sam, and good morning, everyone. Beginning on Slide 10, we continued our strategy of improving the overall quality of our balance sheet and loan during the Q2. Total loans held for investment declined by approximately 800,000,000 quarter over quarter with roughly $300,000,000 of the reduction coming from our consumer installment portfolio, Another $300,000,000 coming from our Corporate and Specializ Banking portfolio, mainly from the syndicated Capital Call line of credit sale, net of the impact of the acquired Venture Banking portfolio from the FDIC And the remaining $200,000,000 coming from our community banking portfolio. These reductions were tactical to free up balance sheet capacity for more strategic relationships that come with corresponding deposits. We continue to be excited about our positioning in the Fund Finance business and will pursue new business opportunities going forward.

Speaker 2

But our focus will be on opportunities that create holistic banking relationships for us across deposits and treasury management as well as credit facilities. Our net interest margin benefited 7 basis points from the increasing yield on our interest earning assets, reflecting the floating rate nature of our assets, including our loan portfolio, which is approximately 70% floating rate and a 13 basis point reduction in our total cost of funds, the average yield on loans in the 2nd quarter increased to 6.83%. Our loan to deposit ratio ended the quarter at 77%, 9 percentage points lower than our regional bank peers. We've operated the bank at around 80% loan to deposit ratio over the last 5 quarters. We believe operating at these levels is prudent, Especially in an environment where liquidity in the banking industry is becoming increasingly scarce.

Speaker 2

Turning to Slide 11. Core non interest expenses increased to $89,000,000 in the 2nd quarter. The increase was primarily related to 2 items. The first and largest component of the increase resulted from higher insurance expenses. 2nd, higher incentive accruals were recorded during the quarter tied to performance and the onboarding of our new venture banking team members.

Speaker 2

While our efficiency ratio may be slightly elevated for a quarter or 2, our business model is highly efficient. We were able to deliver high touch client service while managing non interest expenses because of our limited physical branch network And tech enabled capabilities. This is the true differentiator of the Customers Bank franchise. Moving to Slide 12. We continue to proactively monitor our interest rate risk position With all the moving pieces in this dynamic interest rate environment, without taking undue credit risk, we continue to generate almost 2 times the yield on securities relative to our regional bank peers.

Speaker 2

The spot book yield on our available for sale securities portfolio increased to 5.38%, given that nearly 50% of the portfolio is floating rate. Even more importantly, we've been able to generate that return by taking only 1 third of the duration risk that our regional bank peers have exposed themselves to. As a result of the strong interest rate risk management, the unrealized losses in our securities portfolio relative to our tangible common equity is significantly lower than our regional bank peers. Turning to slide 13. Our liquidity position remains robust and best in class with over $11,000,000,000 in total liquidity and over $9,000,000,000 in immediately available liquidity.

Speaker 2

The net interest margin results we shared with you earlier are even more impressive when you recognize we finished the quarter with over $3,000,000,000 of cash on the balance sheet. We will continue to monitor market conditions to determine the appropriate level of balance sheet cash. That said, we continue to believe it is prudent from a risk management perspective to operate with higher levels of cash. There were modest reductions in our available committed capacity during the quarter, primarily resulting from our loan sales And the collateral value or pledging capacity associated with those loans, immediately available liquidity as a percentage of uninsured deposits remains in excess of 2 20%, putting us at that very highest end relative to our regional bank peers. Moving to Slide 14, we added another dollar per share to our tangible book value in the quarter Despite continued AOCI headwinds, the acquisition and onboarding of the Venture Banking loan portfolio, The one time expense associated with the early surrender of BOLI policies and the one time loss associated with the exit Of the non strategic short term syndicated capital call lines of credit.

Speaker 2

Over the last four and a half years, we have increased our tangible book value per share by 14% on an annualized basis. That pace of tangible book value accretion is significantly more than our regional bank peers. Importantly, we remain on track to achieve a tangible book value of at least $45 by the end of this year. Despite the significant improvement in our stock price during the quarter, we continue to trade at very attractive PE multiples, especially for a franchise that is consistently generating returns on capital of roughly 15%. Turning to Slide 15.

Speaker 2

Our estimated CET1 ratio ended the quarter at 10.3%. That was up an impressive 70 basis points compared to last quarter. We accomplished this despite the acquisition of a $631,000,000 tech and venture loan portfolio through strong organic capital generation and the loan sales previously discussed. Our TCE ratio was 6% at the end of the second quarter. This ratio was negatively impacted by approximately 80 basis points of AOCI, the more than $3,000,000,000 of balance sheet cash also negatively impacted this ratio.

Speaker 2

Excluding this increased balance sheet cash, our TCE ratio would have been around 6.8%. We remain on track to achieve the year end CET1 target of 11% to 11.5% that we disclosed last quarter having achieved nearly 50% of that increase in a single quarter. While this can be largely accomplished through organic capital generation alone, we are continuing to evaluate a modest amount of incremental balance sheet optimization alternatives to the extent we see opportunities to exit additional non strategic assets and relationships. Moving on to Slide 16. Credit quality in our portfolio remains incredibly strong across all metrics.

Speaker 2

Non performing loans fell to $28,000,000 in the quarter. Commercial charge offs were de minimis at just 6 basis points and consumer And total net charge offs remained in line with our expectations. The leading indicator of non performing assets to total assets decreased will be 2 basis points to the quarter to just 13 basis points at June 30th. Commercial Real Estate exposure continues to capture the attention of bank executives and investors. We are extremely well positioned for the potential challenges ahead for the commercial real estate market.

Speaker 2

Cree comprises only 15% of our loan portfolio excluding multifamily compared to our regional bank peers that have about 30% exposure. More specifically, our office and retail sector commercial real estate each only account for approximately 1% of our total loan portfolio. They are both very granular portfolios with an average loan size of under $5,000,000 We closely monitor the minimal exposures that we do have and are pleased with their credit performance. Credits in these two sectors have an average loan to value of less than 60% and debt service coverage ratios of 1.5 to 1.6 times. As Jay mentioned in his opening remarks, Superior Credit Quality has and always will be a core risk management principle that dictates how we operate the bank.

Speaker 2

We are firm believers that management must remain diligent about credit risk during the good times, which is why we are confident that we are very well positioned despite the uncertain economic environment today. Turning to Slide 17. As we touched on earlier, we further de risked the balance sheet in the Q2 through our continued reduction In the consumer installment loans held for investment, we have reduced the balances in our held for investment consumer installment portfolio By 47% over the last year and now accounts for just 7% of our total loan balances. The portfolio we continue to hold is very high quality and short duration. The average FICO score is 733 with no credit extended to consumers with FICO scores below 680.

Speaker 2

The duration of the portfolio is approximately 1.3 years. Going forward, we continue to see opportunity in the consumer space. We have developed differentiated origination capabilities And a robust network of partners. In our held for sale portfolio, we take very limited credit risk And currently are able to generate significant fee like interest income in addition to the potential fee income opportunities we have identified going forward. With that, I'd like to pass the call back to Sam to address our outlook and provide some concluding remarks.

Speaker 2

Sam?

Speaker 1

Thank you, Carla. Before we wrap our prepared remarks, I want to provide a brief update on our expectations for the full year of 2023. To reiterate, our top focus areas for the year are strengthening our balance sheet, led by our improving at deposit franchise, maintaining industry leading levels of liquidity and significantly building our capital base. We are maintaining our loan guidance and our deposit strategy will continue to be focused on further remixing and improving the quality of our deposit base with significant core deposit growth used to pay down high cost and wholesale deposits. It's worth mentioning that despite the $900,000,000 plus core deposit growth in the quarter, our pipeline remains at or above $2,000,000,000 today.

Speaker 1

We are maintaining our full year net interest margin guidance, but now have a bias towards the top end of our range. We're revising our non interest expense guidance to reflect the higher level of expenses inclusive of the Venture Banking Group, as Carla discussed, and we're reaffirming our core EPS guidance of about $6 per share for 2023. Finally, as Carla shared with you, we're well on our way and positioned to achieve $45 or more of tangible book value by year end. Lastly, on Slide 9, before we open it up to Q and A, I want to conclude with the takeaways from the quarter. Firstly, we materially improved the quality of our deposit base and we bucked the industry trend by lowering our deposit cost, increasing our non interest bearing deposit mix and improving the mix led to relatively low cost deposit generation in the quarter with a $2,000,000,000 plus low cost deposit pipeline for continued improvement.

Speaker 1

Our net interest margin, number 2, expansion was differentiated versus the rest of the industry And positions us to meet or beat our full year guidance for 2023. Number 3, we remixed the loan portfolio to emphasize strategic deposit led relationships provide capacity for multi product relationship opportunities across all of our lending franchises. 4th, we meaningfully improved our capital base by an industry leading 70 basis points despite the acquisition, lending to our balance sheet discipline and are well on track to deliver our promise to exceed 11% CET1 by year end. And finally, we accomplished all of this in the quarter while never deviating from our core risk management principles. Our interest rate risk and liquidity positions remain best in class and our loan portfolio is positioned to weather whatever macroeconomic environment may be ahead.

Speaker 1

Thank you. Let's now open it up to

Speaker 3

questions. And your first question comes from the line of Michael Prieto from KBW. Your line is open.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. I wanted to to start on just a couple kind of clarification. Obviously, a lot happened this quarter, right, and a lot Happening this year and I wanted to maybe kind of level set how you expect the business to look in 2024 and beyond. And so I have a couple of questions on that line of questioning.

Speaker 4

So I want to start on the loan portfolio side. I guess, Carla, you mentioned There might still be some actions you take, but is the end of period mix kind of indicative of what you guys think going forward about 50% C and I, maybe 5% to 10% CRE, 5% to 10% mortgage warehouse, the balance CRE and multifamily. Is that does that feel kind of like the right mix was given where you're at now or how should we think about that moving forward?

Speaker 2

Yes, Mike. I think that's right. One of the things we wanted to reiterate is our loan guidance is really anchored back to the end of last year, the beginning of this year. So when we're talking to a flat to declining balance sheet, really focusing on year over year, but I think The mix that we currently have is good to think about what it looks like going forward.

Speaker 4

And then that's perfect. And then switching to the on the side though, I imagine there's still and you guys kind of alluded to this, but that mix still should change a bit over the next 4 quarters, right, I mean you have at least $500,000,000 targeted to come over on the venture side. I imagine that will be a plan to kind of low and no cost deposits. I guess just as you look ahead on that side, you guys have kind of a target ish range of mix on the deposit portfolio that you're hoping to be able to achieve by the end of next year?

Speaker 1

Yes. So Mike, it's a great question. And I would sort of say, firstly, just as a reminder, we had obviously the low cost deposits this quarter. In the press release we talked about the $660,000,000 plus or minus of wholesale and brokered CDs that were paid down. There's an additional almost $2,000,000,000 approximately in the second half of this year.

Speaker 1

And our anticipation is that if the core deposit pipeline continues to come in at the pace that coming in today would be used to continue to pay off high cost and also pay down those brokers. So the remix would actually be significant, not just by the end of next year, but would really accelerate this year and continue at the pace that we're in. And just to kind of go back for a second to our growth, we also had a couple of $100,000,000,000 in the second quarter of high cost digital deposits, consumer related deposits that declined. And so our core deposit generation of actual new customer growth was approximately $1,300,000,000 to over about $100,000,000 a week on average. Having said that, there was a huge acceleration after the FDIC deal announcement in the second half of June.

Speaker 1

And that pace has continued of that approximately $100,000,000 or so plus or minus of core low cost deposit growth in July as well.

Speaker 4

And Sam, if you had to try to like give us a rough indication of the key verticals that drove and are driving that incremental low cost deposit growth going forward. How would you kind of break that out? You had obviously dramatic EDA growth. There wasn't a ton of color in the release about where that came from. I know we could probably guess, but just would like maybe a layer deeper on that just so we have an idea of what businesses you are really driving this?

Speaker 1

Yes, sure, of course. Good question. So it was broad based across the organization 1st and foremost and the pipeline is also reasonably broad based. But there's obviously a couple of verticals in the Q2, but then importantly I can kind of guide a little bit for the Q3 and beyond. So in the Q2, we had a couple of $100,000,000 of fund finance and tech and venture over the last quarter or so, we also had a couple of $100,000,000 in end of period, you know, CBIT balances that we're contributing, but as you know with our discipline, I think we were at 13% last quarter, about 15% plus or minus now with our discipline to any deposit vertical you know, cap from a concentration perspective, you will not see any more, growth from that vertical, whether it's deposits or non interest bearing.

Speaker 1

And then like I mentioned, it was broad based across, but if you look forward to the pipeline, as you mentioned, we have several $100,000,000 of low cost deposit growth in the pipeline of as you can imagine, 150, 200 accounts being opened right now from our tech and venture group of the loan portfolio, none of those deposits came in by June 30th. Those the loans were the credits came on by June 15th and it took a couple of weeks to kind of discuss with the customers, move over some of the servicing in the ACH and to begin those account openings and we're seeing that really in earnest right now. Fund Finance is another big vertical where We have over 100 accounts at various stages of opening right now. And what's interesting about fund finances, as you know, these are typically non interest bearing in nature and they're also ticking on the low end $500,000 to $1,000,000 to $2,000,000 And if you look forward at our deposit pipeline that $2,000,000,000 plus that I mentioned, it's granular, we're talking about average account sizes in the $5,000,000 to $10,000,000 in the high end, it's going to be $20,000,000 to $30,000,000 These are true granular sticky low cost operating accounts.

Speaker 4

That's really good color. Thanks, Sam. Just a couple more quick follow ups for me. Just on the loaner deposit ratio, Carla, I think if I heard you correctly, you said operating in like the 80% to 85% range going forward. Is that did I hear that right or?

Speaker 2

Yes, around 80%.

Speaker 4

Okay, around 80%. And I think in the release of the slides, Sam, you guys mentioned that the venture piece is Two deposits for every dollar loans like normalized might take some time to get there. But so I guess that just all to say, I mean, there's still a good amount of remixing going on, micro on the balance sheet here in terms of like what these businesses are going to contribute going forward, but I think here just as guardrails, if we assume those that low mix, the improving deposit mix and the 80 ish percent lower deposit ratio, it sounds like we should be in the Okay. And then just lastly on the NIM guide towards the high end of the range, that's a full year guide, right, if I recall. So that would suggest you The NIM to maybe be in like the 3.20, 3.30 range in the back half of the year.

Speaker 4

Is that generally fair?

Speaker 2

Yes. The NIM guide was the full year and the range was The 2.85 to the 3.05, so we think that using the Q2 margin around 3.15 is a good way to think about it in the back

Speaker 4

Okay. Very good guys. Busy quarter. Thanks for giving us all the additional detail and for taking my questions. Appreciate it.

Speaker 1

Thanks, Mike. Thanks.

Speaker 3

And your next question comes from the line of Casey Haire from Jefferies. Your line is

Speaker 5

open. Yes, thanks. Good morning, everyone. A couple of follow-up questions. I guess on the NIM, we got the spot deposit costs, obviously moving in the right direction.

Speaker 5

I was wondering given all the moving pieces in the quarter on the loan front, if you could give what the spot loan yield was on sixthirty and the spot NIM, if you have it as well.

Speaker 2

Yes. We don't have the spot NIM that we gave at the end of the quarter focusing just on the 3.15. And the spot loan yields, It's hard to say because it varies so much by the different portfolios, but I think to say on average 7% or higher was about feels about right.

Speaker 1

Yes. And Casey, just to provide a little bit more color on the loan yields. As you may recall, our specialty lending verticals like a capital call lines etcetera were typically whereas those were sort of in that 250 to 350 over SOFR range. They're actually now at a minimum 300 and actually more in the high end of range of 325 to 350. These are direct deposit generating type relationships.

Speaker 1

Additionally, on the Tech and Venture and Venture Banking Group, you're typically at a prime plus 100 which is an additional 50 to 100 basis points over those verticals as well.

Speaker 5

Got you. Okay. And then just on the 11% CET1 target, you guys Clearly sound like you're on a nice path. Just wondering, do you need to do any more pruning of the loan book or can you get there organically? And then how much of the cash position, which is very strong at 10% of the balance sheet, will be utilized to get there in terms of I mean you could shrink the balance sheet obviously and pay down points.

Speaker 2

Yes. So just a little bit of color on that, you're right. We can get there from organic generation alone considering On a core basis, we made $290,000,000 so far in 2023, so the back half of the year that additional retained earnings generation could get you with to our targeted 11% to 11.5% with no other balance sheet optimization strategies.

Speaker 1

And Casey, if I could just go back, I just don't think we fully answered your NIM question as we talked about the loan portfolio. But just wanted to remind and connect some dots, the consumer loan sales were at a weighted average cost of call it mid teens, the venture banking loans which largely filled the hole were at that 9% -ish type range. So while there were very positive trends in the month of June, and continuing on into the Q2, there are also some headwinds, but those are desired headwinds and they kind of neutralize each other as the quarter and the year progresses.

Speaker 5

Right. Yes. No, that's my point is like the consumer book obviously had a very nice rate, and then the yield on the venture book is coming in lower just and understand from a risk perspective, all in that that's what you guys were going for. But yes, that's why I was just curious on the loan yield. Okay.

Speaker 5

And then what was my other oh yes, so on the expense side, Yes, taking the guide up on the FDIC assessments and can you just break out what's The breakdown between what is how much of that is Venture Banking versus the FDIC assessments.

Speaker 2

Yes. So a A couple of points there. So first, I'd just like to reiterate that we were on target to deliver our previous Expense guidance, if it wouldn't be for these two items, obviously, the larger component is the increased insurance expenses And then the second component is tied to sort of the full onboarding of the new venture banking team as well as some increased incentives Associated with or tied to performance. So the larger piece would be the insurance expenses.

Operator

Got you.

Speaker 5

And the FDIC that's my understanding is that comes later in Q4 and it's one time in nature or are you referring to greater FDIC expense assessments on an ongoing basis.

Speaker 1

Yes, Casey, we're referring to accruals for larger expenses going forward and what you probably have seen in large commercial banks and if you really dig in is that This is broad based across the industry for large commercial banks. It's just that we have such a low And we're highly efficient from a cost base perspective, it's jumping out. But again, going back to sort of the way that we think about efficiency, we'll have sort of a one 2 quarter blip in our efficiency ratio of the high 40s and we'll go back to sort of our once the venture banking team and and we sort of digest some of the capital headroom we created in this quarter, we go back to BAU, we'll be back to targeting 45% plus or

Speaker 3

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

Speaker 5

Good morning. Hi, Frank.

Speaker 6

Hey, Sam, I wanted to get just follow-up on the deposit question. Obviously, that was kind of the most eye popping part of the quarter. So just the additional $2,000,000,000 in the pipeline, just want to make sure I understand, is that mostly non interest bearing? Is that just low cost in general, how would you characterize those balances?

Speaker 1

Sure. Great question, Frank. And interestingly enough, it's in the similar sort of strike zone as we're operating in right now 25% to 35% non interest bearing, the rest being moderately low cost. When I say low cost at this point in time, you sort of think of that as sort of at our average cost of deposits as opposed to the marginal cost of high deposits. So our hope is that we can continue sort of in the pipeline.

Speaker 1

I think that of the $100,000,000 plus that I was mentioning that we're bringing on per week right now, I'd say about 20 plus or minus 1,000,000 if not 30,000,000 is not interest bearing. So that pace is continuing. And again, the use of proceeds is going to be paying down the higher costs, Letting some digital high cost digital deposits runoff and wholesale deposits in the second half of this year, and we'll look to continue on the trend of this deposit mix shift in the second half of twenty twenty three to set up a really nice platform to jump off of in twenty twenty four.

Speaker 6

Okay. So even if the is coming on 25% is non interest bearing, the stuff that's coming off is all interest bearing, all higher yielding or higher cost stuff. So we should expect that non interest bearing as a percentage of total to continue to increase, I would assume over time.

Speaker 1

That's the hope Frank. Obviously, you can't fully control these things, but that assumes sort of static non transparent balances from where we are today, which we think is probably accurate given the customer relationships and conversations, as you can imagine, for someone to hold a noninterest bearing account, there has to be either a true 100% operating account or an incredible value at proposition like payments that would have you not demand to put those into an interest bearing account or at least to move some of it into is Brandon Cowen.

Speaker 6

Sure. Okay. And then you mentioned the capital call lines, the sale of the business in the quarter was sort of a one off. There's no deposits tied to it. So at this point, generally speaking, what's on the portfolio is that it's operating stuff where there is deposits funding those lines.

Speaker 6

Is that fair? And so you wouldn't expect and that's why you wouldn't expect, excuse me, additional kind of one offs on that side of the business?

Speaker 1

That's right, Frank. So the way to think about it is that the $600,000,000 plus or minus of commitments that approximately represented about $300,000,000 in outstandings and it was about a third of the So we have, $520,000,000 of outstandings in fund finance at the end of the quarter. Those are 20% as of today. Self funded, which is up significantly from no balances just a couple of quarters ago. And it's a testament to sort of to technology enablement and transaction banking that we first started talking about last summer.

Speaker 1

So we're continuing to add a number though of also direct non credit, non interest bearing deposit relationships as well to counterbalance some of the net credit relationships that we have in the vertical.

Speaker 6

Okay. And then just last question on sticking with that theme, just curious your thoughts on what's the right sort of level of brokered balances on the balance sheet for you guys, given that you've got the branch light model. At this point, do you say, well, we've got these niches that can provide this funding that maybe we're ultimately not looking for any sort of sizable brokered on the balance sheet or Or is that still going to continue to be a sizable portion just given that the model you guys run? What are your thoughts there?

Speaker 1

Yeah, it's a good question, Frank, and thanks for the thoughtful approach to it. So I think that from one of the things that the entire industry Credible sort of diversified deposit strategy for any bank. Typically, a traditional sort of retail banking franchise has somewhere in that 5% to on the high end 10% to 15% of broker or wholesale deposits. I think the right number for us, the right target for us is probably 15% to 20%, given that we're branch light and a commercial grower, it's good to have that diversified contractual space. It also helps from an interest rate risk management perspective.

Speaker 1

If you also sort of split that between short term less than 12 months and longer term, it also allows you to have some reference portfolios in the liability side for hedging purposes. I think that the way that you'll sort of see that number progresses, we'd like to have it half as early as the end of the year or early next year.

Speaker 6

Great. Okay. Thanks for all the color, Sam.

Speaker 1

Absolutely.

Speaker 3

And your next question comes from the line of Peter Winter from D. A. Davidson. Your line is open.

Speaker 7

Thanks. Good morning. I wanted to ask with the acquisition of the Venture Banking loan portfolio and then you've got the recent bank failures that were also in this business. Can you just talk about your competitive positioning and how this deal enhances your capabilities.

Speaker 1

Yes, sure. Absolutely. Thanks, Peter, and good morning, and appreciate the question. So I think I mentioned in my prepared remarks, this team allows us to have a nationwide presence end to end with offices and our presence on the ground presence in Los Angeles, San Francisco, Austin, Atlanta, Denver, Raleigh, Boston, Chicago, DC, so truly a nationwide footprint of on the ground relationship managers, it also comes fully with 5 or maybe half a dozen Person Treasury team, it comes with about 8 or 9 folks on the credit side and about a dozen or so plus or minus relationship managers. So it's truly a fully integrated, well very well regarded team.

Speaker 1

I personally spent a good amount of time with some of the important customers virtually over the past couple of weeks since the onboarding occurred and nothing but incredible things to say. And one of the things that we have noticed is that with all of the dislocation that you referenced, there are very few banks that had a running head start of an existing business that as we did, we're combined on a combined basis over $1,000,000,000 in outstandings, about $2,000,000,000 in commitments right now in this vertical. And with that nationwide presence plus a truly best in class team really is going to set us apart both on the deposit gathering side as well as thinking about continuing to grow from the space over the next couple of quarters in the future in 2024 and 2025 from a credit and lending perspective as well.

Speaker 7

Got it. And then what inning do you think we are in terms of exiting these non strategic relationships. And then would you think that you're going to grow the balance sheet next year?

Speaker 1

Yes. Good question, Peter. So in terms of the non strategic exiting, the plan was to have these to be gradual over the course of the We had an upside opportunity to acquire the FDIC portfolio as well as to recruit the team, as you know that happened very late in the quarter. And we thought it would be prudent to execute on a number of things late in the quarter to do what I would call sort of a clean up catch up. These non bilateral syndicated capital call lines were all maturing in the next call it 100 days, so 120 days.

Speaker 1

So truly this was really an acceleration, make sure that we had both the cash and liquidity on hand so that we were not going 1 step forward, 2 steps forward, 1 back from our deposit remix perspective, but also that we left the capital headroom and stuck to our very important continuing the remix on the deposit side, having deposit growth exceed are core deposit growth exceed loan growth. And when you trade out boldly at 2.5 etcetera, this is just an opportunity for us to really focus on the core strategically important liquidity led credit verticals that we're in.

Speaker 7

And so would that lead to that would accelerate or grow the balance sheet that you can start growing the balance sheet Next year.

Speaker 1

It's too early to say at this point in time, Peter. I think really our focus is just to kind of put a finer point on that. We have $400,000,000 of remaining cash flows in the remainder of this year on our securities portfolio. We have a 1,000,000,000 of loan maturities, there's plenty of opportunity for us to continue to gross originate. We did gross originate in the Q2 to the tune of $500,000,000 plus and we'll continue to do franchise enhancing again liquidity led, deposit led lending and we as an industry will reevaluate as the year progresses.

Speaker 1

At this point in time, we have no plans to increase the balance sheet from where we are because there's enough opportunities in the deposit remix side As well as on the loan remix side, like going back to deposit

Speaker 7

opportunities. Got it. And just my last question, can you just provide some color around this $5,000,000 loss on the sale of the Capital Call line? I guess for me, I was surprised just given the long history of virtually no credit losses in this type of business line. Yes,

Speaker 1

absolutely. Peter, these are this is not a credit sale. This is an exit of non bilateral, meaning syndicated. This is essentially partnered with 1 of the failed institutions, about half a dozen credits. On the small side, we're talking $5,000,000,000 to $10,000,000,000 fund size.

Speaker 1

On the high end, we're talking $100,000,000,000 plus manager. These are not relationships we could have or plan to take over from a much larger institution as those lines matured. Again, this was 100% Good. It would have been nice to be on the other side of this transaction, but it was important for us given the strategic importance of the FDIC transaction on the onboarding to make sure that we had both the capital and liquidity headroom and we were not deviating from our commitments that we made to you early this year.

Speaker 7

Great. Thanks. Congrats on a very nice quarter.

Speaker 1

Thanks, Peter.

Speaker 3

And your next question comes from the line of Matthew Breese from Stephens. Your line is open.

Speaker 8

Hey, good morning.

Speaker 1

Good morning, Matt.

Speaker 8

I wanted to go back to the increase in FDIC expense, up meaningfully quarter over quarter. As measured over deposits, it's now at 22 basis points annualized versus 6 last quarter. And I've seen a lot of the banks with a quarter to quarter increase, but this one stands out in terms of degree. So I'm curious why the more robust change? Was there something

Speaker 1

Yes, Matt. So we are we reaffirmed the run rate guidance of this jumping off point, to be clear, the increase of the 6 plus or minus 1,000,000 in FDIC insurance also included a catch up of 1,500,000 to 2,000,000 for the Q1. That will be replaced more or less by a full run rate of the Venture Banking team, which is why we sort of referenced sort of this as a jumping off point. So it's not fully apples to apples the way you described and again, this is consistent. Those levels are absolutely consistent with large commercial banks that we have evaluated and looked at, and again, this is as I think Carla mentioned, we expect this to be a short to medium term, meaning this is not a multiyear increase and we expect that there'll be some sort of stabilization, especially after the assessments are revised and there's opportunity to have more ongoing two way dialogue.

Speaker 8

So the increase in FDIC insurance is tied to the VC loans and team you brought in?

Speaker 1

It's not tied to any one thing. If you go back to the overall industry, the levels that we are talking about for large commercial banks, as well as those to your point that have transacted with the FDIC, this is a consistent increase in the quarter. Okay.

Speaker 8

Maybe shifting to the mix shift we've seen year to date on the deposit side, particularly in non interest bearing, how much of the change was done from existing customers or existing depositors versus new.

Speaker 1

It's a good question. I'm going to speak directionally because I don't have exact numbers, but I'd say call it $400,000,000 plus or minus is from existing maybe a little less actually, maybe $200,000,000 $250,000,000 plus or minuses from existing customers with higher balances and the rest is coming from the verticals I earlier described.

Speaker 8

Okay. The two ones I would appreciate more color on is, 1, where do Seebit deposits balance wise stand today? And are those in non interest bearing at this point? And where were they at year end?

Speaker 1

That's right. That's right. We, the CBIT balances, at year end I believe were around 2.2. They were similar balance, 2.3 Maybe last quarter, average balances were $2,350,000,000 for the quarter. And we were at or below our target of 15% As we will continue to be.

Speaker 8

Right. Are those in non interest bearing at this point?

Speaker 1

Correct. Yes, they're all non interest bearing.

Speaker 8

Okay. And were those non interest bearing at year end?

Speaker 1

They were non interest bearing at Q1 end.

Speaker 8

Got it. Okay. So they were moved from the

Speaker 1

1st quarter.

Speaker 8

From interest bearing into non interest bearing Earlier this year.

Speaker 1

Correct, in the Q1.

Operator

Yes, Matt. Essentially, what we did is that these are operating accounts for us. And then we've been very much focused on having operating account relationships with every one of our customers. And that is a strategic decision we made and we exited digital businesses as well as other businesses where we do not get where we only get interest bearing relationships and nothing else. So all our digital asset relationships right now are non interest bearing and they are operating accounts tied to our payment systems.

Speaker 8

Understood. Okay. The other chunky deposit base per se are the BankMobile BMTX deposits. What are balances there stand at today? And where are those sitting in terms of are they non interest bearing or interest bearing at

Speaker 7

this point.

Speaker 2

Yes. I could give a follow-up.

Operator

I believe let me go ahead, Martha.

Speaker 2

No, I was just going to add that they are sitting in the interest bearing deposits, and they're not a meaningful part of our deposit balance at this point in time.

Speaker 1

It's like low single digits, Matt. So we've diversified away from that relationship.

Speaker 8

Low single digit in terms of percentage of overall deposits?

Speaker 1

Of overall deposits. That's right.

Speaker 8

Okay. And they're supposed to wind down by late 2024, is that accurate?

Speaker 1

Half of the relationship, then the half that would be remaining would be even less material as it was a percentage of our overall deposit base.

Speaker 8

Got it. Okay. Maybe just switching to the installment book, can you remind us how much has been how much of the I'm sorry, securities portfolio at this point ties back to the installment book? Because I think I remember 2 securitizations, but I couldn't remember if there was a third one.

Speaker 2

Yes. So in our HTM book, we have roughly a little over half of That book is for the securities purchased out of the consumer installment securitizations.

Speaker 8

Okay. And I think in the past there's been some protections as you go through this. Could you remind us of the past protections and then were there any with the most recent securitization?

Speaker 1

It's consistent, Matt. So this is a truly completely protected senior position, not so dissimilar to any other ABS, that's sort of in that AA range.

Speaker 8

Got it. Okay. Last one for me. The VC team, should we assume those were from one of the more recent failed institutions? That's right.

Speaker 8

From Signature Bank.

Speaker 1

From Signature.

Speaker 8

Okay.

Speaker 1

This is the old Square 1 Pac West team.

Speaker 8

Perfect. Okay. That was my thought. Could you remind us of historically what the loss content is for VC lending?

Speaker 4

My understanding is it comes with a lot

Speaker 8

of deposits, but is it comes with a lot of deposits, but tends to have a little bit of a higher loss content. What's the historical loss rate?

Speaker 1

Yes. So the 20 year track record of this team is 1 percent or less and when you actually add in some of the warrant income etcetera, it's actually 0 on a net basis.

Speaker 8

Got it. Perfect. Okay. Along those lines, should we expect or what are expectations around provisioning for the remainder of the year?

Speaker 2

Yes. So for the provision, again, it's hard to predict, but I would say between that $18,000,000 to $22,000,000 range for the back half of this year

Speaker 3

And we only have a little time left. So we'll take our one final question from Bill Dezellem from Tieton Capital Markets. Your line is open.

Speaker 9

Thank you. A couple of questions. First of all, relative to the VC portfolio addition, would you walk us through the background of how we got there and how you all were the ones ultimately that the FDIC chose. And then secondarily, are there other opportunities that the dislocation that's taken place this year in the industry Creating other opportunities, whether VC or otherwise, it's broader than just that, just are other opportunities that you may or may not see out there.

Speaker 1

Sure. Absolutely, Bill. I'm happy good morning. Happy to take that question. So firstly, on the Venture Banking side, we saw this portfolio and this team, we had prior relationships with this team, frankly, from a recruitment perspective for an extended period of time, we had monitored and seen that it had not gone with the whole bank transaction.

Speaker 1

And there's sort of a several week type FDIC related diligence process and with a closing on June 15. So it was a very accelerated process really focused on credit from the loan portfolio side and strategic from a recruitment side. The real focus for us was making sure that we had a team that had the right cultural fit that was aligned with taking our approximately $500,000,000 portfolio business and taking it to the nationwide goals that we would have normally had over a 3 to 5 year period but doing it in an accelerated basis. And the discount provided extra cushion from the perspective of the accelerated credit diligence, which We've now obviously fully completed and feel incredibly comfortable with, but also provided a little bit of headroom from the perspective of what if you couldn't recruit the team, which the team has now been fully onboarded, so that's less of a consideration and look to roll off some portion of that portfolio, which is not our plan at this point in time. So I think that we feel very fortunate that there was an opportunity to bring in that team.

Speaker 1

As I mentioned earlier, after the announcement we saw outside of Venture Banking significant deposit momentum and customer interests and growth. None of those deposits that are related to portfolio actually came in as a reminder as of June 30th so they're coming in, in the Q3. So I think that's sort of the way to think about at the Venture Banking process, you also asked a second question about where else are we seeing opportunities. I think that being a service oriented technology focused, best in class technology focused, niche banking focused commercial bank, there's been a tremendous amount of dislocation whether it's tech and venture, whether it's fund finance, whether it's private banking, whether it's equipment finance across the board in many of our niche verticals. So we're seeing great opportunities both to lean in and remix customers to a lot more sort of franchise enhancing than the much more less competitive environment.

Speaker 1

We're also seeing opportunities to recruit. We've added half a dozen to a dozen new team members in some of those verticals. We've added sort of a venture capital focus in our fund finance team from some of the dislocated institutions and we continue be at any given time at a minimum meeting at a maximum discussing onboarding with a number teams who are figuring out what does their business as usual mean for them and their current or new institution that they're at.

Speaker 9

Thank you and congratulations on that purchase, sir.

Speaker 1

Thanks, Bill.

Speaker 3

And this brings us to the end of our question and answer session. Mr. Samsiddhu, I turn the call back over to you for some final closing remarks.

Speaker 1

Thanks so much everyone. Really appreciate your focus and interest in Customers Bancorp. As Jay and I mentioned earlier, we are Very proud of our team's efforts. We very much appreciate our customer support. And as we said, on a relative basis, we feel this is one of our strongest quarters ever to date and we think it's an incredible foundation to build off of.

Speaker 1

So thank you so much everyone. Have a great morning.

Speaker 3

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Customers Bancorp Q2 2023
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