Customers Bancorp, Inc

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Customers Bank Corp second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. David Patti, Director of Communications, you may begin your conference.

Thank you, Rob. And good morning, everyone. Thank you for joining us for the Customers Bank Corp's earnings call for the second quarter of 2023. The presentation deck you will see during today's webcast has been posted on the investor relations page of the bank's website at customersbank.com. You can scroll to Q2 23 results and click download presentation. You can also download a PDF of the full press release at this 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 risks 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 10-K and 10-Q, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the investor relations section of our website. At this time, it's my pleasure to introduce to you Customer's Bank Corp Chair, Jay Sidhu.

Thank you, Dave, and good morning, ladies and gentlemen. Welcome to Customer Bank Corp's second quarter 2023 earnings call. Joining me this morning, our president and CEO of our bank, Sam Sidhu. Customers Bank Corp's CFO, Carla Liebold, Chief Credit Officer, Andy Bowman, and our Bank CFO and Head of Corporate Development, Phil Watkins. We are very pleased with our second quarter results as we executed seamlessly on our strategic priorities and delivered, one other part, 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. Please join me in thanking all of our team members across the bank who continue to work tirelessly every single day on executing superbly on our short-term as well as our long-term priorities. Beginning on slide three, 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 six 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. While our industry is facing margin headwinds, we demonstrated our ability to improve net interest margin, which 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. 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 two non-core loan sale transactions during the quarter. Sam will provide more detail on each of these transactions later on in the presentation. We have a high quality, diversified, loyal customer base and are laser focused on continuing to improve our deposit base in 2023 and beyond. Evidence of the continued success of the efforts can be seen in the $1 billion or 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 industry. Fourth, our liquidity and capital position remain best in class. 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 one 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 the industry 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. 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 four, 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. 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?

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 second quarter of 2023, we earned $1.39 in GAAP EPS on net income of $44 million. On a core basis, we earned $1.65 in EPS, and our core earnings were $52.2 million. Our core ROA was over 1%, and our core ROE was 15.7%. Our improvement in net interest margin to 3.15% 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. From a balance sheet perspective, deposits were up a net $227 million, 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 two basis points to 13 basis points of total assets, and NPLs declined by 12% to 28 million. Reserve levels remained robust at nearly 500% of NPLs, and we continued to closely monitor the portfolio for any signs of weakness given the uncertain macroeconomic backdrop. Turning to slide six, I'll provide some more detail here on the venture banking FDIC transaction completed in the quarter. 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. 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 the 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 two 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 million discount. Moving to slide seven, in an effort to maintain our deposit remix goals and capital target commitment to our stakeholders, And shareholders, we successfully executed on two loan sales at the end of the quarter to free up balance sheet capacity for the FDIC deal announced on June 15th, 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. It is worth noting that we have already added about $100 million 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 million 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 eight, 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 onboarded over $900 million of net core deposits in the quarter while increasing the level of non-interest-bearing deposit mix by another billion dollars, 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 one basis point. 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 of the significant customer disruption and frustration in the industry, and we hope to look back on 2023 as a year of growing, diversifying, and transforming our deposit base with high quality, low cost, sticky, and granular franchise enhancing deposits. Moving to slide nine, as we discussed earlier, the strength of our deposit franchise drove record net interest income in the quarter of $160 million ex-PPP. I 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 3.15%. The continued improvement in our deposit franchise and the strength of our interest-earning asset positions us to perform best in class despite the headwinds facing the industry. With that, I'd like to turn over to Carla to discuss additional highlights from the quarter.

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 portfolio during the second quarter. Total loans held for investment declined by approximately $800 million quarter over quarter, with roughly $300 million of the reduction coming from our consumer installment portfolio. Another $300 million coming from our corporate and specialized 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 million 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. 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 seven 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 second quarter increased to 6.83%. Our loan to deposit ratio ended the quarter at 77%, nine percentage points lower, Thank you. Turning to slide 11, core non-interest expenses increased to $89 million in the second quarter. The increase was primarily related to two items. The first and largest component of the increase resulted from higher insurance expenses. Second, higher incentive accruals were recorded during the quarter tied to performance and the onboarding of our new venture banking team members. While our efficiency ratio may be slightly elevated for a quarter or two, our business model is highly efficient. This is evidenced by the level of non-interest expense to average assets relative to our regional bank peers. 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 customer's 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 two times the yield on securities relative to our regional bank peers. The spot book yield on our available-for-sale securities investment 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 one-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 billion in total liquidity and over $9 billion in immediately available liquidity. The net interest margin results we shared with you earlier are even more impressive when you recognize we finished the quarter with over $3 billion 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 220%, 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 bully policies, and the one-time loss associated with the exit of the non-strategic short-term syndicated capital call lines of credit. 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, 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 million 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 ALCI. The more than $3 billion of balance sheet cash also negatively impacted this ratio. 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. Non-performing loans fell to $28 million in the quarter. Commercial charge-offs were de minimis at just six 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 two 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. 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 million. 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. 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 second quarter 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. It 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. 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 health 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. Sam?

Thank you, Carla. Before we wrap our prepared remarks, I want to provide a brief update on our expectations for the full year 2023. To reiterate, our top focus areas for the year are strengthening our balance sheet, led by our improving 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 million plus of core deposit growth in the quarter, our pipeline remains at or above $2 billion today. 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 nine, before we open it up to Q&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 interest-bearing deposit mix, and improving the mix led to relatively low-cost deposit generation in the quarter with a $2 billion-plus low-cost deposit pipeline for continued improvement. Our net interest margin, number two, expansion was differentiated versus the rest of the industry and positions us to meet or beat our full-year guidance for 23. Number three, we remixed the loan portfolio to emphasize strategic deposit-led relationships and provide capacity for multi-product relationship opportunities across all of our lending franchises. Fourth, 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 a 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. Thank you. Let's now open it up to questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Michael Pareto from KBW. Your line is open.

Hey, good morning, guys. Thanks for taking my questions. I wanted 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, you know, how you expect the business to look in 2024 and beyond. And so I have a couple questions on that line of questioning. So I want to start on the loan portfolio side. You know, 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&I, maybe 5% to 10% CRE, 5% to 10% mortgage warehouse, the balanced CRE and multifamily? Does that feel kind of like the right mix, given where you're at now, or how should we think about that moving forward?

Yeah, 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 or 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.

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

Yeah, so, Mike, it's a great question. And I would sort of say is, you know, firstly, just as a reminder, you know, we had obviously the low-cost deposits this quarter. In the press release, we talked about the $660 million plus or minus of wholesale and brokered CDs that were paid down. You know, there's an additional almost $2 billion approximately in the second half of this year. And our anticipation is that if the core deposit pipeline continues to come in at the pace that it's 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 hundred billion dollars 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 $1.3 billion. So over about $100 million a week on average. Having said that, there was a huge acceleration after the FDIC deal announcement in the second half of June. And that pace has continued of that approximately $100 million or so, plus or minus, of core low-cost deposit growth in July as well.

And Sam, if you had to try to just 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 love maybe a layer deeper on that just so we have an idea of what businesses are really driving this.

Yeah, sure. Of course. Good question. So It was broad-based across the organization, first and foremost, and the pipeline is also reasonably broad-based. But there's obviously a couple of verticals in the second quarter, but then importantly, I can kind of guide a little bit for the third quarter and beyond. So in the second quarter, we had a couple hundred million dollars of fund finance and tech and venture over the last quarter or so. We also had a couple hundred million dollars in end-of-period investments. 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, you know, growth from that vertical, whether it's deposits or not interest bearing. And then, like I mentioned, it was broad-based across. But if you look forward at the pipeline, as you mentioned, we have several hundred million dollars 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. 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 and 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 I think we have over 100 accounts at various stages of opening right now. And what's interesting about fund finance is, as you know, these are typically non-interest bearing in nature. And they're also small ticket on the low end, half a million to, you know, one to two million. And if you look forward at our at our deposit pipeline of that two billion plus that I mentioned, it's granular. You know, we're talking about average account sizes in the, you know, five to ten million dollars in the high end. It's going to be 20 to 30. These are true, granular, sticky, you know, low cost operating accounts.

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

Yeah, around 80%.

Okay, around 80%. And I think in the release of the slides, Sam, you guys mentioned that the venture piece is going to be two deposits for every dollar alone. It's like normalized. It might take some time to get there. But So I guess, you know, just all to say, I mean, there's still a good amount of remixing going on, you know, micro on the balance sheet here in terms of like what these businesses are going to contribute going forward. But I think just as guardrails, if we assume that low mix, you know, the improving deposit mix and the 80% lower deposit ratio, it sounds like we should be in a flattish balance sheet near term. It sounds like we should be in the right ballpark of what you guys are expecting to happen.

That's right.

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 expect the NIM to maybe be in like the 320, 330 range in the back half of the year. Is that generally fair?

Yeah, the NIM guide was the full year, and the range was the 285 to the 305. So we think that using the Q2 margin around 315 is a good way to think about it in the back half of this year as well.

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

Thanks, Mike. Thanks.

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

Yeah, thanks. Good morning, everyone. A couple follow-up questions, I guess, on the NIM. We got the spot deposit costs obviously moving in the right direction. 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 630 and the spot in him, if you have it as well.

Yeah, we don't have the spot NIM that we gave at the end of the quarter focusing just on the 315. And the spot loan yields, you know, 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.

Yeah, and Casey, just to provide a little bit more color on the loan yields, as you may recall, our specialty lending verticals, like our capital call lines, et cetera, 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 range of 325 to 350, and these are direct deposit generating type relationships. 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.

Gotcha. Okay. And then just on the 11% CT1 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 borrowings.

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

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. We just wanted to remind and connect some dots. The consumer loan sales were at a weighted average cost of 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, um, and continuing on, you know, into the second quarter, there are also some, some headwinds, but those are desired, you know, headwinds and they kind of, you know, neutralize each other as the, as the quarter and the year progresses.

Uh, right. Yeah, no, that's my point is like the consumer book, obviously at a very nice rate. Um, and then, um, the yield on the venture book, um, is coming in lower just, and I understand from a risk perspective, um, all in that, that, uh, That's what you guys were going for. But, yeah, that's why I was just curious on the loan yield. Okay. And then what was my other? Oh, yeah. So on the expense side, taking the guide up on the FDIC assessments, can you just break out, you know, what's, you know, the breakdown between what is how much of that is venture banking versus the FDIC assessments?

Yeah, so 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.

Gotcha. And the FDIC, my understanding is that comes later in the fourth quarter, and it's one time in nature, or are you just referring to greater FDIC assessments on an ongoing basis?

Yeah, 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 expense base and we're highly efficient from a cost-based perspective. It's jumping out, but – And again, you know, going back to sort of the way that we think about efficiency, you know, we'll have sort of a one to two quarter, you know, blip in our efficiency ratio of the high 40s. And we'll go back to sort of our once the venture banking team and we sort of, you know, digest some of the capital headroom we created in this quarter. We go back to BAU, you know, we'll be back to targeting, you know, 45 percent, you know, plus or minus efficiency ratio in 2024 and beyond.

Got it. Thanks, guys.

And your next question comes from a line of Frank Chiraldi from Piper Sandler. Your line is open.

Good morning. Hi, Frank. Hey, just one, Sam. I wanted to get just a follow-up on the deposit question. Obviously, that was kind of the most eye-popping part of the quarter. So just the additional $2 billion in the pipelines, I just want to make sure I understand, is that mostly not interest bearing? Is that just low cost in general? How would you characterize those balances?

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 of it 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, you know, our hope is, is that we can continue sort of in the pipeline. I think that of the, you know, the 100 million plus that I was mentioning that we're bringing on per week right now, I'd say about 20 plus or minus million, if not 30 million is not interest-bearing. So that pace is continuing. And again, the use of proceeds is going to be you know, paying down the higher costs, letting some digital high-cost digital deposits run off and wholesale deposits, you know, in the second half of this year. And we'll look to continue the trend of this deposit mix shift in the second half of 23 to set up a really nice, you know, platform to jump off of in 24.

Okay. So even if the, you know, is coming on 25% is not interest-bearing, the stuff that's coming off is, you know, all interest-bearing, all higher interest. um, yielding stuff or higher cost stuff. So we should expect that, that non-interest bearing as a percentage of total, uh, to continue to increase, uh, I would assume over time.

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

Sure. Okay. And then you mentioned the capital call lines, the, the, the sale of the business in the quarter was sort of a one-off. There was no deposits tied to it. So at this point, Generally speaking, what's on the portfolio, it's operating stuff where there is deposits, funding those lines. Is that fair? And so you wouldn't expect, and that's why you wouldn't expect additional kind of one-offs on that side of the business.

That's right, Frank. So the way to think about it is that the $600 million plus or minus of commitments approximately represented about $300 million in outstandings, and it was about a third of the outstandings that we had on our balance sheet. So we have $520 million 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 that technology enablement and transaction banking that we first started talking about last summer. So, you know, 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.

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

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 learned in March is that brokered, contractual, and insured deposits can be an incredible 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 brokered 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. If you also sort of split that between short-term, less than 12 months, and longer term, it also allows you to have some, you know, reference portfolios on the liability side for hedging purposes. So, you know, I think that the way that you'll sort of see that number progress is, you know, we'd like to, you know, have it halve. you know, as early as the end of the year or early next year.

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

Absolutely.

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

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?

Yeah, sure, absolutely. Thanks, Peter, and good morning, and appreciate the question. So, you know, I think I mentioned in my prepared remarks, you know, this team allows us to have a nationwide presence and to end with offices and, you know, or presence, you know, on the ground presence in Los Angeles, San Francisco, Austin, Atlanta, Denver, Raleigh, Boston, Chicago, D.C. So truly a nationwide footprint of on-the-ground presence. you know, relationship managers. It also comes, you know, fully, you know, with five or maybe half a dozen person, you know, person treasury team, it comes with about, you know, eight or nine folks on the credit side, and about a dozen or so plus or minus relationship managers. So it's truly a fully integrated, you know, well, well, very well regarded, you know, team, I have personally spent a good amount of time with some of the important you know, customers virtually over the past couple of weeks since the onboarding occurred. And, you know, nothing but incredible things to say. And one of the things that we have noticed is, 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, you know, we're combined on a combined basis over a billion dollars in outstandings, about $2 billion in commitments right now. in this, you know, in this vertical. And with that nationwide presence, plus a truly best in class team, you know, really is going to set us apart both on the deposit gathering side, as well as, you know, thinking about continuing to, to, you know, grow from this space over the next couple of quarters in the future in 24 and 25 from a credit and lending perspective as well.

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

Good question, Peter. In terms of the non-strategic exiting, the plan was to have these to be gradual over the course of the year. 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, you know, we thought it would be prudent to execute on a number of things, you know, late in the quarter to do what I would call sort of a cleanup catch up, you know, these non bilateral syndicated capital call lines were all maturing in the next, call it, 100 days, 120 days. 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 one step forward, two steps forward, one step back from our deposit remix perspective, but also that we left the capital headroom and stuck to our very important and differentiated commitment of that significant capital increase strategy. by year end. So to summarize, this was sort of a catch-up cleanup quarter. You're going to see us have sort of a clean focus through the remainder of the year when we're really focused now on continuing the remix on the deposit side, having deposit growth exceed or core deposit growth exceed loan growth. And, you know, when you trade out only at two and a half percent, et cetera, this is just an opportunity for us to really focus on the core strategically important liquidity led, you know, credit verticals that we're in.

And so would that lead to, you know, that would accelerate or grow the balance sheet that you can start growing the balance sheet next year?

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 million of remaining cash flows in the remainder of this year on our securities portfolio. We have a billion plus of loan maturities. There's plenty of opportunity for us to continue to gross originate. We did gross originate in the second quarter to the tune of $500 million plus, and we'll continue to do franchise enhancing. Again, liquidity-led, deposit-led. um, uh, you know, lending. And, uh, we as an industry will, you know, reevaluate as the, as the year progresses. At this point in time, we have no, um, uh, no plans, um, to, uh, 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, uh, opportunities.

Got it. And just my last question, um, Can you just provide some color around this $5 million 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.

Yep, absolutely. Peter, this is not a credit sale. This is an exit of non-bilateral, meaning syndicated. This is essentially partnered with one of the failed institutions. About half a dozen credits. On the small side, we're talking $5 to $10 billion fund size. On the high end, we're talking $100 billion 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% money 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 and 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 earlier this year.

Great.

Thanks.

Congrats on a very nice quarter.

Thanks, Peter.

And your next question comes from a line of Matthew Brees from Stevens. Your line is open.

Hey, good morning.

Morning, Matt.

I wanted to go back to the increase in FDIC expense, you know, up meaningfully quarter over quarter. As measured over deposits, it's now at 22 basis points annualized versus six 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 increases. So I'm curious why the more robust change? Was there something from a regulatory standpoint or matters requiring attention or is it broker deposit related? Can you address these items and what the drivers were behind the increase?

Yeah, Matt. So, you know, what we are, you know, we reaffirmed the, you know, the run rate guidance office for this jumping off point. You know, to be clear, the increase of the six plus or minus, you know, million in FDIC insurance also included a catch up of one and a half to two million for the first quarter. That will be replaced more or less by a full run rate of the venture banking team, which is why we sort of reference sort of this as a jumping off point. So it's not fully apples to apples the way you described it. 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 multi-year 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.

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

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. 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?

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 million plus or minus is from existing, maybe a little less actually, maybe $200 million, $250 million plus or minus is from existing customers with higher balances. And the rest is coming from the verticals I earlier described.

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

That's right. That's right. The CBIT balances at year end, I believe, were around 2.2. They were a similar balance, you know, 2.3 maybe, you know, last quarter. Average balances were 2.35 billion for the quarter. And, you know, we were at our or below our target of 15% as we will continue to be.

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

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

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

They were non-interest bearing at Q1 end.

Got it. Okay. So they were moved from interest bearing into non-interest bearing earlier this year. Correct. In the first quarter.

Yeah, 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 the strategic decision we made, and we exited digital businesses as well as other businesses where we only get interspersing relationships and nothing else. So all our digital asset relationships right now are non-interspersing, and they're operating accounts tied to our payment systems.

Understood. Okay. Okay. The other, you know, chunky deposit base, per se, are the bank mobile BMTX deposits. What are balances there stand at today, and where are those sitting in terms of, you know, are they non-interest-bearing or interest-bearing at this point?

Yeah, I could give a little... 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.

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

Low single digits in terms of percentage of overall deposits? Of overall deposits, that's right. Okay, and they're supposed to wind down by late 2024, is that accurate?

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

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 remember two securitizations, but I couldn't remember if there was a third one.

Yeah, 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.

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 securitizations?

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

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

That's right. From Signature Bank. From Signature.

Okay.

This is the old square one PacWest team.

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

Yeah, so the 20-year track record of this team is 1% or less, and when you actually add in some of the warranted income, et cetera, it's actually zero on a net basis.

Got it.

Perfect.

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

Yeah, so for the provision, again, it's hard to predict, but I would say between that $18 to $22 million range for the back half of this year feels right.

Got it. Okay. That's all I had. I appreciate you taking my questions. Thank you.

Thanks, Matt.

And we only have a little time left, so we'll take our one final question from Bill DeZellin from Titan Capital Markets. Your line is open.

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, you know, whether VC or otherwise, it's broader than just that, just the other opportunities that you may or may not see out there.

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 a whole bank transaction. And there was sort of a several-week type FDIC-related diligence process and with a closing on June 15th. 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 half a billion dollar portfolio business and taking it to the nationwide goals that we would have normally had over a three to five year period but doing it in an accelerated basis. And, you know, the discount provided, you know, extra, you know, cushion from the perspective of the accelerated, you know, credit diligence, which we've now obviously, you know, 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, you know, and look to, you know, roll off some portion of that portfolio, which is not our plan at this point in time. So, yeah. I think that, you know, we feel very, you know, fortunate that there was an opportunity to bring in that team. As I mentioned earlier, you know, after the announcement, we saw, you know, outside of venture banking, significant deposit momentum and customer interest and growth. None of those deposits that are related to this portfolio actually came in as a reminder as of June 30th. So they're coming in, you know, in the third quarter. So I think that's sort of the way to think about 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 You know, private banking, whether it's equipment finance across the board in many of our niche verticals. So we're seeing, you know, great opportunities both to lean in and and remix, you know, customers to a lot more sort of franchise enhancing and a much more less competitive environment. you know, we're also seeing opportunities to recruit. You know, we've added, you know, half a dozen to a dozen, you know, 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 to, you know, be at any given time, you know, at a minimum meeting, you know, at a maximum discussing onboarding, you know, with the a number of teams, you know, who are figuring out what does their business as usual, you know, mean for them and their, you know, current or new institution that they're at.

Thank you and congratulations on that purchase.

Thanks, Bill.

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

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

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

We think it's an incredible foundation to build off of. So thank you so much, everyone. Have a great morning.