Customers Bancorp Inc (CUBI) 2022 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Customers Bancorp Third Quarter 2022 Earnings Call. (Operator Instructions) Thank you. It is now my pleasure to turn today's call over to Mr. David Patti. Sir, please go ahead.

Thank you, Brent, and good morning, everyone. Thank you for joining us for the Customer Bancorp's Earnings Call for the third quarter of 2022. 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 Q3 '22 results and click download presentation.

You can also download a PDF of the full press release at that 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 Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you, David, and good morning, ladies and gentlemen. It's really a pleasure to welcome you to Customers Bancorp Third Quarter 2022 Earnings Call.

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Bancorp Community Bank with diversified niches, several with a nationwide footprint that supplements our community banking business platforms located in Rhode Island, New York, Pennsylvania, North Carolina, and Florida. We operate our $20 billion asset bank with only 672 team records, working out of 39 private banking offices or loan production offices located across many states from [Harrisburg] to New Hampshire to Boston to New York, to Philadelphia and then on to Wilmington, North Carolina, in Florida as well as Dallas, Texas. We are pleased this morning to present to you another solid quarter despite the challenging interest rate and economic environment. We remain laser-focused on our responsible organic growth strategies and have taken prudent risk management strategic actions over the past several quarters to ensure that we are well positioned from our capital, credit, liquidity and earnings perspective in this challenging environment.

We are also pleased to report that we have already beaten our 2022 core earnings per share guidance excluding PPP of between $4.75 to $5 in earnings per share for 2022.

Our Q3 core earnings, excluding PPP were $2.30, up 135% over Q3 2021. Our core ROA or return on average assets was 1.64% and core return on common equity was 25.9%. All these numbers are excluding PPP, and that's a good way to look at our numbers.

Year-to-date September 30, 2022, core earnings per share, excluding PPP were $5.15. Q3 2022 net interest income generated by the core bank was up 38% year-over-year while our total operating expenses were down by $4 million year-over-year.

Core loan growth this quarter was led by increases in lower-risk variable rate specialty lending verticals of $500 million, which were largely offset by an expected decline in loans and mortgage companies of $300 million and a sale of $500 million of consumer installment loans at net gain to the company of about $13 million.

This was executed as part of our balance sheet optimization and capital excellent strategy. Asset quality remains exceptional and credit reserves are robust. Our loan and deposit pipelines remain strong, and we are very focused on maintaining our margins, moderating our growth, improving our capital ratios while controlling our expenses and meeting or beating what the Street expects from us in earnings per share. We remain very optimistic about our future. I would now hand it over to Sam Sidhu, President and CEO of Customers Bank to describe in detail our strategic initiatives and our results for Q3, Sam?

Thank you, Jay. Good morning, everyone. I'm thrilled to walk you through another strong quarter at Customers Bank call. Building off the momentum of industry-leading responsible loan growth in our variable rate low to no loss specialty lending verticals in the first half of the year. In the third quarter, the team focused on disciplined balance sheet management, which helps deliver strong net interest income growth and record recurring earnings even after backing out the benefit of PPP income.

Given the uncertain environment, we believe that moderating our growth and focusing on maintaining and expanding margin, improving our capital ratios, all while further growing recurring revenues is how we will be at and how our shareholders will be rewarded.

Let me briefly summarize our results. From an earnings perspective, we earned $1.85 in GAAP EPS, which represents a net income of $61.4 million. Core earnings were $2.48 after stripping out the benefit of PPP income, we earned $2.30 as I mentioned earlier, a record and an incredible feat, all thanks to the incredible efforts of our team holders. Net interest margin came in at the higher end of the guidance we provided on last quarter's call, lending to the prudent portfolio remix we have undertaken to lower risk and lower yielding at variable rate loans.

This strategic portfolio remix will be mostly complete by year-end, and our margin after incorporating the full impact of the consumer portfolio reduction will begin to increase again in 2023 as we have been very disciplined on loan deposit pricing strategies.

Now moving to the balance sheet. We ended the quarter with $19.2 billion in core assets, excluding PPP, up 36% over the year ago quarter. Our loan book grew an impressive 34% year-over-year to $14.2 billion, excluding PPP at quarter end. Total deposits grew 3% to $17.5 billion and have more than doubled over the last 3 years.

Going forward through the remainder of the year and into 2023, we believe it's prudent to prioritize adding high-quality deposit customers first to provide the funding base for continued measured mode growth as well as, importantly, NII expansion over the next few quarters.

From a profitability standpoint, adjusted pretax pre-provisioned ROA was 1.95%. Strong asset quality, a pillar of our -- is a filler of our franchise, and we are an inherently low credit risk institution. We continue to deliver on superior credit quality versus peers, the industry as well as our own historical averages. As a reminder, at the start of the year, we disclosed that we proactively and frankly, in high-tech smartly tightened credit underwriting and shifted loan growth mix in an effort to continue to maintain a pristine credit book as we wait to see the full impact of the debt actions and inflations on the economy.

Importantly, our book value has been successfully defended into 2022 and has grown significantly about 9% year-over-year as well as through 2022, bucking the industry trend, thanks to strong recurring organic growth and securities book optimization. Importantly, our TCE to TA ratio is at the high end of industry peers, lending to our prudent optimization.

Moving to Slide 6. Strategic initiatives we've implemented to best position us for the current future external environment. As early in the first quarter, we started taking a number of actions to position the company to successfully navigate the challenging macroeconomic environment.

This started with a mix shift in our loan portfolio towards low-to-no credit risk verticals, which represented 90% of our year-over-year loan growth. Our low-to-no loss specialty verticals now represent 63% of total loans, up significantly over the last year as well as the last several years with our consumer installment portfolio declining from 15% to 10% of total loans over the same time period.

This is excluding our government-guaranteed PPP loans, which when included further increase this number and as you can appreciate from a reinvestment perspective, this number will continue to increase in 2023. The focus on lower credit risk verticals has not changed our disciplined commitment to maintain at least 3% to 3.5% spread over our funding costs, allowing us to maintain our commitment to continue to meet and beat our short- and long-term guidance in a rapidly evolving environment.

I'm happy to address this more in Q&A.

Our agile pricing discipline has more recently assisted our strategic moderation and the growth of our balance sheet as we continue to prioritize profitability, margin and lowering overall risk factor. We will not better chase growth or growth's sake alone, especially in conditions like the industry is facing today, where margin, capital and credit parking. For example, we employed a strategy which both increased pricing thresholds or the top of the funnel and also repriced hundreds of millions of dollars of in-flight decline to prioritize margin and capital.

Additionally, it's worth reminding you that our margin the continued reinvestment of proceeds from our PPP loan runoff and our securities book, amortization and cash flows provide significant runway to grow our loan portfolio and continue to increase margin in the coming quarters. Strategic efforts such as the $500 million sale of a consumer loan portfolio this quarter and the transfer earlier this year of available-for-sale securities to held to maturity in the second quarter and meaningful positive impacts on our capital ratio, and we will continue to evaluate opportunities for additional actions.

On the consumer sale, we are pleased that the market validated our conservative underwriting, allowing us to sell $500 million of our Customers Bank direct portfolio for nearly a 3% net gain.

Moving on, the company remains extremely liquid with approximately $10 billion in liquidity. This is further supported by our core deposit pipelines from our existing verticals, evidenced by our financial institutions group growth as well as driven by our differentiated technology capabilities like SBI and our technology-enabled bank transaction banking platform, which is already bringing in significant low-cost deposit opportunities which we expect to onboard in 2023.

As we have demonstrated and have delivered on candidly over the past several years, we have established ourselves as a leader in technology and innovation in the digital banking and fintech space as well as in the banking industry more broadly. This is not just lip service. We are absolutely a top 10 tech-forward bank in the nation out of thousands of institutions, and I'm happy to answer any questions to explain further.

In terms of the customer bank instant token on the next page, I'll spend a minute talking about this in a few pages. We continue to scale our business at a pace that is far greater than we've projected. Our Banking-as-a-Service marketplace lending pilot is kicking off this core as planned, and we expect it to generate as much as $10 million in annual revenue based on current and pipeline partnership opportunities.

We are pleased to report that we are continuing to innovate and adding to our additional SMB, small, medium-sized business, bundle offering next year as well as rolling out an equipment financing pilot launch as we look to build off of our success in learning to the digital 7(a) space and roll into revolving line of credit, term loan as well as credit card offerings.

Finally, at the bottom of the page, we strive for operational excellence and feel that companies must continually evaluate their structure and processes for greater efficiencies. In that honest self-assessment, we uncovered ways in the quarter to simplify and streamline our organization and to better position ourselves to serve our customers while reducing overhead conserve all in addition to the branch closures that we announced last quarter.

Combining these initiatives over the past 2 quarters, we will be reducing our net count by while making us more effective for future growth at the right time. Through these efforts, we are able to maintain an industry-leading efficiency ratio of 43%, improving efficiency while also improving experience supported by truly best-in-class technology allows us to continue making our customers stay well.

Looking to our tech-enabled banking on Slide 7. So we can update you on major technology line strategic priorities and customers bank. Building off of our success and platform innovation on CEVA, we will be seeking to disrupt the transaction banking space by helping our current and future customers build a modern, cloud-based, API-enabled treasury product suite, which is being built to anticipate our customers' current and importantly, future needs.

Our best-in-class tech team is enabling us to expand our commercial treasury and payments capabilities, which now includes a customer-facing API library with documentation enabling simple and robust sector and payment services. This is all in addition to the API led banking-as-a-service fintech partnerships, of which the first fee income marketplace lending partner was signed last quarter and is launching this quarter after complex tech and operational integration.

Our treasury and payments platform has been built in the ground up with input from dozens of interviews with customer end users and decision makers, reinforcing our customer-centric service and experience approach, which we hope will continue to build tremendous customer loyalty and enhance our brand by driving new product and service offerings.

While most banks are focused on digital transformation and digitizing internal processes, we are looking to leapfrog forward and working to package and productize our tech by tailoring it to our customers' current and anticipated needs. Said another way, we are focusing our tech spend on innovation for our customers who now view us as a technology partner by choice rather than a banking partner out of necessity. This may seem nuanced, but it's critical to the future of banking.

Transaction Banking will enhance the customers' bank customer-focused value proposition and facilitate significant low-cost deposit gatherings as well as fee income opportunities in commercial and large corporate high-growth verticals, led by Confiance, Financial Institutions Group, digital assets as well as tech venture.

As we have previously stated, our fund finance business, which crossed over $1 billion in outstandings this year, we expect to be 100% self-funded and supported by these efforts. Similarly, our Tech & Venture business on a steady state, we expect to be at least 100% funded, supported by our tech name.

Flipping to Slide 8 on customers bank instant token. An update on the Instant Payments platform, which we launched, which tokenizes deposits on the blockchain on an instant payment rail that is available 24/7 365. Despite the significant market volatility in the digital asset space during the quarter and frankly, over the last few quarters, we are proud to report that we accelerated customer growth, once again, meeting our internal target to the onboarding of 111 new customers and crossing 312 total customers as of the end of the quarter. The onboarding of compliance team continues to meet best-in-class SLAs for onboarding time line on client risk management.

Our industry-leading technology infrastructure platform is forcing basic and long-needed innovation and calling out service challenges from the incumbent banking institution. Our customer backlog remains robust and to be clear, we have no exposure to underlying cryptocurrency assets of our customers, just their dollar deposits used for operating accounts payments and trading.

CEVA transactions continue to ramp up significantly and more than doubled in the quarter, and the fourth quarter is already ahead with just a month of transactions of last quarter. Our digital asset customer base is diversifying and just a few quarters, Customers Bank already banks many of the largest in each of the major customer categories.

Customers continue to progress in moving their primary banking relationships to us, which speaks to our innovative service on -- take on service and experience, high-tech, high-touch banking model. Now I'd like to hand it over to our Chief Financial Officer, Carla Leibold.

Thanks, Sam, and good morning, everyone. I'll keep my comments focused on 5 key is. Number one, organic low-risk loan growth and positive low mix checks. Number two, growing deposit franchise with a significant and broad proportion of transaction-related duties. The third, net interest income growth Core bank with margin expansion opportunities. Number four, strong liquidity of our capital position and five, tangible book value operations, all combined with effective and potent expense.

Turning to Slide 9. I'll start with low-risk loan growth and positive shift in loans. Our organic core loan growth in the third quarter of 2022 was about $100 million up approximately 1% over the prior quarter. Importantly, this included approximately $500 million of growth in our specialty C&I lending business of approximately 10% led by low-risk variable rate lender finance vertical, which has been a vertical of ours for the past 10 years in which we've experienced no losses or even a single delinquency.

We've also had about $300 million of growth in our lower-yielding relationship-based multifamily business, largely from Q2 production that didn't close until Q3. As expected, our loans to mobile tracking companies declined about $300 million, and our consumer installment loans decreased by $500 million due to the consumer installment loan sale that we recorded earlier this month.

Overall, we are extremely pleased with the results of the consumer sale transaction for a number of reasons. One, it derisks the loan book and that we now have less than 10% of core loans and consumer installment loans which equates to less than 7% of total assets. Execution at a slightly less than par price in this rapidly changing environment is a testament to the superior credit quality of our consumer installment loan book. As a reminder, these are fixed rate loans that despite the 300 basis point increase in rates are still trading at 99.5% of par.

In third, it was the significant financial benefits in Q3 resulting from, one, lower risk-weighted assets of approximately $420 million, which is expected to benefit our regulatory capital ratios between 30 and 40 basis points. And secondly, our CECL reserve relief or benefit of approximately $37 million, net of a loss on sale of roughly $2.5 million, unamortized customer acquisition costs of $18.6 million and other deal costs of about $2.4 million or a net benefit of about $13 million.

Moving on to deposits on Slide 10. We increased total deposits by about $600 million in the third quarter, while also experiencing some shift in mix and higher deposit cost, which was not unexpected given a 300 basis points of rate we've had so far this year. Considering the vast majority of our customers or corporate or institutional funds, these deposit balances are more sensitive to changes in market rates. What you can see from this slide is that our sticky transaction-related DDAs have been steadily increasing over the past 5 years.

Since September 30, we've had more customers move funds from money market accounts into interest-bearing operating accounts, further increasing our proportionate DDAs to about 67%. Given our strong deposit pipeline in the digital asset space, financials institution group and other channels, we are expecting this trend to continue over the next several quarters.

Slide 11 shows the repricing characteristics of our interest-earning assets and overall core loan mix, excluding PPP. Approximately 62% of our interest-earning assets are market sensitive, which is greater than the proportion of our market-sensitive liabilities, leaving up modestly asset sensitive.

From a loan mix perspective, the $500 million sale of consumer installment on at the end reduced our continued installment portfolio by about 21%, ending the third quarter at approximately $1.4 billion. This action, combined with the fact that approximately 73% of our core loan growth year-over-year has been in low risk, variable rate, specialty lending verticals such as lender finance and fund finance has improved our loan mix by reducing overall credit risk, while increasing content sensitivity. We do expect the loan mix shift to be largely complete with the $500 million of low-risk variable rate specialty lending growth expected in the fourth quarter.

Moving to Slide 12. This slide shows a trend of increasing net interest income, excluding PPP over the past 5 quarters largely driven by strong organic growth in our specialty lending C&I business. Compared to the prior quarter, our net interest income at PPP increased 2% or 10% on an annualized basis. Year-over-year, our net interest income from format increased 38%. Over the past 5 quarters, you could see that we have been very disciplined in keeping our margin above 3%. Consistent with our product lines, our third quarter net interest margin ex PPP was 3.18%, towards the upper end of the 3% and 3.25% range we communicated last quarter.

The $500 million sale of consumer installment loan and subsequent purchase of $400 million of investment securities secured by the sold loans at a 5.5% yield negatively impacting our net interest margin in the third quarter 2 basis points, exceeding the timing of the loan sale late in Q3, we do expect to see another 10 basis points or so of net interest margin compression in the fourth quarter all else equal. Upon completion of our line shifting in the fourth quarter, I do believe that our net interest margin would like to trough this year is in the previously guided range with NIM expansion opportunities in 2023.

Turning to Slide 13. PPP loans totaled $1.2 billion at the end of September. There was approximately $400 million of forgiveness in the third quarter of 2022. This resulted in deferred fee recognition of about $11 million, which was approximately $4 million lower than the amount recognized in the second quarter. At the end of September, approximately 91% of PPP loans originated under rounds 1 and 2 has been forgiven and approximately 80% of PPP originated under round 3 have been forgiven.

To date, we've recognized about $318 million of deferred origination fees, leaving approximately $30 million to be recognized in the fourth quarter of 2022 and early 2023. As we've said previously, it's difficult to predict the timing of these fees, but we are expecting the majority of the fees to be recognized over the next 1 to 2 quarters.

Turning to Slide 14. You can see tremendous growth in our liquidity position over time. The growth in our held-to-maturity investment portfolio was driven by the $14 billion purchase of securities backed by the sole consumer installment loan late in Q3. When adding our committed borrowing capacity to our cash and investment portfolio, we have close to $10 billion of liquidity sources available to us, leaving us very well positioned to fund a low-risk growth as well as the outflow of deposits resulted from the expiration of the deposit service agreement with BMTX.

On the right side of that slide, you can see some key characteristics of our available-for-sale investment portfolio, which is approximately 50% floating rate, has an expected duration of 1.7 years in book yield on 3.7%.

Moving to Slide 15. We continue to maintain strong capital levels. The estimated total risk-based capital ratio at the end of September was approximately 12.8%. Our TCE ratio, excluding PPP, was around 6.5% and our estimated CET1 loan ratio was 10.1%. Our TCE ratio was negatively impacted by about $156 million of after-tax unrealized losses deferred in AOCI at the end of September. This negatively impacted our TCE ratio by about 80 basis points. Without this impact of TCE ratio would have been roughly 7.3% at the end of the third quarter, close to the midpoint of our internal targeted range between 7% and 8%.

It's important to note here that the AOCI impact is an accounting fair value just that has no permanent impact on capital if the securities are held on balance sheet. As stated earlier, our third quarter 2022 estimated CET1 ratio was approximately 10.1%, significantly above the acquired regulatory, well-capitalized unions.

Despite a similar impact of AOCI on intangible value, which was negatively impacted this quarter by about $0.96, we saw tangible book value accretion of close to 3% and as our GAAP earnings more than offset the further deterioration in AOCI. Looking forward to the end of 2022, we are still expecting our tangible book value to be over $40. We also expect our TCE ratio to be above 7.5% over the next 3 to 4 quarters, supported by growth in routine earnings and balance sheet management. And with that, I'll turn it over to Andy to talk more about Asset Quality.

Thanks, Carla, and good morning, everyone. As noted on Slide 16, growth file remains strong as evidenced by NPLs of only $28 million or 18 basis points of total loans. NPAs of total assets of just 14 basis points, a 9% decline in the percentage of loans classified special mention or substandard to total loans. And most importantly, as it represents a real-time assessment of portfolio strength, total 30- to 89-day delinquencies or only 17 basis points.

The increase in NCOs was predominantly due to a decision after having completed the detailed forward-looking low-level stress test analysis to exit by performing non-multifamily commercial real estate credit that was heavily impacted by COVID-19 and failed to recover to an operating performance level that clearly evidenced an ability to sustain operations moving forward. For over a year now, we've been performing the same detailed forward-looking analysis on all credits recovery from COVID-19 as well as credits being highly susceptible to any level of deterioration and discretionary spending, given ongoing inflationary pressures and the high probability of a recession in late 2022 to early 2023.

Adjusting for this unique $7 million charge off, Q3 commercial NCOs to total average commercial loans was just 1 basis point. And overall NCOs to total average loans was 29 basis points, both of which are in line with historical levels and actually market improvement over Q2 of this year. From an overall consumer loan book perspective, NCOs to total average consumer loans of 18 basis points for Q3 marked a modest improvement from 197 basis points in Q2.

In addition, we remain pleased with how well our consumer installed loan book continues to perform with annualized charge-off rates running at less than half of fully reserved lifetime loss rate of 5.13%, when factoring in a weighted average life of just 1.7 years.

In addition, after adjusting for the successful $500 million Q3 consumer installment loan sale, the underlying credit metrics of the remaining portfolio improved over that of Q2 and remains strong, as noted on Slides 24, 25 and 26 in the appendix.

Although we are pleased with how well our portfolios are performed, we remain committed to the following: First, maintaining a strong reserve position given continued uncertainty in the social, economic and political pundits as evidenced by solid coverage ratio of 1.03% and which equates to 465% coverage for total NPLs.

Secondly, adhering to our strong underwriting and portfolio management standards, which is evidenced by consistently solid NPL, NPA, NCO and delinquency performance.

And finally, adhering to a strategy of enhancing loan portfolio mix with greater concentrations in low credit risk segments. As evidenced by 63% of our loan portfolio, excluding PPP being in core low-risk lending segments at the end of Q3.

Based on strong credit metrics, a loan mix comprised predominantly of low credit risk loans, strong portfolio management with ongoing loan-level stress testing, limited exposure to higher-risk loan savings such as investment crude office at only $132 million; investment crude retail at only $172 million in hospitality at just $452 million of which 75% carry recourse and 77% are flagged.

And finally, the continued focus on not lending into discretionary spending dependent industries. We feel strongly that our loan portfolio is well positioned to weather the current market volatility and what appears to be almost certain upcoming recession. I'd like to thank you for your time this morning. And I'd now like to turn the presentation back over to Jay Sidhu.

Thanks, Andy. Before we open it up for questions, let me summarize what my colleagues have already shared with you. As you can see from Slide 17, we have shown industry-leading core loan growth and deposit growth supported by best-in-class digital banking.

Since about the middle of last year, our loans, excluding PPP, were up about $5 billion, all organic growth and deposits are up about $3 billion. And we have funded other loan growth from cash received from PPP loans forgiven. We in this rapidly changing environment, intend on continuing with the same, but moderating our growth so as to maintain or expand our margins and further improve our capital raise ratios.

We remain on track to report $6 or higher than core EPS in 2023 in spite of the sale of $500 million of our consumer loans. As you heard from Andy, exceptional credit quality has been one of our hallmarks, and we are confident and we intend to remain that way. Our customer-centric business models are letting us get premium pricing, and we are committed to maintaining our advantages and technological capabilities over a period.

Speaking as one of the largest individual shareholders of the company, I can say our valuation is extremely attractive, trading at only 80% of tangible book and about 5x 2023 consensus estimates. You should expect us to buy back our authorized 2 million share authorization over the next few months if we remain trading below tangible form. So Brent, please open it up for any questions from the audience.

(Operator Instructions) Your first question comes from the line of Michael Perito with KBW.

This is Andrew filling in for Mike. First off, I just wanted to see how you guys will prioritize growth versus capital building in the near term and then into 2023 and beyond.

Yes. So I can take that question. So first, when we're thinking about case, we're always thinking about the best strategy to optimize capital. Supporting organic loan growth is always a priority. That said, we will be opportunistic in using our allowed 2 million share repurchase program. And as Jake said, to the extent we are below tangible book value, you may see a buyback some common shares.

Great. And then turning to CBIT, how do you expect the mix of the deposit customers to be going forward? And then with that diversification, like how will that change as customers continue to grow in the future?

Sure. So this is Sam. Thanks so much for the question. So from the CBIT perspective, I think it's important to remind everyone that when we started the Customers Bank (inaudible) is a platform, and our digital asset banking deposit gathering vertical, we set up to build a low to no-cost deposit acquisition franchise, and that's really what we're doing.

So to put a finer point on that, well over 90% of our client accounts today are noninterest-bearing operating accounts, but we do have a small handful of larger product processors that are earning interest but these customers tend to hold larger balances with us, but they also have happened to be, as I mentioned, anchors to the CBIT payments pool.

So said differently, the CBIT platform allows -- new customer growth allows us to increase the network effect, increasing the network, in fact, increases payments volumes and payment volumes increases the overall deposits that we're getting. So as we look at this platform, you'd expect that the majority of the clients that come on to the individual asset space will be non-interest bearing.

Great. And then just last 1 for me here. I know you mentioned the consumer loan sale in the prepared remarks on there, but do you have any plans to sell any more consumer loans in the near term?

So Andrew, on the consumer loan sale, I think that I'll add a little bit of color on the transaction there. So as we mentioned, this is the CBIT direct originated portfolio. We actually ran an interesting marketing process where we put our entire portfolio out to receive bids. We had multiple bidders a bit at or close to par. We decided on selling a smaller amount as we appreciate, we've created a tremendous amount of franchise value in that platform acquire hundreds of thousands of customers.

We let go about 35,000 plus or minus of customer principle, however, we maintain master servicing on that relationship. At this point in time, we have no further plans to sell more of the portfolio. We plan to manage the portfolio to a size that's approximately where we are today. It's about 70% of this base capital, which feels to go very and less than 10% of total loan, which is a very appropriate level given the diversification of our overall franchise. But we are interested in potentially evaluating strategic type partnerships where we could be an originator for sale type position, but that's something that's on the horizon, not something that we are working on actively in the very near future.

Your next question is from the line of Peter Winter with D.A. Davidson.

I wanted to ask about some of the drivers to the margin expansion outlook for next year.

Sure, Peter. Great to see you in your new seat. So I think it's important to understand how we think about not just margin but also net interest income and more broadly, what actions we've taken over the past 6 months to better position ourselves from a profitability perspective without taking unnecessary credit or interest rate risk especially considering the level of market volatility that we're all experiencing in 2022, which is likely going to continue into next year.

So first of all, we're focused on growing that interest income through the responsible low-risk growth that we've talked about extensively rather than focusing on a specific net interest margin that we have provided guidance or an ideal deposit beta. Our growth is going to be on top of our -- the growth is on top of a static balance sheet will allow us, plus the modest asset sensitivity will allow us to continue to expand our margin throughout next year.

Carla, maybe you could talk a little bit about the PPP loans, the payoffs that we expect next year, the securities book cash flows and how we think about reinvestment as well on top of the ABS (inaudible).

Sure, Sam. Peter. Regarding the margin expansion, there are a couple of big drivers here. First, we are very mine in that we have over $1 billion of cash that could be reinvested over the next couple of quarters at market-based rates solely from the PPP loans for business approximately.

Secondly, approximately 23% of our interest-earning assets are invested in lower yielding assets, which can ultimately be redeployed to generate higher NII over the next 12 to 24 months. And third, we're still not seeing the full benefit of our asset sensitivity because of the lagging of repricing of our variable rate assets compared to our market-sensitive deposits. This slide goes away when the plant causes rate hike and the repricing of the assets catches up to market-sensitive funding. And lastly, as Sam just talked about, we still have significant opportunities to generate very low to no cost core deposit over the next several quarters.

Okay. Just on that point, the last point color, I did see that deposits grew quarter-to-quarter, but there was a big mix shift from CBA into interest-bearing and deposit costs increased really rapidly. Can you just talk about this mix shift in deposits and maybe the outlook for deposit growth?

Sure. I'll talk about the mix shift and then I'll turn it back over to Sam to talk about some of the depository opportunities. So to be competitive in this rapidly changing environment, we moved most of our CBIT-related deposits to money market accounts and paid some market-based rates in the third quarter. Having said that, as of October 1, all of the CBIT-related money market counts have been moved to interest-bearing DVAs. Currently, our total demand deposits make up roughly 67% of our total deposit. And Sam, do you want to talk back about the deposit general strategy?

Yes, absolutely. And let me just add a little bit just before moving on this on noninterest-bearing deposit migration. As Carla stated, this is related to our digital assets CBIT deposits. This is onetime. It's behind us as payments volume was up significantly at (inaudible) in the quarter for CBIT. It was obviously -- has been muted for the industry over the last couple of quarters, but there has been a tremendous amount of competitive pressure, which is why we thought it was important to strategically make the decision, that's to pay interest to some of our key banker clients.

We also saw a small amount of unbearing outflows, which is really just expected from a quarter-to-quarter type of variability as opposed to migration that Carla just mentioned. No customers closed accounts and in our digital asset business or otherwise, we're protecting importing customers across our franchise. And it would be -- it would behoove us to not be able to take some of these actions.

You also talked us about deposit growth -- and what I would say is to reiterate, we talked about some of this in the transaction banking side. That's sort of the waterfall of our important cost growth initiatives is, number one, high-quality deposit growth in our commercial verticals.

Number two, growth in our new lending verticals that we've discussed that are not getting self-funded. For example, our fund finance and technology venture groups in aggregate of $1.3 billion in loans, and we expect those to be self-funded in the medium term in our pipeline. So those deposits are strong. And number three, our newly launched technology-enabled transaction banking platform, which has enabled sensory and payment services. And then obviously, the CBIT platform, which we've talked about that the customer growth leads to stronger and broader network that leads to CBIT integration leads to CBIT payments loan leads to deposits, and those deposits that are payments loan have no associated (inaudible).

Got it. That's really helpful. And just one last question. I appreciate all this color. But you sold the $500 million in consumer installment loans, almost essentially a car. So you did take a $23 million loss from the sale. Can you just give some color what that loss entailed?

Sure, Peter. I can take that one. So there were a couple of components to it. First, there was a $2.5 million loss on sales just resulting from the sales price at 99.5%. But secondly, there was $18.6 million of unamortized customer acquisition costs that need to be written off the time of sale. And then there were some other deal-related costs around $2.5 million.

Your next question is from the line of Frank Schiraldi with Piper Sandler.

Just wanted on the growth. I want to make sure I have it right for the quarter. You talked about the $500 million in specialty lending vertical growth. Is that net of anything? Or do you basically expect the rest of the portfolio to be fairly flat?

I will add that we are expecting a decline, a seasonal decline in the mortgage warehouse book. That can be there somewhere between $1.2 billion to $1.4 billion.

Okay. So outside of -- Yes. I should say outside of mortgage warehouse, the idea would be largely that we see $500 million in that growth that's kind of the thinking.

That's right.

Okay. And then as a follow-up, just if you do make the decision to buy back stock and you do get aggressive on that front in the fourth quarter, what would be sort of the give in terms of would you be willing to accept maybe slightly lower capital level than you had otherwise anticipated to do that? Or would you do you think slow down that growth in your specialty lending?

This is Jay. I'll take that, Frank. We will balance growth, like we said, moderating our growth with the maximization of capital, liquidity, margin and profitability, and it's a balancing act. And from a timing point of view, agreement that we have to take a little bit of a of hit to our capital ratios for 1 quarter, we will do that. If it makes more sense to buy back stock in a certain quarter.

We think that our opportunities for growth are enormous. But at this time in the cycle, it makes more sense to be moderating the growth and improving the quality of our balance sheet. And at the same time, clearly get multiples which our shareholders would expect us to create with the kind of returns that we have provided in terms of our needs, in terms of our way, in terms of return on automatic stuff.

And Frank, I would just add that we are -- if you look at our broader peer group, we are trading the top -- sorry, rather our TCE is the top quartile with the banks out there right now. So even if we did decide to take action, which we would only do if there's an under appreciates a lot of the efforts that we have underway, we do have adequate capital levels relative to our peers and industry.

Your next question is from the line of David Bishop with Hot Group.

Yes. Sticking with the deposits that are grayed in here. Am I reading things wrong? It looks like you guys onboarded 111 new customers in the CBIT platform, but deposit sell, where they were these customers this time not bringing in deposits yet. just curious why that's the big growth in accounts that the decline in deposits, right?

Yes. Sure, absolutely. David. So we onboarded over 100 customers, about 75% of those have already funded some of the open up accounts towards the end of the quarter. and average account balance is approximately $1 million to $1.5 million. So this is a slow growth and ramp up. At the end of the day, deposits get funded into these accounts, whether it is either, a, a primary operating account, or b, it is a payments account and CBIT integration sometimes takes time for some of those key customers. So it's is a leading indicator of future accounts growth. That's the accounts that are very active and funded.

Got it. And then any sense or maybe scale or just size in terms of just payments activity across the platform?

Our all-in payments activity continues to grow, and I referenced in my prepared remarks, but what I would say is it's several billion dollars in the quarter, all payments line.

Got it. And then one final question on the expense front, good cost containment there. did see a decline in the tech expense. Is a good run rate? Just curious what sort of drove the intra-quarter decline in the technology kind of run rate.

Yes. So that is largely impacted by the deposit services agreement that we currently have in place with BMTX. As we said previously, that runs around $15 million on a quarterly basis, up or down maybe $1 million a quarter depending on some seasonality of the deposits that are serviced by BMTX. This quarter, it was roughly $13 million.

Your next question is from the line of Matthew Breese with Stephens.

I apologize, I'm having a tough time hearing you guys. What was the remaining cost tied to BM technologies that should come out here.

So roughly, that's about $15 million a quarter. And this quarter, it was $13 million. On an annual basis, it's roughly $16 million.

Okay. And then similarly, I think -- last I had it, there was about $2.2 billion of deposits tied to BMTX. That's still expected to fall off at the end of the year. What's the offset to that? Is it going to be higher borrowings or some sort of lower assets and if it's lower assets where you expect the offset to be?

Well, a couple of things on that. So currently, the deposit service by BMTX is about $1.6 billion. And I would point you to 2 things. One, Sam described earlier, the strong pipelines were core organic deposit growth. And two, we had some comments in our strong liquidity position. and the fact that we had liquidity sources of close to $10 billion. So that gives us some options on how we fund the actual outflow of the BMTX service deposits.

Okay. And can you remind us the cost of the deposits versus the incremental cost of replacement?

Yes. So right now, those costs are around 3%. And to the extent that they would be replaced. We first go to our organic low-to-no-cost deposit channels. And then any shortfall could be based on market rates.

Okay. And then going back to the NIM, I just wanted to make sure I had the cadence right. The core NIM is expected to be down 10 basis points in the fourth quarter. And then do I have this right it be stable expanding from there? And then if it's expanding, I just wanted some frame of reference, the extent of expansion you expect off of the bottom.

So on the NIM for we said on a static balance sheet, the impact of the consumer sale transaction would be roughly 10 basis points in the fourth quarter. And what we've guided to is that we will be within a 3%, 3.25% for the fourth quarter for fourth quarter, and then we have the margin expansion opportunities based on the items that we discussed earlier on the call.

Okay. And maybe just a follow-up to that. Where do you expect deposit costs to peak if we have another, call it, 150 basis points effect on heights? Or asked another way, what is your full cycle deposit beta estimate at this point?

So we're not giving a specific beta guidance. I think we're not focused on an ideal or optimal deposit beta. But what we can say and what we've said previously, in our deposit franchise, it's just largely built on commercial and institutional clients. When it goes up, they expect events to pay in some more.

And what I would just add that at I think that at the end of last quarter, we talked about what we were seeing in the market from a competitive standpoint related to deposit betas in the industry. Our view has not changed at all over the past 90 days, whereas I think we've seen some folks in the industry continue to reign center that will consummate beta estimates.

And I think what we are focusing on is the consistency of net interest income. And net interest income growth is what we believe everybody should be looking at and expecting so that if we see an abatement going up and we see the profit cost going up, we better have a balance sheet, we still our earning asset is going up too. And that's what we would like for you to focus. It's -- I think you'd be asking us a lot of questions develop our assets betas also.

Your final question comes from the line of Bill Dezellem with Tieton Capital Management.

That's Tieton Capital. And let me start, Sam, I will take the bait. You said that we should ask you about the digital technology initiatives. And being in the top 10 banks. I'll turn that over to you without any specific question. And just what would you like to highlight there?

Sure, absolutely. Bill. Great to speak to you, and thanks so much for the question. We talked a lot last year about a number of initiatives that we had in terms of coupled along with the rebranding of the organization to be able to take the technology development that we have in this franchise back to our predecessor subsidiary, BankMobile, 5-plus years ago where we started to build the bank of the future on top of the traditional [Nexi] technology.

Once that organization was lifted out with investor last year, we had that DNA in our organization that we've added 75 team members in technology innovation. Our security department is separate from our IT department which is separate from our technology deployment.

And the way that we think about information technology is run the bank, which helps facilitate the left hand with the right hand of changing the bank. And our technology team that change the bank tech team of developers, engineers work hand-in-hand with our folks in the market, on the digital market side, CRM, sales force, nCino, product management side, they're the folks that are helping to continue to innovate at this organization. We don't just have a small innovation fee -- we have 60 to 75 team members that are fully dedicated to changing the routes and changing the industry.

So hopefully, that's helpful and the types of initiatives that we have underway are not road map initiatives. We're not focused on digitizing, we're not focusing on the moving paper. We're not focusing on reducing costs.

We're focusing on delivering a best experience that really delights the customer, and it's an effortless and frictionless experience. And the ability to talk to a large commercial customer that has an ability to move for, say, $100 million in deposits to you that need to be able to have X, Y and Z in terms of reporting virtual account capabilities, ERP integration.

And have our team be able to grow map that out and do that in a matter of days as opposed to a matter of months. The types of banks that could compete against us in these types of capabilities, you can count them on 1 or 2 hands. And they tend to be larger (inaudible).

That is helpful. And you talked about the number of CBIT transactions doubling. Is there any revenue or for that matter, any costs associated with transactions in the CBIT arena? Or is it really entirely the deposit benefit?

Sure. So we don't charge revenue for the tokenized deposits and payments executable. We do have traditional commercial banking CBITs, ACH wired, et cetera, which are the on and off ramp outside of our bank before we use the on and off ramp for the digital block chain based payments services.

So we don't charge the cost for the same payments, but begins and absolute development to drive fee income for the organization. But really, again, the main purpose of our CBIT platform, which is starting today in the digital asset industry is to bring and create a large post-gathering vertical low-to-no-cost composites and wealth will continue to improve the deposit franchise and improve margin and reduce volatility in the interim.

And then lastly, banking as a service, would you please discuss the initial interest that you all are seeing there? And maybe it's too early to know, but interested in your perspective.

Sure, absolutely. So Banking as a Service, really, I think of it as 3 pillars. There's loan services and loan origination, which is what we're referring to, and I'll come back to that. There's deposit-taking capabilities in deposit taking capabilities typically are handled by the smaller sub-$10 billion banks because of their Durbin exemption.

So less relevant for our Customers Bank today and finally payments, which we talked about, whether it's CBIT, whether it's other forms of real-time pains, B2B payments as well as ATI-enabled, ACH wired or Fedwire but eventually (inaudible), these are the types of capabilities that we have today or will have in the very near future.

So going back to our marketplace lending partnership, as you know, as we build our consumer lending platform, initially, we were partnering and purchasing loans as long as 5-plus years ago. And we have a number of servicing and originator relationships of the top half a dozen or so of long-standing experience, fintech marketplace type platforms.

So we have already onboarded them from a risk and compliance perspective. In many cases, we still have existing relationships with them. and there's enough opportunities in that small handful of vessels we generally originate billions of dollars of annual loans, whereby we have an opportunity to lend our technology and risk compliance platform, as well as some liquidity to be able to help them run their business. And for that, we get paid a significant amount of high ROA interest in payment.

There are no further questions at this time. I'll now turn the call back over to Mr. Jay Sidhu.

Yes. Thank you very much. Really appreciate your interest in customers. So please give us a call any time. We are always there to your ideas and we are committed to meaning or the consensus estimates you have for us for 2023. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.