(CUBI) 2022 Q1 法說會逐字稿

Good day. Thank you for standing by, and welcome to the Customers Bancorp, Inc. First Quarter 2022 Earnings conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Dave Patti, the Communications Director for Customers Bancorp. Sir, please go ahead.

Thank you, Ludy, and good morning, everyone. Thank you for joining us for the Customers Bancorp's earnings call for the first 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 www.customersbank.com. You can scroll to Q1 '22 Results and click Download Presentation. You can also download a PDF of the full press release at this file. 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 Form 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 the website.

At this time, it is my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you. Thank you, Dave, and good morning, ladies and gentlemen. I too want to welcome you to the Customers Bancorp Bank Q1 2022 Investor Call. Joining me this morning are Sam Sidhu, the President and Chief Operating Officer of Customers; Carla Leibold, our Chief Financial Officer; and Andy Bowman, our Chief Credit Officer.

We are extremely pleased with the Q1 results and are excited that 2022 is off to a great start. In a quarter impacted significantly by geopolitical conflicts, rising interest rates, yield curve inversion, inflationary pressures and the ongoing effects of the pandemic, we remain very focused on superior execution of our strategy while being very mindful of this rapidly changing environment. Before I share my comments with you, please join me in saluting our team members and all their hard work and commitment in helping us achieve these highly -- better than -- significantly better than average results.

From a risk management perspective, we are viewing this challenging operating environment most possibly resulting in a mild to a moderate recession in 2023, and our execution of strategies and guidance for 2022 and 2023 assume the existence of such an environment next year. We would like to take about 5 minutes at each of our quarterly calls to discuss with you our unique strategy, as well as Sam providing you an update on the results of our major strategic initiatives.

Looking at Slide 4. At the core of our strategy is a true obsession with our clients. There are many ways to center a business strategy. You can be extremely competitive focused. You can be technology-focused, product-focused, business model-focused, low cost-focused, et cetera. However, in our view, being obsessively customer-focused is by far the most effective strategy. The customer is at the center of everything we do. We have a unique high touch supported by high tech business model. That is executed by our very experienced teams through a single point of contact model.

So the team is fully capable of delivering the full service private banking through omnichannels depending upon customer preferences and needs. We view ourselves as a forward-thinking bank and have recently focused on improving our brand, streamlining our offerings as well as our underwriting as well as our portfolio management and all resulting in dramatically improved turnaround times so that we are truly delighting our customers.

We've also significantly improved our onboarding experiences and developed real-time B2B instant payment functionality for our business customers that is paying huge rewards, and we believe we are just beginning to see some of those rewards. Our technology, our products and services and all our activities are designed to delight our customers and helping us remain focused and helping us remain forward-thinking to take on tomorrow.

On Slide 5, you can see that our vision for growth has remained a part of our strong -- of our story since the beginning. We took over a failing bank with our own money and formed Customers Bank that has grown organically from a $200 million problem bank into a very strong customer-focused and strong in risk management standards, forward-thinking financial institution with about $19 billion in assets. This equates to a CAGR of about 40% and puts us in the top quartile of banks in our peer group.

On Slide 6, we would like to briefly discuss ESG review because we take that very seriously. In the spirit of just highlighting just 1 or 2 things, I'm pleased to share with you the 2 most significant aspects of our ESG report for 2021. First, we financially supported over 350,000 small businesses across America through our PPP program and believe we saved as many as 1 million jobs and tens of thousands of business establishments with many, if not most, being minority-owned small businesses.

On another initiative, we financed over $40 million of solar energy project in 2021, and our teams members have been recognized, and our company has been recognized as -- locally as providing the best from a wellness point of view for our teams. We have spent a lot of time and effort in diversity and inclusion and have initiated several projects along that way -- along these lines to make ourselves even better.

At Customers, we are laser-focused on maintaining our credit quality better than most peers, increasing total revenues at an above average rate, managing our expenses, improving our efficiency ratios by cutting bureaucracy and continuing to deliver positive operating leverage and superior bottom line results. We will never compromise on effective risk management principles, especially as it relates to maintaining our credit quality.

I really thank you for your continued support and interest in our company, and it's amazing to think that we are just getting started on several very interesting and exciting strategic initiatives and remaining -- and we believe we have a huge runway ahead of us.

So at this time, I'd like to turn it over to Sam to provide you a lot more details on some of these initiatives. Sam?

Thank you, Jay. Good morning, everyone. This is Sam Sidhu, President of Customers Bancorp and President and CEO of Customers Bank. Another great quarter, in fact, a record first quarter at Customers Bank and a very strong start to the year. We continue to gain momentum and are benefiting from impressive and responsible growth across the company, which is showcasing the broad and diversified strength of the franchise.

Let me briefly summarize our results. First, from an earnings perspective, we earned $2.18 in GAAP EPS, which represented net income of about $75 million and up an impressive 116% over the year-ago quarter. Core earnings were $2.19 and stripping out the benefit of PPP income, we earned $1.47. Our core ROCE was 24% and ROA was 1.63%, or 1.24% excluding the benefit of PPP. Net interest margin came in at 3.32% for the quarter.

Now moving to the balance sheet. We ended the quarter with $17 billion in core assets, excluding PPP, up 24% over the year-ago quarter. Our loan book grew an impressive 8% year-over-year to $11.9 billion at quarter end, with our loan pipeline and backlogs at all-time highest levels across the franchise.

Total deposits grew by $3.9 billion year-over-year, driven by monumental efforts from our commercial teams amplified by our digital banking teams' success in deposit gathering associated with our Customers Bank Instant Token, or CBIT, launch late last year. Our digital asset banking team has brought in another approximately $500 million in noninterest-bearing deposits since the end of the quarter, bringing the total digital asset deposits to $2.3 billion as of April 15.

Strong asset quality is at the core of our franchise, and we continue to have superior credit quality to peers with NPAs at just 23 basis points and our coverage ratio at 1.44%. We continue to experience exceptional asset quality attributable to our disciplined risk management, which continues to be core strength and pillar. We have proactively tightened underwriting and will shift loan growth mix to continue to maintain a pristine credit book as we wait and see the impact of the Fed's action.

Flipping to Slide 9. Let me update you on our business line accomplishments and strategic priorities for 2022. This page helps to visually simplify our strategy and explains what makes Customers Bank so unique.

Firstly, on community banking. In the first quarter, we strengthened our presence and reputation in our expansion geographies, laying the foundation for future loan growth and team recruitment. We also continued to grow our existing business lines. We've added several new relationship managers and executives to our existing teams, leading to healthy, strong, high-quality end market growth. Our SBA production grew by 14% quarter-over-quarter, and our digital small ticket 7(a) product picked up as well, crossing $5 million in originations across dozens of loans, which is a testament to our technology-enabled proprietary lending program.

Moving to specialty lending. We continue to recruit specialty lending teams and to add to existing teams to support future growth. We are experiencing industry-leading diversified loan growth in our specialty verticals. Our new lending verticals have already achieved outstanding balances of $434 million since inception in very well-secured asset classes with deposit-rich customers. This growth has been supported by significant customer referrals and is well diversified across existing as well as our new verticals.

We are on track to launch our digital asset lending vertical in the next few months, further strengthening our commitment to our digital asset banking niche vertical. In the quarter, we also onboarded an experienced leader to launch another technology-enabled small ticket SMB, small, medium-sized business, lending product within our equipment finance specialty business. Finally, on the point of diversified growth, we expect to achieve double-digit loan growth across all verticals, excluding our mortgage banking-related vertical.

Moving to digital banking and our technology efforts. We have established ourselves as a leader in technology innovation in digital banking and fintech space and in the banking industry more broadly. In terms of our digital consumer business, we continue to index our portfolio mix to a directly sourced program, and we're pleased to report that in our digital SMB bundle remains on track for a pilot launch in the next quarter.

In terms of CBIT, I'll spend more time talking about this in a minute, but we continue to scale our customers at a pace far greater than we had projected, which was based on the prior bank's growth. Finally, we are on track to launch Banking-as-a-Service business this year, which is expected to add significant fee income growth potential.

Flipping to Slide 10, on CBIT, a quick recap on our exciting launch of a blockchain-based, instant payments platform as well as our creation of the digital asset banking team. After a successful soft launch, we kicked off a full launch in January of this year. We are proud to report that we have substantially exceeded our first quarter customer growth expectations and quadrupled our customer base approximately through the onboarding of 74 new customers, crossing 100 total customers at the end of the quarter. This is a testament to our compliance-first, best-in-class onboarding process and, again, a recognition of our industry-leading technology infrastructure platform, which is forcing long-needed innovation by the incumbent banking institutions.

Our customer pipeline is very robust, and we see growth accelerating in the second quarter. All-in customer payments flows also commenced in the quarter totaling several billion dollars. And while net deposits were mostly flat, as of March 31, as you can see in early April, we benefited from large noninterest-bearing deposit inflows with our total CBIT-related deposits reaching $2.3 billion as of April 15. Our digital asset anchor customer base is diversified and led by exchanges, OTC desks, institutional investors and stablecoin issuers.

In just a few months, Customers Bank already banks several of the largest in each of these categories. We've had a number of customers indicate, after onboarding, that they will be moving over their primary banking relationship to Customers Bank, which speaks to our innovative take on service and experience-based high-touch, high-tech banking model.

Our focus in 2022 will be on growing and strengthening our network by driving customer growth, API connectivity and engagement, thereby attracting more inflows into our ecosystem. We are confident in our ability to add several billion dollars in low to no-cost CBIT-related deposits to our franchise in the second half of the year.

Moving to the next slide, loan growth and mix. We are already seeing the benefit of our 2021 efforts to establish new lending verticals, which has led to a well-diversified loan growth in the quarter. Our teams have posted another $1 billion-plus quarter in net originations, excluding mortgage warehouse, and $559 million net of that business has declined, representing 8% of year-over-year net growth, 5% of quarterly growth and about 20% annualized growth.

The growth is coming from mostly floating rate origination and will help to increase our future asset sensitivity. This growth is well above our $500 million average quarterly loan growth guidance despite the significant decline of over $500 billion due to the rising rate environment in our banking to mortgage companies business line. This business, however, is now down to 15% of loans, which will significantly reduce the seasonality and earnings volatility.

Specialty C&I led the growth with over $500 million of our loan growth coming from our lender finance and fund finance verticals combined. We are thrilled with the performance of our very well secured and structured fund finance business that has been led by a team of senior executives recruited last year from JPMorgan and Bank of America. These executives and, more broadly, this vertical has not experienced a $1 of credit-related charge-offs historically.

Our relationship-based multifamily business also grew by $218 million in the quarter, with $185 million of that production coming from existing and repeat borrowers. Our consumer installment business grew by $153 million in the quarter. However, in this environment, we believe it is prudent to keep these outstandings flat with a bias to potentially declining as we seek to further improve our credit risk profile. And frankly, we just want to focus on low-risk verticals.

To that point, we've had significant improvement in our low-risk loan mix, and it's worth mentioning that our pipeline and backlog in these verticals remains at record levels. We continue to expect an average of $500 million of quarterly net loan growth in 2022.

Flipping to deposits on Slide 12. As we stated at the end of the third quarter and again at year-end 2021, we continue to remix our deposit franchise, thanks to the growth of our commercial and CBIT deposit franchises, led by low cost and noninterest-bearing deposit growth. Our noninterest-bearing deposits at the end of the quarter represented nearly 30% of total deposits at $4.6 billion. We have strategically run off nearly $2 billion of CDs and other high cost and market rate sensitive balances in the last 2 quarters, setting up a strong foundation for 2022. Our cost of deposits bottomed out within the quarter and ended out at about a 32 basis point spot rate.

With that, I'll pass it to Carla Leibold, our Chief Financial Officer, to run through the rest of the financial highlights.

Thanks, Sam, and good morning, everyone. I'll keep my comments focused on 4 key topics: number one, continued strong growth in net interest income generated by the core bank; number two, strong liquidity combined with a well-diversified and managed investment portfolio; the third, asset sensitivity and being well positioned for future rate hikes; and four, strong capital position and accretion in tangible book value. I'll then wrap up by making a few remarks on the revenue and expense trends.

Turning to Slide 13. I'll start with core net interest income and net interest margin, excluding PPP. This slide shows the trend of increasing net interest income over the past 5 quarters, largely driven by strong growth in our core C&I book, including our specialty lines of business, combined with an increase in spreads as we continue to drive down our total cost of deposits by strategically running off higher cost, rate-sensitive deposits.

Compared to the year-ago quarter, first quarter 2022 net interest income from the core bank increased 33%. You can also see from the chart on the right that we've continued to maintain and increase our loan yields while reducing our cost of interest-bearing deposits by 23 basis points. Additionally, there has been a significant increase in the percentage of deposits that are noninterest-bearing year-over-year led by our CBIT launch.

Moving on to Slide 14. PPP loans totaled $2.2 billion at the end of March. There was over $1 billion of forgiveness in the first quarter 2022, which resulted in deferred fee recognition of about $30 million, which was approximately $42 million less than the fourth quarter of 2021. Early in the quarter, the pace of forgiveness was slow, but then picked up later in the quarter, resulting in higher deferred fee recognition in the first quarter than what was initially expected. Coming into the second quarter, the pace of forgiveness has slowed back down a bit.

As we've said previously, it's difficult to predict the timing of forgiveness, but we are projecting that of the roughly $60 million of deferred fees remaining to be recognized at the end of Q1, approximately 2/3 of those fees will be recognized in the second half of this year.

Turning to Slide 15. You can see tremendous growth in our liquidity position, particularly in the back half of 2021. Our cash and investment portfolio has more than doubled over the past year. In first quarter 2022, that growth has slowed as total cash and investment was approximately $4.4 billion, relatively flat from fourth quarter 2021. At the end of Q1, we had about $7.8 billion of total liquidity, which includes committed borrowing capacity of $3.4 billion.

Our investment portfolio remains well diversified with the majority of that portfolio, about 53%, invested in MBS and CMO. At the end of Q1, our portfolio yield was 2.21% with a relatively short duration of a little over 2 years. Also, approximately 50% of our investment securities are floating rate.

Slide 16 shows the repricing characteristics of our interest-earning assets. I'll make a few comments here. First, 68% of our interest-earning assets are market-sensitive and will benefit from a rising rate environment. And second, given the transformational improvement that we've made in our deposit franchise over the past year or so, we are expecting our deposit cost to be significantly less sensitive to rising interest rates. From a deposit beta perspective, we've internally modeled using 45% to 55% in an up 100 basis point interest rate shock.

Moving to Slide 17. We continue to maintain strong levels of capital. The estimated total risk-based capital at the end of first quarter 2022 was approximately 12.9%. And our TCE ratio, excluding PPP, was 7.3%. At March 31, 2022, our tangible book value was $37.50, which was up about 25% year-over-year. I'll add here that increased unrealized losses deferred an AOCI of about $58 million related to our AFS debt securities, negatively impacted our TCE ratio by about 30 basis points in Q1 and also negatively impacted our tangible book value by about $1.75 per share.

I'll also make a few comments here about revenue and expense trends. Our noninterest income was $21.2 million for the first quarter 2022. That was an increase of $4.2 million compared to the prior quarter. This increase was largely driven by a $6.4 million of tax-free BOLI death benefits in the first quarter 2022, partially offset by a couple of items.

The first was that there were no consumer installment sales in the first quarter compared to about $700,000 of gains realized from consumer installment sales last quarter; and second, we realized about $1 million in asset gains from SBA loan sales in the first quarter compared to about $1.8 million in the prior quarter. Over the next couple of quarters, we expect to hold the SBA loans on our balance sheet and earn the NII instead of selling for gains, which is a strategy that we've used previously.

Moving on to expenses. As expected, our noninterest expenses declined $7.7 million to about $74 million in the first quarter, largely due to the onetime or other transitory items that we discussed last quarter, including higher comp and sentiment related to higher incentive accruals last quarter given 2021 record performance, higher occupancy costs associated with the relocation of the bank headquarters and higher ESG-related charitable contributions and corporate sponsorships recorded in the fourth quarter of 2021.

As we've said before, we remain very diligent in managing our expenses, but not at the expense of not making adequate investments to support efficient and responsible growth. As a result, we are not giving specific guidance on noninterest expenses. Instead, we are focused on growing revenues, managing expenses and achieving an efficiency ratio at or below 40% by early 2023.

Moving on to provision. In first quarter 2022, we recorded $16 million of provision expense. This was largely due to growth in our CB direct origination as well as growth in residential and multifamily loans. Our allowance for credit losses and loans and leases at the end of Q1 was $146 million, which was up by about 6% from the $138 million reported at the end of last year. Since adoption, we've utilized Moody's lifetime loss rate models in determining our allowance balance at the end of each quarter.

In Q1, we used Moody's baseline forecast to reflect reasonable expectations on current and future economic conditions. We then added qualitative adjustments as considered appropriate to account for any uncertainty related to economic forecasts or incorporate any risks that may not have been considered in the model.

Specific to our consumer installment book, we maintain internal lifetime loss rate model to inform our qualitative adjustment to come up with our total reserve for this book of business. Other cycle-based macroeconomic models will likely give approximately 35% lower estimated lifetime loss rate. Accordingly, we continue to believe that we are very conservatively reserved in the portfolio entering into 2022 with an estimated lifetime loss rate of 5.68%.

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 18, credit quality remains strong, as evidenced by a decline in NPLs to only $43.9 million with 31 basis points of total loans and a correlating decrease in NPAs to only 23 basis points of total assets.

Additionally, total charge-offs for the quarter were only $7.2 million, equating to an annualized net charge-offs to average total loans and leases of only 21 basis points. If you were to exclude PPP loans from this calculation, annualized net charge-offs to average total loans and leases was only 27 basis points for Q1 of '22, which is right in line with 29, 27 and 26 basis points for Q4, Q3 and Q2 of 2021 when COVID-associated stimulus was still in play.

Although we are extremely pleased with how well all of our portfolios have performed and continue to perform, we remain committed to maintaining a strong reserve position given the continued uncertainties associated with the current social, economic and political climates as evidenced by reserve coverage ratio, excluding PPP loans of 1.44%, which equates to a 333% coverage of total NPLs.

Slides 19, 20 and 21 provide key attributes around our consumer installment loan portfolio and clearly evidence how well said portfolio has performed compared to the industry as a whole. As noted on Slide 19, the portfolio carries a very strong weighted average FICO score of 730 and 99% of all FICO scores are greater than or equal to 680. It possesses an extremely strong and conservative weighted average DTI of 16.5% and 72% of all borrowers have a DTI of less than 30%.

It carries a robust weighted average borrower income level of $101,000, and 83% of borrowers' incomes are greater than or equal to $50,000. The portfolio is also highly geographically diversified and is comprised predominantly of borrowers employed in nondiscretionary spending dependent industries, which was a key driver behind the strong performance during COVID-19 and positions the portfolio extremely well for continued strong performance during the current inflationary environment.

Slides 20 and 21 demonstrate the consistently superior performance of the portfolio compared to the industry as a whole from both an impairment and annualized net loss rate perspective. Additionally, the consumer installment loan portfolio annualized net charge-off ratio of 1.63% for Q1 of 2022 is actually slightly below the average annualized net charge-off rate of same portfolio of 1.64% for the final 3 quarters of 2021, which again rated by COVID-19 economic stimulus.

Finally, as outlined on Page 25 in the appendix, our current allowance for credit losses for our consumer installment portfolio is a robust $107.8 million based on a lifetime loss rate of 5.68%. And although there will inevitably be increased charge-off rates as the portfolio naturally seasons, we remain extremely confident that based on the portfolio's strong attributes and extremely strong performance to date that our reserves will be more than adequate at this time.

With that, I'll conclude my section and turn the presentation back over to Jay.

Okay. Thank you very much, Andy. So in conclusion, looking ahead, we continue to project sustainable and responsible organic core growth and are very optimistic about the prospects of our company. We are focused on improving the quality of our balance sheet as well as our deposit franchise and are not focused on growth just for the sake of growth. In addition, we believe strong asset quality is what will differentiate customers relative to many of our peers in this cycle.

We continue to expect an average, as you heard from my colleagues, $500 million of quarterly loan growth and significant digital asset-related deposit growth by year-end 2022. Through a combination of revenue growth and prudent expense management, we expect our efficiency ratio to be at or below 40%, as you heard from Carla, and we think we will achieve this by early 2023. Customers Bancorp stock at the close of the business on Friday, April 22, was trading at $42.84. And as you all know, that's only about 7x analyst estimates for 2023 and a little over tangible book value at March 31, 2022.

We continue to expect to meet or beat projections of core earnings, excluding PPP, between $4.75 and $5 in 2022 and have had a very good start in the first quarter. You can see that. And we are -- believe that we will be well over $6 in 2023 and are reaffirming that guidance.

As some of you may have noticed, we disclosed in our proxy this week that the top 3 executives at the company, and that is Sam, Carla and myself, again decided to take all our 2021 annual bonuses in Customers Bancorp stock. We remain extremely bullish about our company.

So at this time, I would like to ask Ludy to please to help open it up for Q&A.

(Operator Instructions) And your first question comes from the line of Peter Winter from Wedbush Securities.

Jay, you maintained EPS guidance that you gave in January, the $4.75 to $5. Just what are you assuming in terms of interest rate hikes? And if you could just remind us what the impact is to net interest income from a 100 basis point increase in rates.

Carla, do you want to take that on?

Yes. So we are factoring in about 9 rate hikes, getting up to a rate that's between 2.25% to 2.50%. And as far as net interest income, I'll make a couple of comments there, focusing on 68% of our assets are interest market rate sensitive and our deposit betas are somewhere between 45% and 55% in an up 100 basis point environment. But also, when we think about increasing net interest income over the future period or in 2022, we're really looking at a combination of 3 things in that -- the 3 levers; rate, volume and mix. And all those will contribute to increased NII.

So if you look at our total core loans at the end of March 31 and you factor in about $500 million of quarterly loan growth, that will get you a low double-digit growth. And if you apply that to NII, that will be a good indication of the increase in NII for 2022. So I hope that's helpful, Peter.

It is. I guess I'm just surprised that the full year number didn't go up with the increase in rates and the good momentum you had in the first quarter.

Peter, we'll let you make some estimates, and we just give you conservative guidance.

Okay. And Sam, in the prepared remarks, you talked about that you were tightening the underwriting standards. I was wondering, could you give a little bit more color on what you're doing?

Sure. Peter, it's Andy Bowman. I can take that. I think as we talked about the diversification in the book of business, the growth what we're really focused on is in the extremely low credit risk asset lines of business. We talked about the lender finance and the funds finance. So we're extremely focused on those lines of business. And the positive indicator on that is those are variable rate loans as well. So we're also helping ourselves from an interest rate volatility perspective.

I think also Sam had talked about too, is with our decision to obviously hold firm, if not decline a little bit, in the consumer installment. We just feel right now, based upon the economic environment that's out there, that that's prudent. We have consistently tightened up our underwriting standards as far as projecting out, in our underwriting process, the impact of an escalating rate environment. We've always done that, but we've increased sensitivity around that, especially with the latest impact from the Federal Reserve around the increased rate and rapidity in which they are expecting to increase interest rates.

And finally, we're going through a very in-depth analysis right now, looking at every steel credit that is coming up for a maturation, loan maturity, rate reset, to make sure that those credits will continue to work in the current rate environment. If not, taking the proper steps to alleviate our exposure to those types of credits. So I hope that helps, Peter.

Yes, very helpful. And just my last quick question, just -- you have the share buyback plan in place. Any updated thoughts on buybacks here versus supporting what seems to be a very positive loan outlook?

Yes, Peter, I'll take that. We look at capital allocation on a regular basis. And right now, we have, available to us, all the tools that we believe we need. We're using [10b-1] as we did buy back some of our stock and just not much in the first quarter. We will remain opportunistic and if we believe that the best strategy depending upon what's happening in the market is to buy back, we will do that. But we believe, in our opinion, that the opportunities for growth and very responsible growth remain very crude, very real for us. So buyback is not a priority, but it's an option available to us.

Your next question comes from the line of David Bishop from Hovde Group.

Welcome, David, and in joining the coverage team.

Good to be covering you all. In the guidance, Jay, in terms of the average loan growth, I think you mentioned $500 million per quarter. Just remind me, is that ex-PPP and warehouse? Is that at the core basis? Just curious what that excludes.

Sam, you're going to take that?

Yes, David, that is ex-PPP, but it is inclusive of mortgage warehouse. So as an example, in the first quarter, we achieved that target with $1.1 billion of net originations ex-warehouse and PPP. But including warehouse, but excluding PPP, it was over $550 million of that growth.

And all I would add to that is, David, that our pipelines remain extremely robust. And if anything, we might positively surprise The Street second quarter than be lower than $500 million.

Got it. And then I appreciate the chart, you sort of lay out the build in excess liquidity or short-term liquidity. I guess, it's about $4.4 billion. I think that's end of period, and it's doubled over the past year. Do you see that normalizing back to the $2 billion level over this year or the next 2 years? Just curious whether you're sort of targeting that short-term liquidity to wind up over maybe the next 6 to 8 quarters or so.

Yes. A couple of comments on that. And we see that pretty much staying flat over the next couple of quarters when we think about liquidity. I'll just point out that we have $2.2 billion of PPP loans that are still on our books, which we expect the majority of those to be forgiven by the end of this year, which essentially creates cash that can be reinvested to support the organic loan growth. As I mentioned in my prepared remarks, that comes in a little lumpy at times and it's difficult to predict.

On our investment security portfolio, we probably get about $90 million of quarterly cash flow, $360 million annually, which is also used to help support the organic loan growth that Jay and Sam were talking about. So looking out into 2022, we are comfortable we have sufficient ample liquidity to support the loan growth.

Got it. And then one final question, noted in the earnings release, the narrative about the BMTX servicing agreement and the savings of about $60 million pretax by next year in the deposits. Just curious maybe the nature of deposits, how much of those are noninterest-bearing and where will that $60 million come out of the run rate? Is that coming out of expenses, interest expense? Just curious where we should think about that $60 million flowing out on the income statement.

Yes. So that pretax $60 million is running through operating expenses in the technology-related bank communications financial statement line item.

And the average cost of all of those deposits over the last few quarters have been about 30 basis points. And so you can factor that in, in terms of determining what might be the impact on the cost part.

Your next question comes from the line of Steve Moss with B. Riley Securities.

Maybe just starting with CBIT here. Sam, you mentioned accelerating client adds in the second quarter. Wondering if you could quantify how you're thinking about the pace for the upcoming quarter. And then also maybe a little bit of color about the underlying mix of clients you're adding here.

Sure. Absolutely, Steve. So firstly, in terms of the overall growth, we had guided towards doubling our approximately 25 plus or minus year-end customers. Within the quarter, at the end of January when we announced our full launch, we were very pleased that within 60 days, especially through the addition of nearly a dozen new team members over the past 1 or 2 quarters, with a focus on onboarding SLA and best-in-class compliance and risk management, we really feel that we were able to take on more than we initially anticipated. Hence, the tripling of our initial guidance to about 75 new customers, 74 to be precise. So as we look into the second quarter, pipeline is starting to build as opposed to processing folks that came to us very quickly, which is the point about acceleration.

In terms of overall mix, as you would expect, the large customers represent a smaller amount of the total customer base, so a larger amount of the total deposit base. So most of our customers over the period of the next couple of quarters will be focused more on the investor side -- the institutional investor side. However, much of the deposits, especially the stable and growing deposits, are going to be coming from the exchanges, the OTC desks, the stablecoin providers, et cetera.

Okay. Great. That's helpful. And then in terms of -- maybe just switching a little bit to loan pricing here. Just kind of curious as to what's the blended new money yield on originations, especially for the, I guess, specialty finance verticals as they're going on here.

Sure. I'll speak at kind of by vertical, Steve, if that's helpful for you. If you look at our lender finance and our fund finance business, typically starting at a benchmark of benchmark plus 200 basis points. That's sort of where they began. The smaller the loan size, the higher the spread. And obviously, increasing all floating rate (inaudible) shorter term in duration. Other components of our growth this quarter, as an example, on multifamily, we are pricing or initiating term sheets at about 4.5% in that business right now. And as you would expect on the residential mortgage side, north of 4% as well.

Okay. And then in terms of just -- I hear you guys on the expense side, but maybe just a little color around additional recruiting efforts, just kind of how you're thinking about additional hires as the quarter goes on. And just -- I think I also noticed in the deck, looking at additional C&I teams in adjacent markets, just kind of any incremental color you can give there.

Sure. Absolutely. So I think that the first quarter was more of a foundational digest quarter. So we didn't -- we added to existing teams. We changed the mix of some teams, brought on some new relationship managers and executives. We -- as we stated, we have and we will continue to evaluate the new C&I teams from a geographic expansion perspective. Sitting where we are at this point in time, there are no immediate hires in the pipeline that we expect to bring in, in the near term. However, we continue to recruit and evaluate.

But as I mentioned, the focus, sitting where we are today, is really on building presence, establishing credibility. Our community banking business overall only grew by $45 million in the first quarter. So to put it in perspective, as you can see, the expansion markets and growth markets are still finding their footing and will add to the growth in the latter half of the year.

And in terms of new initiatives, as Sam mentioned, we are launching our security-based lending also. And we think that will be a very attractive offering [of team's] extremely strong credit quality. So that will be a niche and we've already recruited the teams for that. And that should be -- you should expect us to launch that and start to see results in the second half of this year.

Your next question comes from the line of Matthew Breese from Stephens Inc.

I wanted to go back to the deposits a little bit. There are some large swings in the balances this quarter. And you mentioned in the release running off balances that are likely to be higher beta. Could you just give some color on this process?

Sure. So we ran off a couple of hundred million dollars of CDs, several hundred million dollars of our, what we call, Ascent, our savings account product -- digital savings account product and other sort of market rate sensitive -- more market rate sensitive deposits that may not be fully reflected in our spot cost of deposit, but will benefit us from the deposit beta perspective in the 2022 rate environment.

Understood. On the CBIT deposits, could you give some sort of sense of where you expect year-end balances to be?

Yes. So the guidance that we've given is that we expect there to be several billion dollars of CBIT deposit growth in 2022, of which we've achieved just several hundred million of that to date.

Great. That's very helpful. And just my last one. On Page 19 of the deck, you break out the consumer installment stats and I'm particularly interested in how you've been able to shift the less than $50,000 in income cohort to 17% versus 29% last quarter. Could you give some color that, please?

Yes, absolutely. I don't have the data off the top of my head. But if you look at the appendix, we have a chart [over time], which will help provide some color on that, and happy to field a follow-up conversation (inaudible).

And your next question comes from the line of Russell Gunther from D.A. Davidson.

I wanted to circle back to the deposit data discussion briefly. The target that you set out, the 45 to 55, seems particularly high given all the success on the noninterest-bearing growth front to date and what's been discussed going forward. So be curious to get your view on your ability to outperform that range and what that might mean for the NII guide Carla provided earlier.

Yes, I'll take that first, and then Carla, please help add anything to it. What Carla mentioned to you is that that's our conservative deposit beta assumption, assuming an instantaneous 100 basis point increase in rates and that sort of the thing. Now realistically, that's -- it's going to be more gradual.

And realistically, as we've shared with you that we are looking at at least $500 million worth of earning asset growth with majority of that being variable rate, so you got to enter that into the equation also. And that's why we are sharing with you that we are asset sensitive and we remain asset sensitive rather than just focusing on the details on a quarter-by-quarter deposit beta.

Anything you want to add to that, Carla?

No.

I appreciate that, Jay. And then switching gears a bit. You guys mentioned the kick off of the digital asset lending over the next couple of quarters. Just curious in terms of the expected balance sheet growth there, how you would anticipate that ramping and whether or not any of that is included in the $500 million quarterly guide this year.

Sure. Absolutely. Russell, I'll take that. So we will take a -- and this is -- I think we first mentioned that we would be evaluating this vertical a couple of quarters ago. So we're taking a very prudent crawl-walk approach initially as we launch this business, focusing on some of our most institutional customers.

Taking a cryptocurrency, specifically, Bitcoin as collateral regardless of low LTC and margin type provisions is new at Customers Bank. And -- however, it is a secondary source of collateral. We'll only be lending to customers that we would, otherwise, consider lending to our existing credit program and credit policy. I think that's worth mentioning.

In terms of thinking about the growth, again, it's really going to be focused on establishing a multiproduct (inaudible) relationship with our most important institutional customers as part of our CBIT platform and our deposit franchise. So we will grow as our customers would like us to grow over a period of time, but it's difficult to put a number on that at this point in time.

And what I would say is given the crawl-walk approach that I mentioned, you should more or less assume it's part of the $500 million of net quarterly guidance.

Yes. Russell, we are focusing on growing our balance sheet more so in the first half of the year on the asset side and more so on the liability side in the second half of the year. So don't see parallel shift -- parallel growth on both those areas. And that's why we are very confident and as Carla mentioned, it's sort of a rate volume mix approach to NII growth and revenue growth. And that's what gives us the confidence that we're going to meet or exceed the guidance that we provided to you.

That's very helpful. Just last one for me, guys, is any color behind the $5 million run rate in Business-as-a-Service revenue beginning in the back half of this year? Is that a quarterly run rate, an annual run rate and just any additional color in terms of the drivers?

Sure. Absolutely, Russell. So we are -- as we mentioned last quarter, initiative for 2022, we're in the final throes of lining up our first customer there, and we expect it to launch, call it, the next 90 days or so approximately, so in early third quarter. And from an overall tech integration perspective and a volume integration perspective, which leads to fee income perspective, we expect $5 million of annual run rate in the second half of the year. So hitting that in the second half.

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

Sam, you mentioned and Jay mentioned putting on -- (inaudible) variable rate product, increasing that asset sensitivity, just kind of curious, as we think through the rest of this year, obviously, increasing asset sensitivity right now seems like a good thing to be doing. At some point, when do you, I guess, kind of reach the point where you want to start stabilizing that, maybe even reversing that? Is that thought to be later this year? And just if you can talk through a little bit the strategy there.

Yes, I'll take that on. I'm so glad you're asking a strategy question. Frank, we -- our approach to asset liability management and interest rate risk management is that we want to maintain our margin and we'd like to maintain the growth in net interest income, and there will be times when volume has an impact, there will be times when rate has an impact and there will be times when mix has a greater impact. But at the end of the day, for the year on a year-to-year basis, we would like to stay neutral and look at asset sensitivity or liability sensitivity only on the margin depending upon what impact rate, volume, mix can have on our guidance that we provide to The Street.

So we are not in the business of forecasting it. And -- but I've already shared with you that we believe that it will be very difficult for the Fed to have a soft landing. And that's why we believe that there is a high probability of a mild to a moderate recession. If that happens, the interest rate environment, who knows what it will be. It all depends upon inflation. It depends upon geopolitical situation. And that's why we will not make any bets on interest rates, and we will remain neutral to somewhat asset sensitive because it's dependent upon the quality of our assets.

It's the credit risk and what the strategies that we've been deploying as you heard from my colleague, Andy Bowman, is that asset quality and credit risk management is our main focus. And that's why the [pitches] that we've identified, specialty lending, security-based lending, are all secured loans. And they are all very much customer-focused product and tech-focused. And we have an edge over traditional banks.

And we will continue to focus on those. And our teams are very confident that they will be able to meet or exceed the goals that we are sharing with you. And that's what we are focused on. And we will at the -- we will adjust our mix after we see results and not get into the business of forecasting interest rates.

Okay. So overall, you expect not to necessarily increase your asset sensitivity significantly from here. Is that kind of the message? And what is the offset to this variable rate product going on the books? It seems like at an increased rate?

Deposits, which are high-quality core deposits from all sources and makes good loans that will perform well in every economic scenario, manage our expenses, continue to show positive operating leverage and delight customers. That's what we are focused on.

Okay. Okay. So those betas that Carla gave, I guess, are pretty good to continue to use throughout the year?

Right.

Okay. And just a quick follow-up on [CBIT]. I'm sorry if you mentioned it, but in terms of those that are being onboarded, it sounds like that's mostly still new customers to the bank as opposed to current commercial customers looking to adopt, looking to get on to that ecosystem. Is that right?

That's fair. Frank, at this point in time, a lot of the growth, those are all new customers that are being onboarded in the calculations that we shared. Over a period of time, our digital banking team, different than our digital assets banking, our digital banking team is very (inaudible) integrated with business [unique] leaders across the franchise, and we're spending a good amount of time in other verticals beyond digital asset banking as well.

Your next question comes from the line of Bill Dezellem from Tieton Capital.

I'm going to apologize in advance for this macro question, but would you please reconcile your view of how you achieve the loan growth that you had when just this morning, GDP came out being negative 1.4%, at least for the sort of the early number. Those 2 just don't seem to match.

Sure, Bill. There are economic factors and growth factors and then there are niches. When you saw a negative GDP growth, there are so many reasons behind that and that's impacting certain industries more so than others, and then you have inflation on top of it. Where -- that's why specialty lending and niche banking is, in our opinion, the future of banking and financial services.

You can't be all things to all people, then you will get average results. But if you can be fantastic, thanks to certain niches, you will get above average results. And so we are very disciplined on that. And like we shared with you, our specialty lending businesses and the niches that other units that they're getting into, which is security-based lending, irrespective of what happens to GDP, they are growth businesses. And you will see more growth in those.

But like Sam shared with you, our C&I loan in the community banking, that was very moderate, $45 million or so. That's reflective more so with the way GDP numbers are showing -- that were released this morning.

And I will just add, Bill -- as you think about the specialty lines of businesses that we mentioned, our lender finance business, as an example, is secured by a pool of collateral and associated managed rate, which is, in many cases, based upon a lag of historical leverage and origination of loans, which is, I think, important. So we'll track that over a period of time.

Our fund finance business is very much linked to capital raising efforts. And so -- and while there may be temporary slowdowns or changes in GDP, as we all know, and your capital private equity fundraising is at all-time highs. And when you think about deployment of that capital, the deployment of the capital still maintains based on maybe less leverage and there will be more equity. Having said that, those types of investors are still active across different macroeconomic environments.

And your final question comes from the line of Michael Perito from KBW.

It's -- obviously, most of my questions have been asked and answered at this point. But I just want to just drill down on a follow-up question around kind of consumer lending credit appetite and outlook here. And really kind of 2 parts to this question.

I guess, number one, when you look at the direct-to-consumer lending you guys are doing today, how do you guys try to factor in -- with your income range, I imagine this isn't totally relevant for all of your customers. But obviously, consumer balance sheets are a bit stronger than typical. And as you incrementally try to grow that book, just curious how you factor that into your underwriting here.

And then secondly, on the Banking-as-a-Service side, given you guys are north of $10 billion, I imagine a good portion of those initial pipeline candidates are likely in the consumer lending bucket? Please feel free to correct me if I'm incorrect there. But just wondering what your plans are for those originations. Are those going to be balance sheeted? Are those going to be mostly sold? And is there flexibility around that if the secondary market for consumer lending gets weaker?

Yes. Sure. I'll start off with the first question, when you talk about the income levels from the borrowers. The model that we have is a proprietary model, a very detailed model. Carla kind of mentioned before that the model itself is not purely a (inaudible) based model, but we look at a lot of different attributes. And I think Page 19 kind of indicates what those attributes are.

But one of the key items we look at is certainly income level, as we talk about. But the other more important key income item that we look at is more the DTI impact and that kind of covers us both from regardless as to the level of income, which is certainly important, more [abstracted] is the level of debt that the individual has. We will continue to look at obviously lending (inaudible) borrowers that have higher personal income levels.

We think borrowers with higher personal income levels have had upside benefit because when we talk about the escalation pay cycles in the more middle market professional careers. So that's helping to offset some of the pressure as well around the inflationary pressure. So we are very focused in our model on those 2 components, which is (inaudible) income level and then certainly the DTI level.

I'm going to kind of move to Sam for a more strategic analysis perspective as to how we're looking from an origination standpoint. But I think as we mentioned before, we're really looking right now but pretty much of a stack position to hold the portfolio where it is with the possibility of a slight decline in the overall portfolio. But as far as how we're going to handle those originations and (inaudible).

Absolutely. So focusing on the Banking-as-a-Service, associated originations, but leading to the fee income, Mike. To kind of put it in perspective, assuming sort of linear origination over the course of the year, you have a fee income relationships with a -- take consumer marketplace lender as an example, in the several hundred millions up to $1 billion of, say, annual origination would still never lead to more than a few million dollars on your balance sheet at any given time, given that these are just typically held on balance sheet for just a couple of days. Even if you went to several billion dollars that you scale that business origination, you will still be more or less (inaudible) linear origination threshold and that sort of $10 million to $20 million at any given time.

The second thing that I would add is that we have the luxury of having worked with a number of institutional investors, rather originators in the fintech space and have an ability to cherry pick best-in-class and then also are focused on originating for a fee income basis only loans that we would, otherwise -- despite the thresholds that I just mentioned that we would, otherwise, be comfortable holding for investment.

That's helpful. So that last point sounds fairly critical here. So in some type of situation where the secondary market for these Banking-as-a-Service consumer originations dries up, you guys are originating credits where you'd be comfortable holding, which would give you time to kind of adjust your originations down in a more volatile environment and make sure you're not left with too much -- basically, for lack of a better way of putting it, bad credit on your balance sheet?

Yes. I think it's important to note, I mean, regardless of whether we're doing it is intended to underwrite to sell or underwrite to hold, it's the same strong credit criteria. We're not changing the credit underwriting criteria, the credit underwriting attributes of the individual loans, regardless of whether they're going to be held on the balance sheet or to be sold as a Banking-as-a-Service type of sector.

And the reason for that is exactly what you mentioned. In case that environment would dry up and we did have to hold (inaudible) quality as the loans directly that we're originating to be held on the book.

And we have reached the end of our Q&A session. I would now like to hand the conference back to Mr. Jay Sidhu for the closing remarks.

Thank you very much. We really appreciate your interest in our company. Please give us a call if you have any further questions, and have a good day.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.