Customers Bancorp Inc (CUBI) 2021 Q4 法說會逐字稿

Good day. Thank you for standing by, and welcome to the Customers Bank 2021 Fourth Quarter and Year-End Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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

Thank you, Ludy. And good morning, everyone. Thank you for joining us for the Customer Bancorp's earnings call for the fourth quarter and year-end of 2021. 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 access the deck by hovering over and clicking on the line Earnings Presentation. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to use download or print 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 the information or future events, except for 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 our website.

Now at this time, it's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you very much, Dave, and good morning, ladies and gentlemen. Thank you so much for joining us today this morning for the year 2021 as well as Q4 2021 investor call. 2021, in our opinion, was a remarkable year for the company. And please join me in saluting our team members for their unwavering commitment, their dedication, their hard work and helping Customers Bank make huge remarkable achievements. We are so proud of our team. And as you will see later in the presentation today, we've also had the privilege of attracting talent this past year or 2 from several very well-known, high-performing institutions.

Now on to our presentation. Joining me this morning is Sam Sidhu, the Chief Executive Officer of Customers Bank; Carla Leibold, the Chief Financial Officer of Customers Bancorp; as well as Andy Bowman, the Chief Credit Officer of Customers Bank. In 2021, we achieved record core earnings for the full year of $343.6 million or $10.20 per share, up 187% over full year 2020 and Q4 2021 core earnings of $100 million or $2.92 per share, up 83% over Q4 '20. Core EPS, excluding PPP, for the full year was $4.41 per share, up 90% over full year 2020 and well above our guidance of $4 for the year 2021.

Our vision for growth has remained a part of our story since the beginning. As you can see in Slide 4, we inherited or got involved with Customers Bank back in 2010 by making personal investments of $17 million in this company, which was a problem institution at that time. In a span of 12 years, Customers Bank has grown from this $250 million problem bank into a digital-first, technology-driven financial institution with assets of approximately $20 billion, which equates to a staggering CAGR of about 40% and clearly puts us as a top 100 bank in the United States.

On to some other accomplishments. As promised, in January of 2021, we divested BankMobile, which became BMTX, and we are pleased that we were able to provide a special distribution of BMTX stock to our shareholders valued at approximately $75 million in Q1 2021. We are now also preparing for the exploration of the deposit servicing agreement with BMTX by the end of this year. We expect that due to our success in generating considerably above-average, low-cost core deposits, this exploration will be accretive to our net income by about $16 million pretax in 2023 and beyond.

We also funded in 2021, either directly or indirectly, about 256,000 PPP loans totaling $5.2 billion, bringing the total PPP loans funded to over $10 billion and to over 350,000 small businesses across America. We earned close to $350 million of deferred fees from SBA to the PPP loans, which is significantly accretive to our earnings and capital levels, as these loans are being now forgiven by the government. This initiative not only helped save over 1 million American jobs but also would have added approximately $300 million to our common tangible equity by the middle of this year.

In October 2021, we launched a blockchain-based instant payment token that immediately began serving a growing array of B2B clients, who want the benefit of instant payments and generated close to $2 billion of low cost, no -- or low-cost deposits in only 90 days. We will provide more details about this initiative in a few minutes.

Now let's get on to the financial highlights. First, from the earnings perspective, I will focus on the core earnings, Slide 6. We earned a record $2.92 in core earnings, which represented net income of $100 million, as I shared with you earlier, and that's up 83%. This translates to a core return on common equity of 33.7%, return on average assets of 2.11% and pretax pre-provision ROAA of 2.67%, and our margin, net interest margin, was 3.12% for the quarter.

Now moving on to the balance sheet. We ended the quarter with $16.5 billion approximately in core assets, excluding PPP. Our loan book was $11.3 billion at the end of the quarter. C&I was up about 45% or $1 billion. Consumer loans were up about 40% or $500 million. Commercial real estate, owner-occupied, was up about 18% or $83 million. Construction loans up about 41% or $58 million. As we saw some risks in the multifamily business, so we continued to let that decline, but that's turned around. You saw an increase in our multifamily loans in the fourth quarter, and you should continue to see a much greater growth this year, because we see that as a very good -- good credit quality, good asset quality asset now as we are building that pipeline.

Our loan pipeline, overall, and our backlog have grown to an all-time high levels across the franchise, and we expect loan growth to continue into 2022 at double-digit levels. Total deposits this past year grew by $5.5 billion year-on-year, driven by monumental efforts from our commercial teams amplified by our digital bank team's success in deposit gathering, associated with our Customers Bank instant token or CBIT. And we brought in, as I've shared with you earlier, about $2 billion in low cost or no-cost deposit.

Our demand deposits are up 131%. Our noninterest DDA were up 90%, and all this growth while maintaining excellent credit quality. Strong asset quality is at the core of our franchise, and we continue to have superior credit quality compared to the peers with NPAs at just 25 basis points and reserves to NPLs of about 278%.

I want to thank you for all your continued support, and it's amazing to think that we are just a young company and getting started in the next phase of our growth. I will now turn it over to Sam Sidhu, the President of CEO -- and CEO of Customers Bank to take you through a lot more detail. Sam?

Thank you, Jay. Another incredible quarter capping off a record year for our company. Flipping to Slide 7, let me update you on our strategic priorities, both are incredible accomplishments, in 2021 as well as our ambitious road map for 2022, which we are hyper focused on delivering. This helps explain what makes Customers Bank so unique and what has driven incredible value creation for our shareholders.

In 2021, CUBI was the #1 bank stock in the country, and we expect that our innovation and unique business model will continue to drive strong returns for our shareholders. In 2020, we laid out a plan for what we set could achieve significant value creation for our shareholders, and we are proud to have delivered on that guidance resulting in a tremendous return. Firstly, on Community Banking on this slide, in 2021, we recruited several new teams covering new geographies in Texas, Florida, the Carolinas and the Pennsylvania capital region, plus a reboot of our Chicago office. This brought the annual total to 4 new expansion markets. We also added several new relationship managers and executives to our existing teams over the course of the year as well as in the last quarter.

We are also focused on continuing to grow our existing business lines. As previously stated, we began maintaining and will now begin to grow our multifamily portfolio. SBA originations grew by over 150% in the year, and we also achieved our target of quadrupling our gain on sale fee income by ending the year with $6.2 million in total income. In terms of 2022, community banking priorities, we will continue to recruit regional C&I teams, and in fact, have several conversations in flight. Our community verticals are expected to grow by about 10% or more, while SBA is expected to grow by over 50%, albeit off of a lower base.

Moving to Specialty Lending, in the middle. In 2021, we expanded our niche verticals and launched 3 new lines last year. Fund Finance, Technology and Venture Capital Banking as well as the Financial Institutions Group. These new verticals are close to our existing core competencies, enabling strategic cross-sell to existing customers. To help emphasize this, in the last quarter, we had over $350 million of referrals from existing customers. In general, these verticals operate with inherently low credit risk, as you heard from Jay, that come with deposit-rich clients and are supported by high operating leverage characteristics. Our existing verticals also performed incredibly well in the year with lender finance growing by 77%, real estate specialty lending by 60% and equipment finance by 27%.

We also, importantly, outperformed on our mortgage warehouse target of about $2 billion ending at $2.4 billion. In 2022, in Specialty Lending, we will continue to recruit lending teams to support future growth in our existing verticals, and we will evaluate new verticals, including digital asset lending. This year, new lending verticals, including real estate specialty lending, which was technically formally launched just prior to '21, are expected to cross over $1 billion in cumulative outstandings. Over time, each of these new verticals is expected to be at least $1 billion plus individual business line.

Moving to the right side of the page to Digital Banking and our technology efforts. We have established ourselves as a leader in technology and innovation in the digital banking and fintech space and in the banking industry more broadly. In 2021, we successfully completed a tech reorganization, hiring a number of new key senior executives and team members. We also completed a corporate rebranding and website relaunch, which has been very well received by our customers and the market. And very importantly, we achieved a big milestone in the quarter, crossing over 0.5 million customers acquired through our digital banking platform. At Customers Bank, we have created a unique, extremely profitable credit-led neo bank within our bank that is acquiring consumer and small- and medium-sized business customers sourced through digital channels at scale.

Moving to the digital consumer more specifically. Our direct personal loan origination business topped $1.7 billion of cumulative lifetime loan sourced, underwritten and funded through our credit program since inception. We ended with additional personal loan portfolio of $1.5 billion. In terms of digital small- and medium-sized businesses or SMB, we funded over 250,000 PPP loans in the year, bringing our total, as you heard from Jay, to 358,000 PPP loans for $10.3 billion funded, generating approximately $350 million in origination fees for the bank. We have now attracted $1.9 billion in CBIT-related deposits in the first 90 days of launch.

Finally, we launched a banking-as-a-service effort for our fintech lending partners. As we look forward to 2022, we will be seeking to add a number of digital first consumer and SMB products to our portfolio to offer multiproduct relationships to our 0.5 million plus digitally native customer base through credit cards, term loans, revolving lines of credit in the coming quarters. This presents a tremendous opportunity for our data science and digital marketing teams, who are advancing our data analytics to help our team prioritize products on the road map as well as create digital cross-sell journeys for this customer base. Importantly, last but not least, we expect over $5 million of run rate revenue in 2022 as a result of our Banking-as-a-Service efforts, which we expect to increase to $15 million to $20 million in revenue in 2023.

Moving to Slide 8. As we evolve from a community bank to a digital forward super community bank and beyond, our talent needs have shifted significantly and the slide here shows firms we have recruited talent from in the last year. We've hired from best-in-class organizations in each of the new required competencies related to our strategic priorities. We have also found that our entrepreneurial environment and our rapidly scaling business is an exciting draw for team members from much larger and in many cases, much more tech-oriented institutions, who in turn bring best practices and deep industry experience to Customers Bank.

Flipping to Slide 9. A quick recap on the exciting launch of our blockchain-based instant payments platform as well as our creation of the digital asset banking team. The circle on the left lays out the vertical opportunities as we see them today, with our initial primary focus on new customer acquisition, led by the digital asset vertical. We launched with approximately 25 customers in our soft launch and are creating sticky customer relationships strengthened by a powerful payments network effect. 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 in full launch mode now and expect significant customer and deposit growth in 2022.

Moving to Slide 10, on PPP. Here, we lay out a summary of the PPP balances at year-end, which continue to decline. In addition to the purchase of the $529 million portfolio in the third quarter, we purchased another $313 million portfolio for a similar discount in the fourth quarter, adding several million dollars of additional PPP revenue, most of which we'll realize in 2022. As Jay mentioned, we saw a slowdown in PPP fee forgiveness application momentum, which surged after our technology partnership with the SBA on the direct forgiveness platform. Voluntary forgiveness has remained slow in January. This impacted NII versus consensus, but this is a timing move. It's a question of when, not if, and this will be pushed into 2022. We still have about $90 million of deferred origination fees, which we expect to be recognized, mostly this year.

Moving to Slide 11. We are incredibly proud of our record loan growth in the quarter, which is setting us up nicely for 2022 and tracking well ahead of the industry. We were very tactical throughout '21 gearing up for the launch of CBIT by adding commercial teams in our expansion geographies and many verticals. These teams will be ramping up significantly in 2022. Jay walked through some loan growth characteristics, but to summarize, loans, excluding PPP and mortgage warehouse, grew by $1 billion in the quarter or 18% year-over-year. We have had significant improvements in our loan mix and our pipeline and backlog remain at record levels. We are reaffirming our guidance of an average of $300 million to $500 million of quarterly loan growth, with a bias to the upper end, which we expect to be double-digit loan growth this year.

Moving to deposit growth and mix on Slide 12. We had an incredible year with $5.5 billion of growth or 48% year-over-year. Importantly, our noninterest-bearing deposits were up 89% to $4.5 billion. As we laid out last quarter, we took a number of actions with the addition and future expectation of significant low to no-cost CBIT deposits and have further reduced our cost of funding 36 basis points for the quarter and 29 basis points spot rate. These initiatives, coupled with a reduction in mortgage warehouse DDAs of about $500 million, which was linked to market activity as well as lower seasonal student deposits down $300 million, resulted in a slight quarterly decline in balances; however, this was in line with our expectations. Many banks have bottomed out on deposit cost reduction opportunities facing the backdrop of a rising rate environment, but we expect to still have room to go, supported by our deposit remix and significant CBIT deposit growth potential.

With that, I'll pass it to Carla to run through the rest of the financials.

Thanks, Sam, and good morning, everyone. I'll keep my comments focused on 5 key topics. The first is strong growth in net interest income generated by the core bank; number two, ample liquidity, resulting in significant investment portfolio growth and the ability to fund future organic loan growth; the third, asset sensitivity and being well positioned for future rate hikes; fourth, exceptional credit quality; and number five, significant accretion in capital and tangible book value.

Turning to Slide 13, I'll start with core net interest income and net interest margin, excluding PPP. This slide shows a trend of the increasing net interest income over the past 5 quarters, largely driven by strong growth in core, C&I and consumer loans. Compared to the year-ago quarter, fourth quarter 2021 net interest income increased 18%. You can also see that we've maintained our loan yields quarter-over-quarter, while continuing to drive down our cost of deposits. Additionally, there has been a significant increase in the percentage of deposits that are noninterest-bearing year-over-year as well as a 26 basis point decline in the cost of interest-bearing deposits.

Moving on to Slide 14. You can see tremendous growth in our liquidity position, particularly in the back half of 2021. Our investment portfolio has more than tripled year-over-year and has doubled over the prior quarter. At year-end 2021, we had about $6.3 billion of liquidity, which includes committed borrowing capacity of close to $2 billion. Our investment portfolio remains well diversified with the majority of the portfolio invested in MBS and CMOs. Our overall strategy remains unchanged in that excess cash is first used to pay down any higher cost or wholesale funding, before it is deployed in investment security and then ultimately used to fund organic loan growth.

Slide 15 shows the repricing characteristics of our interest-earning assets. I'll make a few comments here. First, 64% of our interest-earning assets are market sensitive, meaning that net interest income will increase in a rising rate environment. And second, given the transformational improvements that we've made in our deposit franchise, over the past year or so, we are expecting our deposit costs to be significantly less sensitive to rising interest rates. From a deposit beta perspective, we've internally modeled using 15% to 25% and an up 25 to 50 basis point scenario, and 40% to 50% in an up 100 basis point scenario.

Briefly turning to Slide 16, a few high-level comments related to credit quality and reserve levels. Overall, our asset quality remains exceptional. Our credit reserves are strong and our near-term credit outlook remains stable. For 2021, we had less than $3 million of commercial charge-offs and all of our prior commercial loan deferments became current by year-end 2021.

Moving to Slide 17. This slide really highlights the significant improvement in our total risk-based capital over the periods presented. The estimated total risk-based capital at the end of fourth quarter 2021 is up about 139 basis points over the year-ago period, despite the $82.5 million preferred stock redemption in the third quarter of 2021, which on a stand-alone basis decreased total risk-based capital by about 70 basis points. At December 31, 2021, our TCE ratio, excluding PPP, was 7.5%, up 111 basis points from the 6.4% reported a year ago. This accretion is driven by the profitability of the core bank as well as PPP related revenues. At December 31, our tangible book value was $37.21, that's up 33% year-over-year. Lastly, if you fully pro forma in the remaining $90 million of deferred PPP origination fees, our tangible book value is at or above $40.

And with that, I'll turn it back to you, Jay.

Yes. Thank you very much, Carla. And as you can see, we are really proud of this remarkable achievements of our team, and we are very upbeat about the future prospects of our company. Looking at the way we've summarized on Slide 18, we expect strong core above-average, double-digit growth in loans as well as low-cost core deposits, while maintaining our above-industry average credit quality. And we are focused on improving the profitability as well as bringing our efficiency ratios in the low 40s within the next 12 to 24 months, through a combination of revenue growth and prudent expense management over the next 2 to 3 years.

We are very well positioned for a higher interest rate environment. As you heard from Carla, with 64% of our interest earning asset is expected to be market sensitive and the lower deposit beta in the current environment. We've modeled in 3 rate increases in 2022, and we believe that maybe there is a possibility that the rate increases will continue into 2023. However, it doesn't matter to us because we believe it will be prudent for us to remain somewhat asset sensitive.

From a strategy point of view, the best-in-class tech facility of Customers Bank is a huge strength of ours compared to the rest of the industry, and we believe this has allowed us to be a major participant in the PPP program, which generated $300 million of -- approximately $300 million of common equity for our shareholders. And it's also helped us incubate new lines of businesses that we believe will support our sustainable above-average growth over the coming years. The financial benefits of PPP aside, we project our recurring core earnings power to be in the $4.75 to $5 range in 2022, and well above $6 per share in 2023, 2 or 3 years ahead of our previous guidance of $6 by either 2025 or 2026.

We believe our stock is attractively valued trading at about 1.5x the real current adjusted tangible book value; like Carla explained, that the number is about at least $40 a share. And it's less than 10x our guidance of 2023 earnings, and we see huge upside potential for our shareholders. I'm also pleased to share with you that 100% of our team members at end of year 2021 were shareholders of the bank.

So with that, I would like the operator to please open it up for Q&A.

(Operator Instructions)

And our first question comes from the line of Casey Haire from Jefferies.

Wanted to touch -- I'll start on the loan growth. Obviously, a pretty big step up here in the fourth quarter. And if I heard you right, Jay, it sounds like the pipelines are at an all-time high. So appreciate the double-digit pace of loan growth, but could you put a little bit more -- could you frame that a little bit more? Because I mean we're coming off a 28% linked quarter annualized level, and 10% just seems like a very low bar.

Sam, you want to take that?

Sure. Casey, so as we think about 2021, 2021 was a back-ended year for many banks with the first half of the year being relatively slow as we all recall and have blocked out of our memories. Having said that, as we look forward to 2022, we will be building off of the momentum that we've created in the fourth quarter. To put a little bit of a finer point on the loan growth. It was led by our specialty businesses. Fund Finance grew by about $250 million in the quarter. Our lender finance business grew by nearly $300 million in the quarter. So as we look forward in 2022, we gave guidance of $300 million to $500 million in Q3. We've adjusted that to the higher end of that range, closer to an average of $500 million per quarter in 2022.

And I think, Casey, as I also mentioned, we see opportunities in the multifamily area that you only saw a $100 million growth. Like I mentioned to you, you ought to see much greater than that. I think the mortgage warehouse business, we expect that the curve is probably going to get flatter. And if that does happen, we think the MBA's projections are not going to be correct. And that you might see the mortgage warehouse business also do better than what most of the folks in the industry are expecting. But we haven't factored -- we haven't modeled that. That will be I think (inaudible).

Okay. Great. And just switching to the deposits. CBIT deposit growth is still positive, just a little bit lower than what we saw in a very strong start in the third quarter. Can you just provide some color as to what drove that moderation? And what you expect going forward? It sounds like you're pretty upbeat on the growth prospects there.

Sure, absolutely. As we sort of laid out at the outset of the launch of the platform, we've said 20 to 25 customers for a soft launch, which is what we stuck to. So there's no real customer increase in the fourth quarter. It was really just customers adding to their existing deposit bases. So -- while the number of customers did not grow appreciably, but we will begin to start growing the customer base in the first quarter and ramping up over the course of the year as the network strengthens.

Okay. Very good. And on the expense side, Obviously, a lot going on here, a lot of new verticals, and it sounds like you guys are still recruiting. What kind of expense growth is reasonable for '22?

So Casey, I can take that one. So first, I just want to comment that expense management is always a focus for us at Customers Bank. And consistent with last quarter, our fourth quarter results had certain nonrecurring or transitory items that I think it's important to understand. So quickly walking through them, there was about $9 million in the fourth quarter, the third quarter had about $8 million of nonrecurring expense items. But in the fourth quarter, we had about $3.5 million of increased incentive accruals that was really tied to the record 2021 financial performance that we incurred -- we achieved.

Secondly, there was about $1.6 million of -- it's described as occupancy-related expense, but it's really for the relocation of the bank headquarters. There was some flooding in our previous headquarters that resulted in a move that took place to a much more efficient and attractive location. So that was recorded in our fourth quarter results. We also had $1.8 million of increased technology and servicing-related expenses that was tied to growth in BMTX service deposits. And then there was another $1.2 million of increased charitable contributions, corporate sponsorships, some of which were ESG related.

And then we had miscellaneous a couple of hundred thousands, which totaled about $9 million. So when you look at the trend for the second, third and fourth quarter, you can see that our what we think of as core expenses remained relatively stable at around $70 million to $71 million. And so when we're thinking about the expense guidance going out into 2022 and 2023, we think the right measure to really focus on is not the absolute level of expense growth but really that efficiency ratio and making sure that the growth in revenue surpasses the expense growth and that efficiency ratio that we're focused on, and we gave guidance in 2023 is to get to the low 40s, so that will exclude some of the PPP-related revenues as well as the expenses associated with the deposit services agreement. So throughout 2022, you should expect to see increasing efficiency ratios and then to -- in 2023, see that 20% -- below 40%.

Okay. Great. I appreciate that. Just last one for me on the '23 EPS guide of well over 6%. Just want to make sure I'm thinking about this right. So assuming you get to that high $4 number in '22 and then you have the BankMobile deposit service agreement lapsing, which is about $1.35. I mean that puts you in around $6.25. And that doesn't factor in anything from growth or any benefit from rates on an asset-sensitive balance sheet, correct?

Yes, that's correct.

Your next question comes from the line of Peter Winter from Wedbush Securities.

You guys -- you reconfirmed EPS guidance this year for $4.75 to $5. And you had given that guidance in October, but the interest rate environment is more favorable. And I'm just wondering, at one point, Jay, you mentioned that your model assumes 3 rate hikes, but is that included in the guidance of $4.75 to $5?

Yes, Peter. And who knows, we've -- generally speaking, we give an overall general guidance, not a precise number on the models that we are running the company at. So yes, we are asset sensitive. We do have some floors on certain aspects of our loan portfolio. We have -- those kind of things have also been factored in. But going forward, I think the real earnings power of our company will be very evident in the second half of 2022 as well as leading into 2023. And there are opportunities to really accelerate the growth in net interest income as a result of the higher rate is not going to be evident because the rate hike isn't going to be there until March of this year. So we factored all that in. That's why we are very bullish on 2023. And rather than give you precise numbers, we are only going to continue saying well above $6. This year, GAAP earnings should be well above $7, and again because of PPP.

Right. Maybe if I can ask it one different way, does -- just going back to $4.75 to $5, does that assume any rate hikes, that earnings estimate?

Yes. It does.

Okay. Can I ask one more question on that. Just for every 25 basis point rate hike, can you talk about what the impact to net interest income is?

Yes. So we can give some guidance to that. And I'll keep the comments focused on -- I think I talked about the deposit betas between 25 and 50 basis points and that we're using a 15% to 25%. Looking at -- I'll give you a 100 basis point up scenario. So you should expect to see NII increase somewhere between 5% to 10% in an up 100 scenario. I would say that we probably internally modeled more conservatively than that, but I think that's a good estimate to use.

Okay. Thanks, Carla. And then just -- Sam just one the CBIT launch. One, it's good to see that it's -- it looks like you're rolling it out about a quarter earlier than you originally had planned. And I'm just wondering if you have any type of guidance in terms of deposit growth or customer growth from the CBIT initiative?

Sure. So I think that it's -- as we've sort of stated previously, at the beginning of launch, it's difficult to give specific guidance. As I mentioned, we expect it to be significant over the course of the year. And I think that the way to sort of think about it is we are taking a little bit of the crawl-walk-run approach. As you mentioned, we started to walk right now. And as the network gets to a level where there's a lot more API connectivity and scale, we'll see payments, volume and deposits increase naturally through those efforts. So while we are not giving specific guidance, what you could probably assume is that from a customer-base perspective, we would at least double in the first quarter.

Your next question comes from Michael Perito with KBW.

Obviously, really strong 2021. So congratulations on that. Just a couple of clarifications I wanted to touch on. Sam, just to stick on the CBIT platform for a second here. Based on what you guys have said, I mean, it seems like the pilot really is working about growing customers, obviously, right? It's about getting those targeted 20 to 25 on and making sure everything functions. So I was wondering if you could just spend a second talking about what the -- not only what the customer pipeline looks like as you exit the pilot but also what the kind of sales process will transform to as you -- I mean, obviously, you made some hires, I believe, in the back half of the year. And I'm just curious how that will play out now that you guys could presumably start to kind of more aggressively pursue growth opportunities there?

Sure. Absolutely. So Mike, I think the way to sort of think about the soft launch, as you mentioned, it was tactical. It was to take time to pressure test the technology, the infrastructure, processes, onboarding, payments. But it was also to spend time working with very key customers in the space to think about where they need to be to grow their businesses, what they're looking for from their bank partners over a period of time. The addition of the team members is very helpful and critical for that. So we'll -- as you mentioned, we look to double the customer base in the first quarter.

We are adding more customers with API connectivity, think of that as automation for payments. And we are expanding the relative networks of the hubs and spokes that we previously described of each of the various market participants in the digital asset subverticals. So that's the way to sort of think about how we're road mapping over the course of the year. Now over the course of the year, we may also add lending, which we talked about and other legacy as well as sort of cutting-edge products and services for the overt digital asset banking coverage.

Got it. When you talk about kind of digital asset lending, is that digital asset collateralized USD loans or there are other products that you guys are exploring?

Yes. So they would be enterprise loans to market participants that we would otherwise lend to regardless of whether they're focused on the digital asset industry. And then to your point, they could also include loans that are backed by the digital asset collateral, specifically Bitcoin.

Got it. Okay. Helpful. And then on the BM Technologies termination or expiration rather of the service -- deposit service agreement. The $60 million cost that you guys will pick back up, what is that exactly? Is that servicing cost? Is that -- I believe that you guys were kind of honoring the debit interchange rate of BankMobile, even though you guys moved over $10 billion.

Is that incorporated in there? Just trying to get a better sense of what actually makes up that number and what will be moving away? And then just secondarily on that, the accretion also assumes that you will replace the lost deposits with new deposits fully at a comparable rate conservatively. Is that correct also?

Yes. I'll take that. So Mike, yes, we will have CBIT deposits growth that are expected to be replacing those. They are -- right now, those deposits are costing us about 30 basis points and that we expect to replace them with lower cost than that. And yes, we are -- that $60 million number includes our deposit servicing cost as well as any make-whole agreements that we have with BMTX.

At that time, as you know, when we set up this agreement was in 2019 and the rates were heading up and these were flat maximum 30 basis points for deposits. So that's why we locked them up with earning assets and so these are profitable to us, but they will become much more profitable to us when we look at the overall operating expenses plus cost of funds. And both those categories will be coming down. And that's why we are confident that we will be able to transfer $60 million of accretion as a result of this strategy.

Okay. And so just to kind of be clear on the geography, though, it sounds like it will be a mix of -- unless I misheard, but it sounds like there will be a mix of lower expenses that will come out when that expires, but then also potentially higher spread from the lower funding costs, assuming it's all replaced with CBIT deposits. Is that kind of a fair geographic representation of the $60 million of accretion?

Yes, Mike, that's correct.

Okay. And then just lastly for me, the pull forward of the $6 EPS -- well, $6-plus of EPS in '23 that you guys are now guiding to. I was wondering if you could just maybe give some rails around the balance sheet size and the reserve percentage that you guys generally see the bank operating at, at that time. Just with kind of the excess liquidity in the system in PPP, it's obviously -- I know it's a bit of a moving target, but with some of the niche lending you have targeted also, just any kind of guardrails you can provide on those 2 items? That would be helpful for me. I just appreciate anything if you can provide.

I'll start off and then ask Carla to give you a lot more color on that. But overall, we are looking at not significantly increasing our balance sheet but improving the quality of the balance sheet. And by that, I mean, by having much greater stable core deposits replacing our higher cost deposits. Then, of course, this the BMTX termination of the deposit servicing agreement is going to be accretive to us.

We see -- and Carla can run some of those numbers with you. There's going to be quite a bit of capital accretion this year as well as into next year. So we are very disciplined about maintaining our capital ratios at the same time. So when you combine all that up, from a modeling point of view, you should assume somewhere in that $17 billion, $16 billion to $18 billion type on a net average balance sheet bringing the total size of the balance.

Yes. And then from a reserving perspective, obviously, we don't give any forward-looking provision expense guidance per se. Our coverage ratio right now is about 1.56%, which we feel we are adequately, if not conservatively, reserved. Internally, when we're modeling out that far, I think we're still looking at that $10 million to $15 million quarterly provision expense, which makes sense and is what we're using to internally model.

And your next question comes from the line of Steve Moss from B. Riley Securities.

Maybe just starting off with the -- going back to the pipeline of CBIT customers. Sam, I heard you on more than doubling the customers here in the first quarter. Just kind of curious as to how to think about the backlog and the size of the potential customers that you have over the next -- over the course of the year?

Yes. So I think that the -- we sort of stated this in the beginning, when we brought in 25 customers, it wasn't that we necessarily had a backlog. It was more programmed. So we were focused on selecting customers, reaching out to customers through both a push and a pull type strategy to be able to create a healthy sort of test and pilot ecosystem. So as we think about Q1, Q2, it will be more augmenting the respective networks of the first 25 as well as creating new nodes, and hubs and spokes for future network growth as well as, as I mentioned, automating our initial customer bases, especially the key larger customers to make sure that they as well as their partners are connected via API and thus have an ability to ramp up payments volume quickly.

Okay. Okay. That's helpful. And then in terms of following up on loan growth here. Just kind of curious as to what you're seeing for loan pricing these days, just as a model going forward?

Your question was on loan pricing?

Yes. Yes.

I think we've seen, as you can see from our average yields, we've been able to maintain loan pricing pretty much during this time period, I think, on the different categories. As such, the fund finance, which is -- and specialty lending other areas, which are really very, very strong credit quality, they are all variable rate loans and the pricing you should expect that to be adjusted as the rates go up on that portfolio.

In the multifamily area, since we are back in that business now, we've seen about 3.5% or so average yield in that. The consumer sector is seeing a lot of pressure. Everybody is suddenly finding consumers to be attractive. We were ahead of the game. And so there's a lot of pressure around the higher, better quality consumers. So you should -- we are seeing some pressure in that sector.

As such, I think in the mortgage warehouse business, like I talked about floors, so we had instituted floors of 1% in the mortgage warehouse business and now going over to (inaudible) or some other index. So we are removing the floors. So in the short period of time, it could be a slightly lower yield, but we like it. Because of the portfolio, we don't expect -- we expect it to be at the sort of the lowest level in the first quarter. And before it starts to build up, we think the Feds will be increasing the rate, so we think that we will be able to benefit from that. So the margins on that will be about the same as what we've seen in the past.

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

Just wanted to ask on the 2023 guide. Any sort of -- you talked about your expectations -- for really more balance sheet optimization than growth. So just kind of curious if you could give -- and I guess, I could back into that, but ROAA expectations that you need to kind of hit to get to that $6 plus?

Yes. I think, Frank, we are factoring all those in. So it will be the ROA in that $1.20 $1.25 range. You can figure that out. And then we are -- you are absolutely correct, our priorities are both balance sheet optimization as well as growth. And we will, all the time, evaluate which is the best optimum way for us to allocate capital and look at making sure that the end result is optimization of shareholder value creation. So that's what we are focused on.

Okay. And Carla, sorry, if I missed it. I know you -- I caught the tangible book comments, tangible book value per share comments, but as far as the TCE ratio for 2022, have you shared expectations there?

Yes. So just to give a little bit of color, what we shared is if you take the $90 million of deferred fees, you get to that $40 and then factoring in just on the -- between the $4.75 to $5 of our core EPS, which excludes the PPP, you get to that $44 to $45 range.

Right, on tangible book value per share. And then on the TCE ratio?

So on the TCE ratio, again, factoring in just the size of the balance sheet is somewhere around that 7.5% range.

Okay. Sorry. I missed that point. And I guess, 7.5% is still, I'd say, a bit below the peer group. Given that the opportunity on the CBIT side, given the opportunity on the C&I side, Jay, what are your thoughts on the potential for an offensive capital raise in the near term?

We continue to always see and the best way to allocate our capital. At this time, we have no plans, which are in the process, but we will always evaluate which is the best opportunity and the best option available for us to build the shareholder value. And so we will continue to always evaluate all options.

Okay. And then just finally on the $60 million pickup from BankMobile. Just want to make sure I understand what is required to be able to move or to end that deposit relationship? Do you -- I think BankMobile is currently in the process of buying a bank partner. And they will replace CUBI, I guess, as the bank partner in that relationship. Is that a requirement to ending that deposit service relationship or does it expire anyway?

It expires anyway. But I think BMTX has taken the steps to maintain their -- whatever their objectives are. So that's why I think it's all falling in line pretty well. And by the end of this year, you'll see that being a win-win for both institutions, both BMTX should do well by taking those deposits. And of course, CUBI will do well by seeing the termination go into effect by December 31.

Okay. And then just finally on that front, you mentioned the 30 bps in deposit costs. I guess that's on about $2 billion in related deposits. So that's around $6 million. The rest of the $60 million is, I guess, an expense. Where is that just from a modeling standpoint? Is that all or mostly in that technology communications line? Where is that going to...

That's right.

That's right.

Okay. And that's $60 million pickup or $15 million a quarter from the 4Q run rate?

That's correct.

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

Well, thank you very much, again, for dialing in. We really appreciate your interest in Customers. And if you have any follow-up questions, please give us a call. Thank you, and have a good day.

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