Q3 2022 Customers Bancorp Inc Earnings Call
At 8% year over year, while our total operating expenses were down by $4 million.
Year over year.
Core loan growth. This quarter was led by increases in lower risk valuable grades specialty lending verticals of $500 million.
Which were largely offset by an expected decline in loans to mortgage companies.
$300 million and the sale of $500 million of consumer installment loans at a net gain to the company of about $13 million.
This was executed as part of our balance sheet optimization and capital enhancement strategy.
Asset quality remains exceptional.
Credit reserves are robust.
Loan and deposit pipelines remained strong and we are very focused on maintaining our margins.
Moderating our growth improving our capital ratios, while controlling our expenses and meeting or beating what the speed expects from us and earnings per share.
We remain very optimistic about our future I would now like to hand, it over to <unk>, President and CEO of customers bank to describe in detail, our strategic initiatives and our results for Q3.
Thank you Jay good morning, everyone.
I'm thrilled to walk you through another strong quarter at customers Bancorp built.
Building off the momentum of industry, leading responsible loan growth and our variable rate low to no loss specialty lending verticals in the first half of the year in the third quarter. The team focused on disciplined balance sheet management, which helps deliver strong net interest income growth and record recurring earnings even after backing out with that.
A PPP.
Given the uncertain environment, we believe that moderating our growth and focusing on maintaining expanding margin improving our capital ratios all while further growing recurring revenues is how we will measure at how our shareholders will be rewarded.
Let me briefly summarize our results from an earnings perspective, we earned $1 85, and GAAP EPS, which represents net income of $61 4 billion.
Core earnings were $2 48, after stripping out the benefit of PPP income we earned $2 30.
As I mentioned earlier, a record and an incredible peak all thanks to the incredible efforts of our team members.
Net interest margin came in at the higher end of that.
Guidance.
We provided on last quarter's call lending to the prudent portfolio remix we are undertaking this with lower risk and lower yielding but variable rate loans.
This strategic portfolio remix will be mostly complete by year end and our margin after incorporating the full impact of the consumer portfolio reduction will begin to increase again in 2023, as we have been very disciplined on loan and deposit pricing strategies.
Now moving to the balance sheet, we ended the quarter with $19 $2 billion of core assets, excluding PPP up 36% over the year ago quarter.
Our loan book grew an impressive 34% year over year to $14 2 billion, excluding PPP at quarter end.
Total deposits grew 3% to $17 5 billion.
If more than doubled over the last three years.
Going forward through the remainder of the year and into 2023, we believe it's prudent to prioritize adding high quality deposit customers.
To provide the funding base for continued measured loan growth as well as importantly, NII expansion over the next few quarters.
From a profitability standpoint, adjusted pre tax pre provision ROA was 195%.
Strong asset quality, a pillar of our is a pillar of our franchise and we are inherently low credit risk institution.
We continue to deliver on superior credit quality quality versus peers, the industry as well as our own historical averages.
As a reminder, the started the year, we disclosed that we proactively and frankly in hindsight smartly tightened credit underwriting and shifted loan growth mix in an effort to continue to maintain a pristine credit book as we wait to see the full impact of that is actually an inflation and inflation on the economy.
Importantly, our book value has been successfully defended into 2022 and has grown significantly about 9% year over year as well as through 2022 bucking the industry trend.
Strong recurring organic growth and securities book optimization.
Importantly, our TCE to Ta ratio is at the high end of industry peers lending to our prudent optimization.
Moving to slide six strategic initiatives, we've implemented to best position us for the current and future external environment.
As early as the first quarter, we started taking a number of actions to position the company to successfully navigate the challenging macroeconomic environment.
This started with a mix shift in our loan portfolio towards low to no credit risk verticals, which represented 90% of our year over year loan growth.
Our low to no loss specialty verticals now represent 63% of total loans up significantly over the last year as well as the last several years with our consumer installment portfolio declining from 15% to.
10% of total loans over the same time period.
This is excluding our government guaranteed PPP loans, which when included further increase this number.
As you can appreciate from a reinvestment perspective. This number will continue to increase in 2023.
The focus on lower credit risk verticals has not changed our disciplined commitment to maintain at least three to three 5% spread over our funding costs, allowing us to maintain our commitment to continue to meet and beat our short and long term guidance and a rapidly evolving environment I'm happy to address this more during Q&A.
Anginal pricing discipline has more recently assisted our strategic moderation in the growth of our balance sheet as we continue to prioritize profitability margin and lowering overall risk appetite.
We will not ever chase growth for growth's sake of loans, especially in conditions like the industry is facing today, where margin capital and credit market.
For example, we employed a strategy, which both increased pricing thresholds for the top of the funnel and also repriced hundreds of millions of dollars of inflight pipeline to prioritize margin and capital.
It's worth reminding you that our margin the continued reinvestment of proceeds for a PPP loan run off the securities book amortization and cash flows provide significant runway to grow our loan portfolio and continue to increase margin in the coming quarters strategic.
Strategic efforts, such as the $500 million sale of our consumer loan portfolio this quarter.
And the transfer earlier this year available for sale securities to held to maturity in the second quarter and meaningful positive impacts on our capital ratio.
And we will continue to evaluate opportunities for additional action on.
On the consumer sale, we are pleased that the market validated our conservative underwriting, allowing us to sell $500 million of our customers bank direct portfolio for nearly a 3% net gain.
Moving on the company remains extremely liquid with approximately $10 billion of liquidity.
This is further supported by our core deposit pipeline from our existing verticals evidenced by our financial institutions group growth.
As well as driven by our differentiated technology capabilities like EBIT and our technology enables bank transaction banking platform, which is already bringing in significant low cost deposit opportunities.
Which we expect to onboard in 2023.
We have demonstrated and have delivered on handedly over the past several years, we have established ourselves as a leader in technology and innovation in the digital banking and Fintech space as well as in the banking industry more broadly. This is not just lip service. We are absolutely a top 10 tech forward innovation thousands of Institute.
And I'm happy to answer any questions to explain further.
In terms of the customer think instant token on the next stage.
I'll spend a minute talking about this.
So we continue to scale our business at a pace that is far greater than we had projected.
Our banking as a service marketplace lending pilot, that's kicking off this quarter as planned and we expect it to generate as much as $10 million in annual revenue based on current pipeline.
Partners partnership opportunities.
We're pleased to report that we are continuing to innovate and adding to our digital <unk>.
The small medium sized business bundle offering next year as well as rolling out an equipment financing pilot launch as we look to build off of our success and learnings for digital <unk> space and roll into a revolving line of credit term loan as well as credit card offerings.
Finally at the bottom of page, we strive for operational excellence and feel that companies must continually evaluate their structure and processes for greater efficiencies in the honest self assessment, we uncovered ways in the quarter to simplify and streamline our organization and to better position ourselves to serve our customers, while reducing overhead which are <unk>.
All in addition to the branch closures, which we announced last quarter combining these initiatives over the past few quarters, we will be reducing our head count by 8% while.
While making us more effective for future growth at the right time.
Through these efforts.
We are able to maintain an industry, leading efficiency ratio of 43% improving efficiency. While also improving experience supported by truly best in class technology allows us to continue making our customers say wow.
Looking to our tech enabled banking on slide seven.
So we can update you on major technology led strategic priorities of customers back.
Building off of our success and platform innovation on <unk>, we will be seeking to disrupt the transaction banking space by helping our current and future customers build a modern cloud based API enabled treasury product suite, which is being built to anticipate our customers' current and importantly future needs.
<unk>.
Our best in class Tech team is enabling us to expand our commercial treasury and payments capabilities, which now includes a customer facing API library with documentation, enabling simple and robust treasury and payment services.
This is all in addition to the API land banking as a service fintech partnerships.
The first fee income marketplace lending partner was signed last quarter and it's launching this quarter after complex tax and operational integration.
Our treasury and payments platform is being built from the ground up with the input from dozens of interviews with customer end users and decision makers reinforcing our customer centric service and experience approach, which we hopeful we will continue to build tremendous customer loyalty and enhance our brands by driving new products and services.
While most banks are focused on digital transformation and digitizing our internal processes, we are looking to leapfrog forward.
And working to package and product ties are tapped by tailoring it to our customers' current and anticipated needs.
Said another way, we are focusing our tech spend on innovation for our customers, who now view us as a technology partner by choice rather than a banking partner out of necessity.
This may seem nuanced, but it's critical to the future of banking.
Transaction banking will enhance the customer's bank customer focused value proposition.
And facilitate significant low cost deposit gathering as well as fee income opportunities in commercial and large corporate high growth verticals led by confidence financial institutions group digital assets as well as tech adventure.
As we have previously stated our confidence business, which crossed over $1 billion in Outstandings. This year, we expect to be 100% self funded and supported by these efforts. Similarly, our tech adventure business on a steady state we expect to be at least a 100% funded.
Supported by our Tech enabled.
Flipping to slide eight on customers back into instant token.
An update on the instant payments platform, which we launched which cocainize deposits on the blockchain.
Instant payment rail that is available 24 by seven 365 despite.
Despite significant market volatility and the digital asset space during the quarter and frankly over the last few quarters. We are proud to report that we accelerated customer growth once again, beating our internal target for the on boarding of 111, new customers and crossing 300 total customers as of the end of the quarter.
The on boarding of compliance team continues to be best in class Sla's, We're onboarding timeline compliance risk management.
Our industry industry, leading technology into infrastructure platform is forcing basic and long needed innovation and calling out services service challenges from the incumbent banking institution.
Our customer backlog remains robust.
To be clear, we have no exposure to underlying crypto currency assets of our customers just their fee dollar deposits used for operating accounts payments and trading.
See the transactions continue to ramp up significantly and we more than doubled in the quarter and the FERC fourth quarter is already ahead.
With just two months of transactions of last quarter.
Our digital asset customer base is diversified.
And in just a few quarters customers bank already banks many of the largest in each of our major account customer categories.
Customers continue to progress in moving their primary banking relationships to us which speaks to our innovative service on take on service and experience High Tech high touch banking model.
Now I'd like to hand, it over to our Chief Financial Officer Carlo I think.
Thanks, Tom and good morning, everyone.
Okay.
Number one.
Loans loans that.
Positive alone.
Number two growing deposit for each month.
Yeah.
Sure.
Good deal.
Net interest income for our shareholders.
With margin expansion opportunity.
Dawn.
From a liquidity and capital.
Hi, Keith.
Both performance approach.
Awesome.
Okay.
Turning to slide nine I'll start with low rates with loan growth and positive.
Our core loan growth in the third quarter of 2021.
101.
Of the approximately 1% for the high point.
Mark.
This included approximately $500 million of growth in our specialty C&I lending.
Up approximately 10% led by one of the variable rate.
Good morning, guys fair to come which has been a vertical advanced enhanced.
And what's really the themes youre launching.
Consumer.
And you've also.
Please remove grant.
Memories of the relationship.
Multifamily.
Lastly in situ production.
Until Q3.
Loans to mortgage companies declined about 300 million.
Consumer installment.
Increased 5 million due to the consumer installment loan form.
As I pointed out earlier.
Overall.
Extremely pleased with the results of the consumer sale transaction for a number of reasons.
One is the loan book.
Meanwhile, has less than 10% of Korlym.
Tom.
Which equates to less than 7%.
Execution, and a slightly less than par price in this rapidly changing environment.
Similar to the superior credit quality of our consumer installment loans.
As a reminder, these are fixed rate loan.
An increase in rates are still trading.
5% coupon.
Significant financial benefits.
Three resulting from lower risk weighted assets of approximately 421, which is expected to.
Ah represents foreign capital ratios between 38.
Secondly.
From a reserve release.
Of approximately <unk> 7 million net.
Loss on sale of roughly two and.
Along with customer acquisition costs.
<unk>.
I think your cost of about $2 1 million or <unk>.
Number one.
Moving on to deposits on slide 10.
We increased total deposits for any follow up.
In the first quarter, while also being shipped.
These higher deposit costs.
Not unexpected.
Understood.
Great.
We've had so far this year.
Considering the vast majority of our costs.
Unfortunately for institutional funding.
Can you just talk us down.
On March.
The changes in marketing.
You can see from this slide.
Transaction related GBM.
Increasing over the past five years.
Thanks.
We've had more with the customers.
Customers move tons from money market accounts.
Interest bearing perforated and.
Further decrease.
Our proportional needs to evolve.
Given our strong deposit timeframe digital assets.
I'm also with institutions.
Thank you this trend to continue.
That's helpful.
Yes.
Slide 11 shows the repricing characteristics of.
Our interest earning asset.
All four of them.
Using TTP.
Approximately 62% of our interest earning assets on market sentiment, which is greatest in the proportion of our markets.
Moving on for Robyn.
Okay.
Along with respective departments.
With consumer installment at the end.
Q3 reduced.
Total net portfolio.
21%.
During the third quarter approximately $1 four.
This action combined with approximately.
73%.
Our returns year over year.
<unk> with vertical group.
Key verticals such as <unk>.
Improved unknown on reducing overall critical while increasing.
Liquidity.
We do expect alone it seems to be largely complete with the 500.
And at the right spot.
Glen.
In the fourth quarter.
Moving to slide 12.
This slide shows the trend of increasing.
Excluding TCT over the past five quarters, largely driven by a strong performance.
Specialty normally.
Compared to the prior quarter, our net interest income.
Keith.
<unk>, 2% or 10%.
Year over year.
Interest income from the core bank increased 38%.
Over the past five quarters, you can see that.
We have been very disciplined in keeping our margin of 3%.
Mr. Zhang on first quarter net interest margin of CCP was 381, 8%.
The upper end of the three during the quarter brings and we can move to the last quarter.
<unk> hundred nodes.
Thanks, Tom.
Subsequent purchase of 400 million of import.
Security secured by the sold loans.
Yields negatively impacted and welcome to <unk>, Inc third quarter.
Two basis points.
The timing of the loan.
Thank you.
We expect to see another 10 basis points yourself.
Interest margin compression in the fourth quarter all of our people.
Completion of our Nymex shift.
Got it.
Believes that our net interest margin would likely trough.
Sure.
Crazy times.
With margin expansion opportunities in 2020.
Turning to slide 15.
GTT loans totaled $1 2 billion.
There was approximately 400 million in the first quarter of 'twenty from Q. This resulted into FERC fee recognition.
$11 million, which was approximately 4 million moment.
Rocky Mountain.
At the end of September approximately 91%.
Loans originated under Ron's, Bluetooth Hudson Petulantly, approximately 80% PTC loans originated since around three Hudson again.
Okay.
Let me move to Mark <unk>.
Origination fees, leaving approximately 30 million to be recognized.
In the fourth quarter of 2020 too.
Currently 23 at.
So crazy.
Typically the timing in BC.
We are expecting the majority of the fee.
Will be recognized over the next one.
Once the key clients.
Turning to slide 14, you can see tremendous growth in our liquidity cushion from the time the growth in our held to maturity investment portfolio, which has driven market.
Purchases of securities backed by the slow consumer installment.
Keith.
When adding our committed borrowing capacity to our cash and investment portfolio.
Close to 2 billion of liquidity available.
Forward.
Leaving us very well positioned.
Low risk growth.
As well as the outflow of deposits.
On the exploration corporate deposit physical payment.
Yes.
Yes.
Okay.
On the right side of that.
Slide you can see from key character.
Our affordable for sale investment portfolio, which is approximately 50% prudently Hudson for consideration of $1 seven years in Brookfield.
Henry.
Moving to slide 15.
We continue to maintain strong capital levels.
Estimated total risk based capital ratio at the end of the.
September was approximately 12, 8% our TCE ratio, excluding DCP was around 5% and our estimated CET one ratio was 10, 1%.
Our TCE ratio lumpy deeply impacted.
$156 million of after tax annualized monthly.
Burnt and MSCI index of Kinder.
Negatively impacting our TCE ratio.
80 basis.
Without this impact our TCE ratio would have been roughly seven 3%.
We ended the third quarter close to the midpoint of our internal targeted range.
78%, it's important to market <unk>.
In fact, it's all accounting.
No permanent impact on capital.
Securities.
Sure.
As stated earlier, our third quarter 2022 estimated.
<unk> ratio.
10, 1%.
Yes, absolutely.
Bob.
Our regulatory well for frontline.
This fund.
The impact of <unk>.
John .
You can book value, which was negatively impacted first quarter Frank Bachman.
Tangible book value accretion of close to 3%.
GAAP earnings.
Okay.
The further deterioration in.
Looking to the full year 'twenty.
Two we are still expecting multiple book value to be over $40. We also expect the TCE ratio.
Above 75%.
Three to four quarters supported by growth in fluid handling in Florence.
And with that I'll turn it over to.
To talk more.
Okay.
Thanks, Carlo and good morning, everyone.
As noted on slide 16.
Credit quality remains strong as evidenced by mpls with only $28 million were 18 basis points of total loans.
NPA to total assets of just 14 basis points.
A 9% decline in percentage of loans classified special mentioned.
We're sub standard to total loans.
Most importantly, as it represents a real time assessment of portfolio strength.
Total 30 to 89 day delinquencies were only 17 basis points.
The increase in Ncos was predominantly due to a decision.
After having completed a detailed forward looking low level stress test analysis.
Exit are performing non multifamily commercial real estate credits.
Was heavily impacted by COVID-19, and fail to recover to an operating performance level that clearly evidenced and ability to sustain operations moving forward.
For over a year now we've been performing the same detailed forward looking analysis on all credits recovery from COVID-19, as well as credits being highly susceptible to any level of deterioration and discretionary spending given ongoing inflationary pressures and the high promise.
Ability of a recession in late 2020 to the early 2023.
Adjusting for this unique $7 million charge off.
Q3 commercial Nco's. The total average commercial loans was just one basis point and.
And overall NCR was the total average loans was 2090 basis points.
Both of which are in line with historical levels and actually marked improvement over Q2 of this year.
From an overall consumer loan book perspective, and she goes the total average consumer loans of 180 basis points for Q3 marked a modest improvement from a 197 basis points in Q2.
In addition, we remain pleased with how well our consumer installment loan book continues to perform with.
With annualized charge off rate running at less than half of our fully reserved lifetime loss rate of five 3% when factoring in a weighted average life of just one seven years.
In addition, after adjusting for the successful $500 million Q3, consumer despondent loan sale.
Your line of credit metrics that the remaining portfolio improved over that in Q2 and remained strong as noted on slides 24, 25 and 26 in the appendix.
Although we are pleased with how well our portfolios have performed we remained committed to the following.
First maintaining a strong reserve position given continued uncertainty in the social economic and political climates as evidenced by solid coverage ratio of 1.0% to 3%.
Which equates to 465% coverage of total mpls.
Secondly, adhering to our strong underwriting and portfolio management standards, which is evidenced by consistently solid NPL NPA and <unk>.
<unk> ended delinquency performance and finally in.
Adhering to our strategy of enhancing loan portfolio mix with greater concentrations in low credit risk segments as evidenced by 63% of our loan portfolio, excluding PPP being a core low risk lending segments at the end of June .
Great.
Based on strong credit metrics.
Our loan mix provides predominantly of low credit risk loans.
Strong portfolio management with ongoing loan level stress testing.
Limited exposure to high risk loan segments, such as investment Cree office, and only a $132 million.
Investment grade retail at only $172 million.
In hospitality, and just $452 million of which 75% carry recourse and 77% our flag.
And finally continued focus on not lending as a discretionary spending dependent industries.
We feel strongly that our loan portfolio was well positioned to weather the current market volatility.
What appears to be almost certain upcoming recession.
I'd like to thank you for your time this morning, and I would now like to turn the presentation back over to Jason.
Thanks, Andy.
Before we open it up for questions. Let me summarize what my colleagues have already shared with you.
As you can see from slide 17, we have industry, leading core loan growth and deposit growth quarter.
Duplass digital banking.
Since about the middle of last year, our loans excluding DTD.
About $5 billion, all organic growth and deposits are up about $3 billion and we have funded other loan growth from cash received.
Both years.
We in this rapidly changing environment intent on continuing with the team.
But moderating our growth.
Escrow maintained or expanded our margins.
And further improve our capital ratios.
We remain on track to report $6 or higher in core EPS of <unk> 43.
<unk> with sales of $500 million of our consumer loans.
As you heard from Andy exceptional credit quality has been one of our hallmarks and we are confident in butane to convey exactly.
Our customer centric business models on letting us get premium pricing.
We are committed to maintaining other branded different technological capabilities.
Peter.
Speaking of one of the largest individual shareholders of the company I can see our valuation will be attractive trading at only 80% of tangible book and above five times 2023 consensus estimates you should expect us to buyback our authorized 2 million share authorization over the next.
A few months, if we remain clearly Brazil.
Book.
So Brent.
Open it up for any questions mobility.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Michael Perito with VW. Your line is open.
Hi, This is Andrew filling in for Mike. Thank you for taking my questions.
First off I, just wanted to see how you guys would prioritize growth versus capital building in the near term.
For 2023 and beyond.
Okay.
Lawrence I can take that.
Last question. So first one is our capital we're always thinking about the best strategy to optimize capital. According organic loan growth is always a priority.
That said, we will be opportunistic.
<unk> 2 million share repurchase program.
Thanks Felicia.
Hello.
Tangible book value.
Or that kind of common shares.
Okay.
Great. Thank you and then tend to see that.
Do you expect the mix of the deposit customers to be going forward and then with that diversification like how will that change as customers continue to grow in the future.
Okay.
Sure. So there's a Sam good morning answer. Thanks, so much for that question. So the EBIT perspective, I think it's important.
To remind everyone that when we started the customer's bankruptcy cooking platform and our digital asset banking deposit gathering vertical we set out to build a low to no cost deposit acquisition franchise and that's really what we're doing so to put a finer point on that well over 90% of our client accounts today.
Interest bearing operating accounts, but we do have a small handful of larger cornerstone depositors that are earning interest.
But these customers tend to hold larger balances with us, but they also have happened to be as I mentioned anchors.
The payments platform.
Said differently.
This EBIT EBIT platform.
New customer growth allows us to increase the network effects increases the network effect increases payments volumes.
Payments volumes increases the overall deposits.
So as we look at this platform you should expect that majority of the clients that come on.
Midwest space will be noninterest bearing.
Great. Thanks, and then just last one for me here I know you mentioned the consumer loan sale in the prepared remarks on there but.
Do you have any plans to sell any more consumer loans in the near term.
Okay.
Okay.
So Andrew on the consumer loan sale I think that.
That a little bit of color on the transaction there. So as we mentioned this is the CD direct.
Originated portfolio, we actually.
Ran an interesting marketing process, where we put our entire portfolio outs to receive it.
Multiple bidders.
At or close to par, we decided about selling a smaller amount as you can appreciate we've created a tremendous amount of franchise value in that platform yet.
Acquired hundreds of thousands of customers, we let go of about 35%.
Plus or minus.
Customer.
Sure.
Principal however, we maintained master servicing on that from that relationship. So at this point in time, we have no further.
Plans to sell more of the portfolio, we plan to manage the portfolio to a size thats approximately where we are today, it's about 70% of risk based capital.
Feels like a very less than 10% of total loans, which feels like a very.
Procreate level, given the diversification of our overall franchise, but we are interested in potentially.
Value added strategic tech partnerships, where we could be at an originate for sale.
Physician, but thats something thats on the horizon and not something midyear.
Looking actively in the very near term.
Great. Thanks for all the color and thank you for taking my questions.
Sure.
Your next question is from the line of Peter Winter with D. A Davidson your line is open.
Thanks, Good morning.
No.
I wanted to ask about.
Some of the drivers to the margin expansion outlook for next year.
Okay.
Sure Peter Good morning.
Great Great to see you in their new seats.
So I think.
To understand how do we think about.
Not just margins, but also net interest income and more broadly what actions we've taken.
Over the past six months to better position ourselves from a profitability perspective, without taking unnecessary credit or interest rate risk, especially considering the level of market volatility that we're all experiencing in 2022, which is likely going to continue into next year. So.
So first of all.
We're focused on growing net interest income through the responsible low risk loan growth that we've talked about extensively.
Rather than focusing on a specific net.
Interest margin, but we have provided guidance or an ideal deposit data our growth is going to be on top of our.
Growth is on top of us.
<unk> balance sheet will allow us plus a modest asset sensitivity will allow us to.
We continue to expand our margins throughout next year.
Carlos maybe you could talk a little bit about.
The PPP loans, the payoffs that we expect next year the.
The Securities book cash flows and how do we think about reinvestment as well on top of the asset and office asset sensitivity.
Sure Sam and good morning, Peter.
Regarding the margin expansion there are a couple of quick service here first we are very unique and that we have.
For the balance of cash that can be reinvested over the next couple of fourth quarter at.
At market based rate slowly from the PPP loans.
Secondly, approximately 23% of our interest earning assets are invested in lower yielding assets, which can ultimately be redeployed to generate higher NII over the next 12 to 24 months.
We're still not seeing the full benefit from our.
Asset sensitivity because of the lag in the repricing of our former interim rate assets compared to our market sensitive deposits. This line goes away when the carnival, great nice and the repricing of the asset.
Catches up to market sensitive funding and.
Lastly, as.
John just talked about.
We have significant opportunities to generate very low to no cost.
Cost of our deposits over the next several quarters.
That's helpful.
Okay.
Yes.
Just on that point that last point Carla.
I could see that deposits grew quarter over quarter.
But that was a big mix shift.
From DBA.
Interest bearing deposit costs increase pretty rapidly.
Lukas talk about this mix shift in deposits and maybe with your outlook for deposit growth.
Sure I'll talk about the mix shift and then I'll turn it back over to.
Let's talk about some of the deposit generating opportunity.
So to be competitive in this rapidly changing environment.
Most of our EBIT related policies to money market accounts and take to market based rates in the third quarter, having said that as of October 1st all of the EBIT related money market accounts have been moved to interest bearing DBA.
Currently our total demand deposits make up roughly 67% of our total profit.
Tim do you want to talk about deposit generating strategy, yes, absolutely yes.
We just add low, but just before I move on us.
Non interest bearing deposit migration as Carlos stated this is related to our digital assets either deposits. This is one time, it's behind us as payments volume.
It was up significantly.
Probably in the quarter for <unk>.
If it goes obviously has been beautiful industry over the last couple of quarters.
There has been a tremendous amount of competitive pressure, which is why we thought it was important strategically make the decision.
Hey, guys Chris.
To some of our key anchor clients. We also saw a small amount about interest bearing outflows, which is really just expected from a quarter to quarter type volatile variability as opposed to a migration of our largest businesses no customers closed accounts.
I think youll acid business or otherwise, we're protecting important customers across our franchise.
And.
Would be.
It would be we could move us too.
To not be able to take 76 now you also asked about deposit growth.
What I would say is to reiterate we've talked about some of this in the transaction banking side, but sort of a waterfall of our quarterly deposit growth initiatives number one high quality deposit growth in our commercial verticals.
Two.
Growth in our new lending verticals that we've discussed that are not yet self funded for example, our funds had asked this technology venture groups in aggregate are one 3 billion.
Loans, and we expect those to be self funded in the medium term at our pipelines. So those deposits are strong.
Number three our newly launched technology.
April transaction banking platform, which is good.
Treasury and payment services, and then obviously, the <unk> platform, which we've talked about.
<unk> growth leads to stronger about our network.
Steven integrations, we see advanced both suites of deposits those deposits that are kind of floats have no associated expenses once again.
Yes.
Okay.
Got it that's all.
Really helpful and just one last question and I appreciate all the color but.
So the $500 million in consumer installment loans.
Almost essentially at par.
You did take a 23 million.
Loss from the sale can you just give some color.
That loss.
<unk>.
Sure I can take that one so there were a couple of confirm that first.
Your line is open.
Loss on sale different Hoffman from Jeff the sales price at $99.
Secondly, the 18.
From a loan type customer acquisition.
And to be ready at the time now and then there were some other.
Deal related costs around soon.
Got it okay. Thank.
Thanks for the question for taking my questions.
Okay.
Your next question is from the line of Frank Schiraldi with Piper Sandler Your line is open.
Good morning.
Just wanted to on.
The growth I want to make sure I have the right for the fourth quarter, you talked about the $500 million.
Specialty lending part of the growth is.
Is that net of anything or.
Are you basically expect the rest of the portfolio to be fairly flat.
I will add that we are expecting a decline with seasonal decline in our mortgage warehouse book.
And again similar to 2014.
Okay.
Okay. So outside of.
Just outside of mortgage warehouse.
It would be largely that.
$500 million in that growth of kind of the thinking.
That's right.
Okay.
And then as a follow up just if you do.
Make the decision to buybacks.
And you do get aggressive on that front in the fourth quarter.
What would be sort of absorb in terms of.
Would you be willing to accept maybe slightly lower capital levels than you thought.
Otherwise anticipated to do that or would you think slowdown.
That growth in this customer for London.
Brian This is Jay I'll take that Frank.
We we will balance growth I can say.
Moderating growth.
With the maximization of capital liquidity margins and profitability and it is a balancing act.
From a timing point of view agreement that we have to take a little bit of book.
<unk> hit to our capital there just for one quarter, we will do that if it makes more sense to buyback stock.
For the quarter.
We think the opportunities for growth are enormous but at this time in the cycle. It makes more sense to be moderating the growth and improving the quality of our balance sheet and at the same time great multiples.
All of our shareholders would expect us with greater for the kind of returns that we are providing in terms of learnings in terms of either way in terms of the agenda.
Andre.
Okay.
And Brian I would just add that we are if you look at the data of our broader peer group.
We are trading.
Rather our TCE is always a top core top of the banks out there right now so.
So even if we did decide to take action, which we would only do if there is an under appreciation of a lot of the efforts that we have underway.
We do have adequate capital levels relative to our peers in the industry.
Got it okay. Thank you.
Yes.
Okay.
Your next question is from the line of David Bishop with D. D Group. Your line is open.
Hello.
Yes, good morning.
Sticking with the.
Deposit growth from here.
Even things wrong it looks like it does on boarded.
100, <unk> 111, new customers in the Cedar platform, but.
Upon the sell where they will be customers with clients by bringing in deposits yet.
Curious why the big growth in accounts, but the decline in deposits.
Yes, sure absolutely David.
Morning.
So we on boarded over 100 customers about 75% of those are already funded some approach open up accounts towards the end of quarter.
The average account balances approximately one to one and a half loading.
So thats.
Slow growth, but wrap up at the end of the day for deposits get funded entities accounts, whether it's either a primary operating account.
It is.
Payments account.
<unk> integration.
Sometimes it takes times for some of the for some of those key customers.
It's a leading indicator of future deposit growth.
Such accounts the accounts are very active and funded.
Got it and then any sense there maybe.
Or just size in terms of just payments activity across the platform.
And our all in payments activity continues to grow and I referenced in my prepared remarks, but what I would say as I've said several billion dollars in the quarter.
Davidson.
Got it and then one final question on the expense front.
Good cost containment there.
Did see a decline in the tech expense is that a good run rate just curious what sort of drove the answer quarter decline and the technology expense run rate.
Okay.
So that is largely impacted by the deposit Center arena.
Thanks, Chris.
Yes.
We said previously that runs around $15 million on a quarterly basis.
For media.
Quoted on some.
Seasonality of deposits at this time.
This quarter.
Lastly, <unk>.
Got it thanks.
Your next question is from the line of Matthew Breese with Stephens. Your line is open.
Good morning.
I apologize.
I'm hearing you guys what was the remaining cost tied to VM technologies that should come out here.
So roughly thats about $15 million a quarter this quarter with $15 million on an annual basis, it's roughly 16.
Okay, and then similarly I.
Thank you.
Last I had it there was about $2 $2 billion of deposits.
Tied to the MTX.
That's still expected to fall off at the end of the year, what's the offset to that is it going to be higher borrowings or some sort of lower assets and a bit slower assets, where you expect the opposite to be.
From a couple of things on that so currently that deposit central frankly.
One.
And I would point you to two things one Tom described earlier the strong pipelines for two.
Deposit growth in Canada, we've had some comments in a strong liquidity position and the fact that.
We have liquidity sources of close to $3 billion, so that gives us some options.
How do we find the actual outflow into doing Jack.
Yes.
Okay and can you remind us the cost of the deposits first then.
Incremental cost of replacement.
Yes, so right now those call center.
Around 3% to the extent that they will.
Replace we first go to our organic low to no cost deposit channel.
And then any shortfall could be based on market rate.
Okay.
And then going back to the NIM I just wanted to make sure I had the cadence right. The core NIM is expected to be down 10 basis points in the fourth quarter and then do I have this right will be stable flash expanding from there and then if it's expanding I just wanted some frame of reference the extent of expansion you expect off of a bottom.
So and again.
We've said now.
Balance sheet.
As a consumer sale transaction would be less than 10 basis.
In the fourth quarter.
What we've guided to is that we will see.
Yes.
III and frame the quarter for the fourth quarter and then we have the margin expansion opportunity based on the items that we described earlier.
Okay.
And maybe just a follow up.
And to that where do you expect deposit costs to.
Peak, if we have another call it 150 basis points of Fed fund hikes or asked another way what are your full cycle deposit beta estimate at this point.
Okay.
So we're not.
Thank you.
Guidance.
Okay.
NPL on optimal composite data about what we can say and what we said previously.
Our deposit franchise largely dealt with congressional institutional client when that does not express the entertainment.
But what I would just add that that is I think that at the end of last quarter, we talked about.
What we are seeing the market looks at that standpoint related to deposit betas in the industry. Our view has not changed at all.
Over the past 90 days, whereas I think you've seen some folks in the industry continue to raise that or possibly of estimates.
Okay.
And I think okay.
I think what we are focusing on is the consistency of net interest income and net interest income growth is what we believe everybody should be looking at as expected. So that if we see a deposit beta is going up and we see deposit costs going up we better have a balance sheet.
Sure on owning the asset we are growing up to and.
That's what we would like for you to book.
You should be asking lots of questions about our ASP.
The adults.
Okay.
Understood Okay.
I appreciate it that's all that's all the questions I had thank you.
Thanks Simon.
Your final question comes from the line of Bill does Allen with Teton Capital Management. Your line is open.
Okay. Thank you that's <unk> capital and let me just start Sam I will take the bait you said that we should ask you about.
The digital and technology initiatives.
And being in the top 10 banks.
I'll turn that over to you without any specific question and just what would you like to highlight there.
Sure absolutely good morning Bill.
Great great to speak to you and thanks, so much for the question.
<unk> talked a lot last year about a number of initiatives that we have in terms of a couple of along with the rebranding of the organization to be able to take the.
The technology development that we have this franchise thanks to our predecessor.
Sure.
Subsidiary Bank mobile.
Five plus years ago, when we started to build.
The bank of the future on top of the traditional legacy technology.
Once that organization was lifted out the divested last year, we had that DNA in our organization.
Okay.
<unk> five team members in the technology implementation.
Our security Department are separate from our IC Department is separate from our technology Department.
And the way that we think about it information technology is run the bank.
Which helps facilitate the left hand, the right hand of changing event.
And our technology team.
The bank Tech team of developers engineers work hand in hand, with our folks in the market in the digital marketing side CRM Salesforce.
Sure.
Product management side. They are the folks that are helping us to continue to.
Innovative this organization, we don't just have a small innovation team we have.
60 to 75 team members that are will be dedicated to changing the packaging industry. So hopefully that's helpful.
These types of initiatives that we have underway are not roadmap initiatives, we're not focusing on digitizing, we're not focusing on that moving paper.
Not focusing on reducing costs, we're focusing on delivering a best in class customer experience.
That really just likes it comes to customer and it's a factor but effort less friction less experience.
And.
The ability to talk to.
Large commercial customer.
That has an ability to move up or say $100 billion of deposits to your ability to be able to.
X y and Z in terms of reporting.
Virtual account capabilities ERP integration and have our team vehicles, a roadmap that out and do that.
A matter of days as opposed to a matter of months.
The banks that we compete against us.
These types of capabilities.
You can count them on one or two hands.
It tends to be larger and a lot less agile.
Okay.
That is that is helpful. Thank you Sam and <unk>.
You talked about the number.
EBIT transactions doubling.
Is there any revenue or for that matter any cost associated with transactions in the <unk> arena or is really entirely the.
The deposit benefit.
Sure.
We don't charge revenue for the top nice deposits and payments.
Settlement.
Do have a traditional commercial banking fees for HCA, Trier et cetera, which are the on and off ramps outside of our banks.
Four we used the on and off ramps.
The digital blockchain based payments.
So we don't charge the customer for the instant payments, but the ins and outs of EBITDA do derive fee income for the organization, but really again.
<unk> purpose of our.
<unk> platform, which is starting today and potential asset industry.
To bring in.
Creates a barge.
<unk> gathering vertical low to no cost deposits at a level that will continue to improve the deposit franchise.
Sure.
Margin and reduce volatility.
Sure.
Okay.
And then lastly banking as a service would you please.
Discuss the initial interest that you all are seeing there and maybe it's too early to know but.
Interested in your perspective.
Sure absolutely.
So banking as a service really to think of it as three pillars.
There is a loan services and loan origination, which is what we're referring to and I'll come back to that.
Or is deposit taking capabilities.
Deposits.
Taking capabilities typically are handled by a smaller sub $10 billion banks because of better Durban exception, so less relevant for our customers back today, and finally payments, which we've talked about whether it's <unk>, whether it's other forms of real time payments VW payments.
As well as <unk>.
ATI enabled.
Squire fed wire.
I've actually gone down.
Mix of capabilities that we have today and will have in the very near future.
So going back to our marketplace by expanding partnership as you know as we built our consumer lending platform initially youre partnering purchasing loans.
Loans.
August five plus years ago.
And we have a number of servicing an originator relationships.
That's helpful.
Half a dozen or so.
Long standing experience.
Genentech marketplace lending platforms.
So we have already onboard them from a risk and compliance perspective.
Cases, we still have existing relationships with them.
Lots of opportunities in that small handful of customers, who generally originate billions of dollars of annual alone.
Whereby we have an opportunity.
To lend our technology and risk and compliance platform as.
As well as some liquidity to be able to help them.
Run their business and for that we get paid.
A significant amount.
Hi.
Interest and fee income.
Thank you.
Thanks. So there are no further if there are no further questions. At this time I will now turn the call back over to Mr. Jay Sidhu.
Yes. Thank you very much really appreciate your interest in customers. So please give us a call anytime we are always there.
Your ideas.
We're meeting or beating consensus estimates you have for us for 2023.
Thank you.
Okay.
Ladies and gentlemen, this concludes today's.