Q2 2023 Customers Bancorp Inc Earnings Call
Turning to slide six I'll provide some more detail here on the venture banking FDIC transaction completed in the quarter.
Firstly, let me start off by saying that we are thrilled to welcome our new team members and clients to customers Bank.
This acquisition was a perfect addition to our existing venture banking vertical.
The recruited team comes with an exceptional 20 year track record in this space and is widely regarded as one of the top performing teams in the industry.
I know that the team and the clients are extremely excited to get back to working together doing what they do best which is driving their respective businesses forward.
We're so happy to be able to support them.
Customers Bank is now immediately being recognized as a leading bank partner for venture backed companies serving customers from early stage, all the way to IPO or.
Our nationwide presence and customized best in class technology platform will provide truly unique service and experience for those innovation and technology companies.
Our acquisition of the FDIC portfolio and the parallel recruitment of the team will bring significant near and medium term deposits to our franchise, we expect that the new portfolio will be self funded this year.
And a remainder and a reminder, that historically these clients have deposit balances that are generally two times their loan balances.
We expect that this will provide tailwind to our already robust deposit gathering momentum.
Finally, the transaction is immediately accretive to both tangible book value and earnings per share and we expect it to be at least 5% accretive to earnings in 2020 for lending to the meaningful.
Approximately $95 million discount.
Moving to slide seven and an effort to maintain our deposit remix goals and capital target commitment to our stakeholders and.
And shareholders, we successfully executed on two loan sales at the end of the quarter to free up balance sheet capacity for the FDIC deal announced on June 15th late in the quarter.
First we fully exited the non bilateral portion of our capital call Fund finance credits.
These did not have any meaningful deposit relationships and with very large fund managers and reminder, this is a one time event.
We remain highly committed to the direct capital call line lending vertical and are seeing incredible bilateral opportunities and are excited to add clients to the portfolio that brings full deposit operating account relationships.
It is worth noting that we have already added about $100 million in very granular noninterest bearing operating accounts in the vertical over the past few months with a big pipeline being on boarded as we speak. Additionally, we sold about $550 million of consumer installment loans at a slight premium and ahead of plan.
This transaction validates our strategy to increase the velocity of assets and our digital lending business and generate fee and fee income with limited to no credit risk.
The combination of these two transactions will provide us balance sheet capacity to grow our partnership with strategic clients with primary banking relationships that support our funding and liquidity goals of the bank all while continuing to meet the targeted increase in our capital levels.
Moving to slide eight this was clearly a fantastic quarter for customers bank for many reasons, but we're most proud of our deposit successes. These wins are a true testament to the strength of the relationship based banking supported by best in class technology product and solutions that we are delivering to our customers.
In an environment, where many banks are struggling to attract deposits, let alone low cost deposit gathering customers bank on boarded over $900 million of net core deposits in the quarter, while increasing the level of noninterest bearing deposit mix by another $1 billion, bringing the total to now 25% of total deposits.
This already as of today it makes up for the late 2022 negative mixed shift that both we and the industry as a whole experienced.
I am extremely pleased to report that our average cost of deposits declined by 21 basis points and our spot cost of deposits also declined by one basis point. These.
These declines were despite the rate increase and importantly highlights our unique ability to add low cost and noninterest bearing deposits used to remix our high cost and wholesale deposits.
We have been able to achieve this in one of the most challenging and competitive deposit gathering environments in modern banking history.
We remain deeply focused on the quality of our deposits and at the year end at the end of the quarter, 77% of our deposits are either in short or collateralized. This metric keeps us in a very strong position relative to our regional bank peers.
We are a beneficiary of the significant customer disruption and frustration in the industry and we hope to look back on 2023, as a year of growing diversifying and transforming our deposit base with high quality low cost sticky and granular franchise enhancing deposits.
Moving to slide nine as we discussed earlier the strength of our deposit franchise drove record net interest income in the quarter of $160 million ex PPP I repeat record NII with the lowering of quarter over quarter interest expense being the main driver.
As mentioned, our net interest margin increased significantly to $3 one 5%.
The continued improvement of our deposit franchise and the strength of our interest earning asset positions us to perform best in class. Despite the headwinds facing the industry with that I'd like to turn the call over to Carla to discuss additional highlights from the quarter.
Thank you Sam and good morning, everyone. Beginning on slide 10, we continued our strategy of improving the overall quality of our balance sheet and loan portfolio. During the second quarter total loans held for investment declined by approximately 800 million quarter over quarter with.
Roughly $300 million of reduction coming from our consumer installment portfolio, another $300 million coming from our corporate and specialized banking portfolio, mainly from the syndicated capital call line of credit sale.
The impact of the acquired venture banking portfolio from the FDIC and the remaining $200 million coming from our community banking portfolio. These reductions were tactical to free up balance sheet capacity for more strategic relationships that come with corresponding deposits, we continue to be <unk>.
Sided about our positioning in the funds finance business and will pursue new business opportunities going forward, but our focus will be on opportunities that create holistic banking relationships for us across deposits and treasury management as well as credit facilities.
Net interest margin benefited seven basis points from the increasing yield on our interest earning assets, reflecting the floating rate nature of our assets, including our loan portfolio, which is approximately 70% floating rate.
13 basis point reduction in our.
Our total cost of funds the average yield on loans in the second quarter increased to $6 eight 3%.
Our loan to deposit ratio ended the quarter at 77% nine percentage points lower than our regional bank peers. We've operated the bank at around 80% loan to deposit ratio over the last five quarters. We believe operating at these levels is prudent, especially in an environment.
Where liquidity in the banking industry is becoming increasingly scarce.
Turning to slide 11.
Core non interest expenses increased to 89 million in the second quarter. The increase was primarily related to two items. The first and largest component of the increase resulted from higher insurance expenses second higher incentive accruals were recorded during the quarter tied to performance and the Onboarding of.
Our new venture banking team members.
While our efficiency ratio, maybe slightly elevated for a quarter or two our business model is highly efficient.
As evidenced by the level of non interest expense to average assets relative to our regional bank peers, we were able to deliver high touch client service, while managing non interest expenses because of our limited physical branch network and tech enabled capabilities. This is the true.
Differentiator of the customer's bank franchise.
Moving to slide 12.
We continue to proactively monitor our interest rate risk position with all the moving pieces in this denial dynamic interest rate environment without taking undue credit risk we continue to generate almost two times the yield on securities relative to our regional bank peers the spot book yield.
On our available for sale Securities.
Portfolio increased to $5 three 8% given that nearly 50% of the portfolio is floating rate even more importantly, we've been able to generate that return by taking only one third of the duration risk that our regional bank peers have exposed themselves to.
As a result of the strong interest rate risk management, the unrealized losses in our securities portfolio relative to our tangible common equity is significantly lower than our regional bank peers.
Turning to slide 13.
Our liquidity position remains robust and best in class with over $11 billion in total liquidity and over $9 billion in immediately available liquidity. The net interest margin results. We shared with you earlier are even more impressive when you recognized we finished the quarter with over $3 billion of cash.
On the balance sheet.
We will continue to monitor market conditions to determine the appropriate level of balance sheet cash that said, we continue to believe is prudent from a risk management perspective to operate with higher levels of cash there were modest reductions in our available committed capacity during the quarter.
<unk>, primarily resulting from our loan sales and the collateral value of pledging capacity associated with those loans.
Immediately available liquidity as a percentage of uninsured deposits remains in excess of 220% putting us at the very highest end relative to our regional bank peers moving to slide 14.
We added another dollar per share to our tangible book value in the quarter. Despite continued LCI headwinds the acquisition and Onboarding of the venture banking loan portfolio. The one time expense associated with the early surrender of Bali policies and the one time loss associated with the exit.
Of the non strategic short term syndicated capital call lines of credit.
Okay.
Over the last four and a half years, we have increased our tangible book value per share by 14% on an annualized basis that pace of tangible book value accretion is significantly more than our regional bank peers importantly, we remain on track to achieve a tangible book value of at least 45.
By the end of this year.
Despite the significant improvement in our stock price during the quarter, we continue to trade at very attractive p/e multiples, especially for our franchise that is consistently generating returns on capital of roughly 15%.
Turning to slide 15.
Our estimated CET one ratio ended the quarter at 10, 3% that was up an impressive 70 basis points compared to last quarter. We accomplished this despite the acquisition of a $631 million check and venture loan portfolio, So strong organic capital generation.
<unk> and the loan sales previously discussed our TCE ratio was 6% at the end of the second quarter. This ratio was negatively impacted by approximately 80 basis points of LCI.
The more than $3 billion of balance sheet cash also negatively impacted this ratio. Excluding this increased balance sheet cash our TCE ratio would've been around six 8%.
We remain on track to achieve the year end CET, one target of 11 to 11, 5% that we disclosed last quarter, having achieved nearly 50% of that increase in a single quarter.
While this can be largely accomplished through organic capital generation alone. We are continuing to evaluate a modest amount of incremental balance sheet optimization alternatives to the extent, we see opportunities to exit additional non strategic assets and relationships.
Moving on to slide 16.
Quality in our portfolio remains incredibly strong across all metrics nonperforming loans fell to $28 million in the quarter commercial charge offs were de Minimis at just six basis points and consumer and total net charge offs remained in line with our expectations the leading <unk>.
Decatur of nonperforming assets to total assets decreased two basis points to the quarter two.
To just 13 basis points at June 30th.
Commercial real estate exposure continues to capture the attention of bank executives and investors. We are extremely well positioned for the potential challenges ahead for the commercial real estate market.
<unk> comprises only 15% of our loan portfolio excluding multifamily.
<unk> to our regional bank peers that have about 30% exposure.
More specifically, our office and retail sector commercial real estate each only account for approximately 1% of our total loan portfolio. They are both very granular portfolios with an average loan size of under $5 million, we closely monitor the minimal exposures that we do.
Do have and are pleased with their credit performance credits in these two sectors have an average loan to value of less than 60% and debt service coverage ratios of one and a half to one six times.
As Jay mentioned in his opening remarks superior credit quality has and always will be a core risk management principle that dictates. How we operate the bank. We are firm believers that management must remain diligent about credit risk during the good times, which is why we are confident.
That we are very well positioned despite the uncertain economic environment today.
Turning to slide 17.
As we touched on earlier, we further derisked the balance sheet in the second quarter. So our continued reduction in the consumer installment loans held for investment we have reduced the balances in our held for investment consumer installment portfolio by 47% over the last year.
It now accounts for just 7% of our total loan balances. The portfolio. We continue to hold is very high quality and short duration. The average FICO score is 733 with no credit extended to consumers with FICO scores below 680, <unk> the duration of.
The portfolio is approximately one three years.
Going forward, we continue to see opportunity in the consumer space, we have developed differentiated origination capabilities and a robust network of partners and our held for sale portfolio, we take very limited credit risk.
Currently are able to generate significant fee like interest income. In addition to the potential fee income opportunities. We have identified going forward with that I'd like to pass the call back to Sam to address our outlook and provide some concluding remarks Sam.
Thank you Carla.
Before we wrap our prepared remarks I want to provide a brief update on our expectations for the full year 2023.
To reiterate our top focus areas for the year are strengthening our balance sheet led by our improving.
Deposit franchise, maintaining industry, leading levels of liquidity and significantly building our capital base we.
We are maintaining our loan guidance and our deposit strategy will be will continue to be focused on further remixing and improving the quality of our deposit base with significant core deposit growth used to pay down high cost in wholesale deposits.
It's worth mentioning that despite the 900 million plus of core deposit growth in the quarter, our pipeline remains at or above $2 billion today.
We are maintaining our full year net interest margin guidance, but now have a bias towards the top end of our range.
We're revising our noninterest expense guidance to reflect the higher level of expenses inclusive of the venture banking group, that's Carla discussed.
And we're reaffirming our core EPS guidance of about $6 per share for 2023.
Finally, as Carla shared with you, we're well on our way and positioned to achieve $45 or more of tangible book value by year end.
Lastly on slide nine before we open it up to Q&A I want to conclude with the takeaways from the quarter.
Firstly, we materially improved the quality of our deposit base and we bucked the industry trend by lowering our deposit cost increasing our non interest bearing deposit mix.
And improving the mix.
Led to a relatively low cost deposit generation in the quarter with a $2 billion plus low cost deposit pipeline for continued improvement.
Our net interest margin number two expansion was differentiated versus the rest of the industry and positions us to meet or beat our full year guidance for 'twenty three.
Number three we remix the loan portfolio to emphasize strategic deposit led relationships and provide capacity for multi product relationship opportunities across all of our lending franchises.
Fourth we meaningfully improved our capital base by an industry, leading 70 basis points. Despite the acquisition lending to our balance sheet discipline and are well on track to deliver on our promise to exceed 11% CET one by year end.
And finally, we accomplished all of this in the quarter, while never deviated from our core risk management principles, our interest rate risk and liquidity positions remain best in class and our loan portfolio is positioned to weather whatever macroeconomic environment may be ahead.
Let's now open it up to questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and your first question comes from the line of Michael Perito from K B W. Your line is open.
Hey, good morning, guys. Thanks for taking my question.
I wanted to start on.
Just a couple kind of clarify obviously.
A lot happened this quarter right and a lot happening this year and I wanted to maybe kind of level set.
How you expect the business to look in 2024 and beyond and so I have a couple of questions on that line of questioning so I wanted to start on the loan portfolio side.
Yes, I guess.
Carla you mentioned there might still be some actions you take but at the end of period mix kind of indicative of what you guys think going forward about 50% C&I, maybe 5% to 10% CRE, 5% to 10% mortgage warehouse the balance CRE and multifamily is that does that feel kind of like the right mix, which given where you're at now or.
How should we think about that moving forward.
Yeah, Mike I think that's right one of the things we wanted to reiterate is our loan guidance is really anchored back to the end of last year. The beginning of this year. So when we're talking to a flat to declining balance sheet really focusing on year over year, but I think the mix that we currently have is good too.
Think about what it looks like going forward.
And then that's perfect and then switching to the deposit side, though I imagine there's still.
Are you guys kind of alluded to this but that mix still should change a bit over the next four quarters right. I mean, you have at least half a billion dollars targeted to come over on the venture side I imagine that will be acquired the kind of low and no cost deposits.
I guess just as you look ahead on that side you guys have kind of a target ish range of mix on the deposit portfolio that youre, hoping to be able to achieve by the end of next year.
Yeah, So Michael it's a great question and I would sort of say is firstly just as a reminder, we had obviously the low cost deposits. This quarter in the press release, we talked about the $660 million plus or minus of of wholesale and brokered Cds that were paid down.
There is an additional.
Almost $2 billion approximately in the second half of this year and our anticipation is instead of just the core deposit pipeline continues to come in at the pace that it's coming in today.
Would would be used to continue to pay off high cost and also pay down does brokerage. So the remix would actually be significant not just by the end of next year, but would really.
Accelerate this year and continue at the pace that we're in and just to kind of go back for a second too.
Our growth we also had a couple hundred billion dollars.
In the second quarter of high cost digital deposits.
Consumer related deposits that declined.
So our core deposit generation of actual new customer growth was approximately $1 3 billion. So over about $100 million a week on average having said that there was a huge acceleration after the FDIC deal announcement in the second half of June and.
And that pace has continued of that approximately $100 million or so plus or minus of core low cost deposit growth.
In July as well.
And Sam if you had to try to like just give us a rough indication of the key verticals that drove that drove and are driving that incremental low cost deposit growth going forward. How would you kind of break that out you had obviously dramatic DDA growth.
There wasn't any color in the release about where that can't provider, we could probably guess, but just would love it like maybe a layer deeper on mattresses. We have an idea of what businesses are really driving this.
Yes sure of course good question so.
It was broad based across the organization first and foremost and the pipeline is also reasonably broad based but theres. Obviously, a couple of verticals in the second quarter, but then importantly, I can kind of guide a little bit for the third quarter and beyond so in the second quarter. We had a couple of hundred million dollars of fund finance and Tech adventure over the last.
So we also had a couple of hundred million dollars.
And end of period.
EBIT balances that we're contributing but as you know with our discipline I think we were at 13% last quarter about 15% plus or minus now with our discipline to any deposit vertical.
Cap from a concentration perspective, you will not see anymore.
Growth from that vertical whether it's deposits are noninterest bearing and then like I mentioned it was broad based across but if you look forward at the pipeline as you mentioned we have several.
Several hundred million dollars.
Low cost deposit growth and the pipeline of yes, you can imagine.
<unk>.
<unk> hundred 5200 accounts being opened right now.
Our tech and venture group of the loan portfolio. None of those deposits came in by June 30 of those loans were.
Credits came on.
By June 15th and.
It took a couple of weeks to kind of discuss with the customers move over some of the servicing and the action to begin those account openings and we're seeing that really in earnest right now fund finance is another.
Big vertical where I think we have over 100 accounts at various stages of opening right now and what's interesting about fund Financers. As you know these are typically noninterest bearing and nature and Theyre also small ticket on a low end half a million to.
$1 million to $2 million.
And if you look forward at our at our deposit pipeline that 2 billion plus that I mentioned, it's granular we're talking about average account sizes in the $5 million to $10 million at the high end, it's going to be 20 to 30. These are true granular sticky low cost operating accounts.
That's really good color. Thanks, Andrew just a couple more quick follow ups for me just on the loan to deposit ratio Karl I think if I heard you correctly, you said operating in like the 80% to 85% range going forward is that did I hear that rider yeah around 80%.
Okay around 80% and I think in the release or the slides Sam you guys mentioned that the venture piece is going to be two two deposits for every dollar of loans like normalized might take some time to get there, but so I guess that's it.
Did that just all to say I mean, there is still a good amount of remixing going on.
<unk> on the balance sheet here in terms of like what these businesses are going to contribute going forward, but I think youre just as guardrails, if we assume knows that loan mix improving deposit mix and the 88% loan deposit ratio. It sounds like we should be in the flattish balance sheet near term. It sounds like we should be in the right ballpark of what you guys are expecting to happen.
That's right.
Okay, and then just lastly on the NIM guide towards the high end of the range. That's a full year guide right. If I recall, so that would suggest you expect the NIM to maybe be like the $323 30 range in the back half of the year is that generally fair.
Yeah. The NIM guide was the full year and the range was the $2 85 to the 305.
So we think that using the Q2 margin around 315 is a good way to think about it in the back half of this year as well.
Okay.
Very good guys are busy quarter. Thanks, thanks for giving us all the additional detail and for taking my questions I appreciate it.
Thanks, Mike.
And your next question comes from the line of Casey Haire from Jefferies. Your line is open.
Yes, thanks, and good morning, everyone.
Couple of follow up questions.
Yes on the NIM.
We got the spot deposit costs.
Obviously moving in the right direction.
I was wondering given all the moving pieces in the quarter on the loan front, if you could give what the spot loan yield was on 630.
And the spot in them, if you have it as well.
Yeah, we don't have the spot NIM that we gave at the end of the quarter focusing just on the $3 15 in the spot loan yield it's hard to say because it varies so much by the different portfolios, but I think to say on average 7% or higher was about feels about right.
Yes in case, you just provide a little bit more color on the on the loan yields.
As you may recall, our our specialty lending verticals like a capital call lines et cetera, where typically.
Whereas those were sort of in that $2 50 to $3 50 over sofa range. They are actually now at a minimum 300 and actually more on the high end on a range of 125 to $3 50, and these are direct deposit generating type relationships.
Additionally on.
On the Tech adventure and venture banking group.
You're typically at a prime plus 100, which.
Which is an additional.
50 to 100 basis points over over those verticals as well.
Yeah.
Gotcha Okay.
And then just on the on.
The 11% CET one target you guys.
You know clearly sounds like you are on a nice path just wondering.
Do you need to do any more.
More pruning of the loan book or can you get there organically and then how much of the cash position, which is very strong at 10% of the balance sheet.
We will be utilized to get there in terms of I mean, you can shrink the balance sheet, obviously and pay down borrowings.
Yes, so just a little better color on that you're right. We can get there from organic generation alone considering on a core basis, we made $2 90, so far in 2023, so the back half of the year that additional.
Retained earnings generation could get you with to our targeted 11 to 11, 5% with no other balance sheet optimization strategy.
And Casey if I could just go back I, just don't think we fully answered your NIM question as we talked about the loan portfolio, but just wanted to.
Reminded connect some dots.
Tumor loan sales.
We're at a waiver that weighted average cost of call it mid teens <unk>.
The venture banking loans, which largely filled the hole where at.
At that 9% ish type range. So while there were very positive trends in the month of June and continuing on into the second quarter. There are also some some headwinds, but those are desired headwinds and they kind of neutralize each other as the quarter on a year progresses.
Right Yeah, no. That's my point is like the consumer book, obviously had a very nice rate.
And then.
The yield on the venture book.
Is coming in lower just and I understand from a risk perspective I'm all in.
Uh huh.
That's what you guys were going for but yeah. That's why I was just curious on the ammonia.
Hey.
And then.
What was my other Oh, yes, so on the expense side.
Taking the guide up on the FDIC assessments and then can you just breakout.
What.
<unk>.
The breakdown between what is how much of that is venture banking versus the FDIC assessments.
Yeah. So a couple of a couple of points. There. So first I'd just like to reiterate it that we were on target to deliver our previous.
<unk> guidance.
If it wouldn't be for these two items obviously the larger component is the increased insurance expenses and then the second component is tied to sort of the full onboarding of the new venture banking team as well as some increased incentives associated with are tied to <unk>.
So the larger piece would be the insurance expenses.
Got you.
The FDIC.
My understanding is that comes late in later in the fourth quarter and it's one time in nature or are you just referring to a greater FDIC expenses assessments on ongoing basis.
Yes Casey.
You're referring to.
Accruals for larger expenses going forward and what you probably have seen in large commercial banks and if you really dig into said this is broad based across the industry for large commercial.
Thanks, It's just that we have such a low expense base and we are a highly efficient from a cost base perspective, it's jumping out, but again going back to sort of the way that we think about efficiency.
Have sort of a one to two quarter.
Blip in our efficiency ratio of the high Forty's and will go back to sort of our once the venture banking team in and we sort of digest some of the capital headroom. We created in this quarter, we go back to <unk>.
We'll be back to targeting 45% plus or minus efficiency ratio in 2024 and beyond.
Got it thanks guys.
Alright.
Your next question comes from the line of Frank <unk> from Piper Sandler Your line is open.
Good morning, Brian .
Just wanted to get a little follow up on the deposit.
And obviously that was kind of the most eye-popping part of the quarter. So just.
The additional $2 billion.
In the pipeline.
Just wanted to make sure I understand is that mostly noninterest bearing as a low cost in general how would you characterize.
Those balances.
Sure Great question, Frank and interestingly enough. It's in the similar sort of strike zone as we're operating in right now 25% to 35% noninterest bearing.
The rest of it being a moderately low cost when I say low cost at this point in time, you sort of think of that as sort of at our average cost of deposits as opposed to the marginal cost of high deposits.
So our hope is is that we can continue sort of in the pipeline I think that of the.
The 100 million plus that I was mentioning that we're bringing on per week right now I'd say about 20, plus or minus million if not $30 million is noninterest bearing so that paces is continuing and again the use of proceeds is going to be paying down the higher cost letting some digital high cost digital deposits run off and home.
So deposits.
In the second half of this year and we will look to continue that.
<unk> of this deposit mix shift in the second half of 'twenty three to set up a really nice platform to jump off of in 'twenty four.
Okay. So even if the is coming on 25% as noninterest bearing the stuff that's coming off.
All interest bearing all higher.
Yielding stellar higher cost stuff. So we should expect that noninterest bearing as a percentage of total.
To continue to increase I would assume over time.
That's the hope Frank obviously, you can't fully control these things.
But that assumes sort of static in the non interest bearing balances from where we are today, which we think is probably accurate given the customer relationships and conversations as you can imagine for someone to hold noninterest bearing account there has to be either a true 100% operating account already incredible value added proposition like payments.
What have you.
Not demand to put those into an interesting interest bearing account or at least to move some of it into an interest bearing account.
Sure. Okay, and then you mentioned the capital call.
<unk>.
The sale of the business in the quarter was sort of a one off there was no deposits tied to it.
So at this point.
Generally speaking what's on the portfolio is that it's operating stuff, where there is deposits.
Funding those lines.
Is that.
Fair and so.
Wouldn't expect and Thats why you wouldn't expect excuse me additional kind of one offs.
On one side of the business.
That's that's right Frank so the way to think about it is that.
The 600 million plus or minus a commitment set up approximately represented about $300 million in outstandings and it was about a third of the Outstandings that we had on our balance sheet. So we have.
$520 million of Outstandings in fund finance at the end of the quarter, there was a 20% as of today.
The self funded which is up significantly from no balances just a couple of quarters ago.
It's a testament to sort of that.
Technology enablement and transaction banking that we first started talking about last summer.
So we're continuing to add a number though also direct non credit noninterest bearing deposit relationships as well too.
To counterbalance.
Balance some of the net credit relationships that we have in the vertical.
Okay.
And then just last question on <unk>.
Sticking with that theme.
Just curious your thoughts on what's the right sort of level.
Brokered balances on the balance sheet for you guys given that you've got the branch light model.
At this point DSA, we got these niches that can provide this funding that may be.
Sure.
Ultimately now looking for for any sort of size.
Sizeable brokered on the balance sheet or or is that still going to continue to be a sizable portion just given that the model you guys. One what are your thoughts there.
Yes, that's a good question Frank and thanks for the thoughtful approach to it so I think that from one of the things that the entire industry learned.
March us at brokered contractual and insured deposits can be an incredible sort of diversified deposit strategy for any bank.
Typically you know a traditional sort of retail banking franchise has somewhere in that five to on the high end, 10% to 15% of our brokered or wholesale deposits.
I think the right number for us the right target for us is probably 15% to 20% given that where branch light and a commercial grow its good to have that diversified contractual space. It also helps from an interest rate risk management perspective, if you're also sort of split that between short term less than 12 months and longer term. It also allows you to have some reference portfolios and the liability side for hedging purposes.
<unk>.
I think that the way that we all youll sort of see that number progresses, you know we'd like to have it have.
As early as the end of the year early next year.
Great. Okay. Thanks for all the color Sam.
Absolutely.
And your next question comes from the line of Peter Winter from D. A Davidson your line is open.
Thanks, Good morning.
I wanted to ask.
With the acquisition of the venture banking loan portfolio and then you've got the recent thanks failures that were also in this business can you just talk about your competitive positioning and how this deal enhances your.
<unk>.
Yes sure absolutely.
Thanks, Peter and good morning, and.
Appreciate the question. So I think I mentioned in my prepared remarks. This team allows us to have a nationwide presence and to end with offices in.
Our presence on the on the ground presence in.
Los Angeles, San Francisco, Austin, Atlanta, Denver, Raleigh, Boston, Chicago, DC, so truly a nationwide footprint of on the ground.
Our relationship managers that also comes fully.
With five or maybe half a dozen purse person treasury team that comes with about.
Eight or nine folks on the credit side.
And about a dozen or so plus or minus relationship managers. So it's truly a fully integrated.
Well, well very well regarded team I I have personally spent a good amount of time with some of the important.
Customers are virtually over the past couple of weeks since the Onboarding occurred.
And nothing but incredible things to say and one of the things that we've noticed is as that.
With all of the dislocation that you referenced.
There are very few.
Banks that had a running head start of an existing business.
That as we did where combined on a combined basis over $1 billion in Outstandings about $2 billion in commitments right now in this in this vertical.
With that nationwide presence plus a truly best in class team.
It really is going to set us apart both on the deposit gathering side as well as thinking about.
Continuing to to grow from this space over the next couple of quarters in the future in 'twenty four and 'twenty five.
From a credit and lending perspective as well.
Got it.
And then.
What inning do you think we are in terms of exiting.
These non strategic relationships and then would you think that youre going to grow the balance sheet next year.
Yep. Good good question, Peter So in terms of the.
The non strategic exiting the plan was is to have these to be gradual over the course of the year, we had a upside opportunity to acquire the FDIC portfolio as well as to recruit the team.
As you know that happened very late in the quarter.
And.
We thought it would be prudent to execute on a number of things late in the quarter or two to do what I would call sort of a clean up catch up <unk>.
Non bilateral syndicated capital call lines were all.
Maturing in the next call.
<unk> hundred days 120 days.
So truly this was this was really an acceleration make sure that we had both the cash and liquidity.
On hand, so that we were not going.
One step forward two steps forward one step back from our deposit remix perspective, but also that we left the capital headroom and stuck to our our are very important and differentiated commitment of that significant capital increase.
By year end so to summarize.
This was.
Sort of a catch up cleanup quarter youre going to see us.
<unk>.
Sort of a clean focus through the remainder of the year, where we're really focused now on continuing the remix.
On the deposit side.
Having deposit growth exceed.
Core deposit growth exceed.
Loan growth.
And when you trade out only at two 5% et cetera. This is just an opportunity for us to really focus on the core strategically important liquidity led.
In our credit verticals that we're in.
And so.
Would that lead to that.
Accelerate or grow the balance sheet that you can start growing the balance sheet next year.
It's too early to say at this point in time, Peter I think really our focus is just to kind of put a finer point on it we have $400 million of remaining.
Cash flows in the remainder of this year on our securities portfolio, we have a $1 billion plus.
Loan maturities, there's plenty of opportunity for us to continue to grow so originate we did gross originate and.
In the second quarter to the tune of $500 million, plus and we'll continue to do franchise enhancing again liquidity led deposit led.
Lending and we as an industry, we'll reevaluate as the as the year progresses at this point in time, we have no.
No plans.
Two to increase the balance sheet from where we are because there is enough opportunities on the deposit remix side and as well as on the loan remix side like going back to deposit opportunities.
Got it and just my last question.
Can you just provide some color around this $5 million loss on the sale of the capital call line I guess for me I was surprised just given.
The long history of virtually no credit losses and the <unk>.
The business line.
Yep, absolutely you know Peter these are this is not a credit sale. This is an exit of non bilateral meaning syndicated there was this is essentially.
Partnered with one of the failed institutions about half a dozen credits credits on the small side, we're talking $5 billion to $10 billion fund size on the high end, we're talking $100 billion plus manager. These are not relationships, we could have or plan to take over from a much larger institution as those lines matured.
Again, this was 100% money good.
It would've been nice to be in the other side of this transaction, but it was important for us.
Given the strategic importance of the FDIC transaction on the on boarding.
To make sure that we had both C.
Capital and liquidity headroom, and we were not deviating from our commitments that we made to you early this year.
Great. Thanks, Congrats on a very nice quarter.
Thanks Peter.
And your next question comes from the line of Matthew Breese from Stephens. Your line is open hey, good morning.
Morning, Matt I wanted to go back to the increase in FDIC expense up up meaningfully quarter over quarter.
As measured over deposits now at 22 basis points annualized versus six last quarter and I've seen a lot of the banks.
With a quarter to quarter increase but this one stands out in terms of degree.
So I'm curious why the more robust change was there something from a regulatory standpoint or matters requiring attention or was it broker deposit related can you address these items and what the drivers were behind the increase.
Yes, Matt. So we are re reaffirm the run rate guidance office after the jumping off point.
To be clear the increase of the six plus or minus $1 million in FDIC insurance also included a catch up of one and a half to $2 million for the first quarter.
That will be replaced more or less by a full run rate of the venture banking team, which is why we sort of referenced this as a jumping off point. So it's not fully apples to apples the way you described it.
And again this is consistent those levels are absolutely consistent with large commercial banks.
That that we have evaluated and looked at and again. This is I think karla mentioned.
We expect this to be a short to medium term.
This is not a multi year increase and we expect that there'll be some sort of stabilization, especially after the assessments are a revised and there is opportunity to have more ongoing.
Ongoing two way dialogue.
So the increase in FDIC.
Insurance has.
Is tied to the V C.
Loans and team you brought in.
It's not tied to any one thing if you go back to the you know the overall industry the levels that we're talking about for large commercial banks as well as those to your point that have transacted with the FDIC. This as a consistent increase in the quarter.
Okay.
Maybe shifting to.
The mix shift we've seen year to date on the deposit side.
Particularly in noninterest bearing how much of the change which was done.
From from existing customers or existing depositors versus versus new.
It's a good question.
I'm going to speak Directionally, because I don't have exact numbers, but I'd say call it $400 million plus or minuses as.
From existing well, maybe a little less actually maybe $200 million 250 million plus or minus is from existing customers.
With higher balances.
And the rest is coming from.
The verticals I earlier described.
Okay. The two ones I would appreciate more color on is one.
Where do you see the deposits balanced Y stand today and are those in noninterest bearing.
At this point and where were they at year end.
That's right.
Right.
We perceive it balances.
At year end I believe were around two two when there were similar balance two three maybe last quarter.
Average balances were $2 35 billion for the quarter.
And we were at our or below our target of 15% as we as we will continue to be.
Right are those in noninterest bearing at this point correct, yes, they're all noninterest bearing.
Okay, and where those noninterest bearing at year end.
They were non interest bearing.
Noninterest bearing at Q1 end.
Got it okay.
Were moved from the first quarter.
Interest bearing into noninterest bearing earlier this year correct in the first quarter, Yes, Matt essentially what we did is that these are <unk>.
Operating accounts for us.
And we've been very much focused on having operating account relationships with every one of our customers and that is a strategic decision to be made and we exited.
Digital businesses as well as other businesses, where we do not yet where we wanted to get interest building relationships and nothing else. So all our digital asset relationships right now are non interest bearing and their operating accounts tied to our payment systems.
Understood Okay.
Other.
Chunky deposit base.
Per se or the.
The bank Mobil BMT ex deposits.
What are the balances there stand at today, and where are those sitting in terms of our the noninterest bearing or interest bearing at this point.
Yeah, I think I believe.
Go ahead.
No I was just going to add that they are sitting in the interest bearing deposits and theyre not a meaningful part of our deposit balance at this point in time.
Like low single digits, you know, Matt So we've diversified away from that relationship.
Low single digit in terms of percentage of overall deposit of overall deposits that's right.
Okay, and they were supposed to wind down.
By late 2024 is that accurate half of the relationships within the half there would be room remaining would be even less material as a as a percentage of our overall deposit base.
Got it.
Okay.
Maybe just switching to the installment book can you remind us how much has been.
How much of the I'm, sorry securities portfolio at this point ties back to the installment book.
I remember two securitizations, but I Couldnt remember if there was a third one.
Yeah. So in our HTM book, we have roughly a little over half of that book is for the us.
For the securities purchased out of the consumer installment securitization.
Okay, and I think in the past there has been some protections as you go through this could you remind us of the past protections and then were there any with the most recent securitization.
Consistent consistent Matt. So this is a truly a completely.
Completely protected senior position not so dissimilar to any other ABS, that's sort of in that doubled.
Doubled AAA range.
Got it okay.
Last one from me the VC team.
Should we assume those were from one of the more recent failed institutions.
That's right I'm signature bank from signature. Okay. This is the old.
Square one pack Westin.
Perfect Okay.
That was my thought could you remind us historically, what the loss content is for VC lending. My understanding is it comes with a lot of deposits, but tends to have a little bit of a higher loss content, what's the historical loss rate, yes. So the.
The 20 year track record of his team as 1% or less and when you actually add in some of the the warrant income et cetera, It's actually zero on a net basis got it.
Perfect Okay.
Along along those lines should we expect.
Or what are your expectations around provisioning for the remainder of the year.
Yes, so for the provision again, it's hard to predict but I would say between that $18 million to $22 million range for the back half of this year feels right.
Got it okay.
That's all I had I appreciate taking my questions. Thank you.
Thanks, Matt.
And we only have a little time left so we will take our one final question from Bill <unk> from Titan capital markets. Your line is open.
Hi, Thank you a couple of questions that first of all relative to the V C.
Portfolio addition would you walk us through the <unk>.
The background of how we got there and how you all are.
We're the ones ultimately the FDIC chose and then secondarily are there other opportunities that the dislocation thats taking place this year and in the industry, creating other opportunities, whether <unk> or otherwise it's broader than just that.
Other opportunities that you may or may not see out there.
Sure absolutely Bill I'm happy good morning, happy to take that question. So firstly on the venture banking.
<unk>, we saw this this portfolio and this team and we had prior relationships with this team frankly from a recruitment perspective for an extended period of time, and we had monitored and seen that it had not gone with the whole bank transaction.
And there was sort of a several week type.
Type.
<unk> related to diligence process.
With the closing on June 15th so it's a very accelerated.
Process really focused on on credit from the loan portfolio silence and strategic from a recruitment side. The real focus for US was making sure that we had a team.
That had the right cultural fit there was aligned with taking are approximately half a billion dollar.
Portfolio of business and taken it to the nationwide.
Goals that we would have normally had over a three to five year period, but doing it in an accelerated basis.
And the discount provided extra.
Cushion from the perspective of the accelerated credit diligence, which we've now obviously fully completed and feel incredibly comfortable with but also provided a little bit of headroom from the perspective of what if you couldn't recruit the team which the team has now been fully on boarded so it's less of a consideration.
And look too.
Roll off some portion of that of that portfolio, which is not our plan at this point in time, So I think that we feel very.
Fortunate that there was an opportunity to bring in that team as I mentioned earlier after the announcement we saw.
Outside of venture banking significant.
Deposit momentum and customer interest and growth none of those deposits that are related to this portfolio actually came in as a reminder, as of June 30th sort of coming in.
In the third quarter.
So I think that's the way to think about the venture banking process. You also asked a second question about where else are we seeing opportunities I think that being a service oriented technology focused best in class technology focused.
No relation niche banking focused commercial bank, there's been a tremendous amount of dislocation, whether it's second venture whether its fund finance whether it's.
Private banking, whether it's equipment finance across the board in many of our niche vertical so we're seeing.
Great opportunities both to lean in.
And remix.
Customers to a lot more sort of franchise enhancing and I'm not sure it less competitive environment.
We're also seeing opportunities to recruit.
You know we've added.
Half a dozen to a dozen.
New team members and some of those verticals.
We've added sort of a venture capital focus and our fund finance team from some of the dislocated institutions and we continue to.
At any given time.
At a minimum minute meeting.
At a maximum discussing onboarding with.
A number of teams who are figuring out.
What does their business as usual for them and their current or new institution that they're at.
Okay. Thank you and congratulations on the on that purchase.
Thanks Bill.
And this brings us to the end of our question and answer session. Mr. Sam <unk> I turn the call back over to you for some final closing remarks.
Thanks, So much everyone really appreciate your focus and interest in customers Bancorp as a as Jay and I mentioned earlier, we are very proud of our team's efforts we very much appreciate our customer support.
And as we said this on a relative basis. We feel this is one of our strongest quarters ever to date and we think that's an incredible foundation to build off of so thank you. So much everyone have a great morning.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Where we think it has an incredible foundation to build off of so thank you. So much everyone have a great morning.
This concludes today's conference call. Thank you for your participation.