Customers Bancorp Inc

NYSE:CUBI

Earnings Call Transcript 2022-Q1

[Operator]

Good day. Thank you for standing by and welcome to the Customers Bancorp Inc., First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers ' presentation, there will be a question-and-answer session. [Operator Instructions]. Thank you.

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

[David Patti, Communications Director]

Thank you, Ludi and good morning, everyone. Thank you for joining us for the Customer Bancorp's Earnings Calls for the first quarter 2022. The presentation deck you will see during today's webcast has been posted on the Investor Relations page, the bank's website at www.customersbank.com. You can scroll to Q1 ’22 results and click download Presentation. You can also download the PDF of the full press release at this spot. Our Investor Presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking.

These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is really anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and Form 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of the website. At this time it's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

[Jay Sidhu, Executive Chairman]

Thank you, Dave, and good morning, ladies and gentlemen. I too want to welcome you to the Customers Bancorp Inc., Q1 2022 investor call.

Joining me this morning are Sam Sidhu, the President and Chief Operating Officer of Customers; Carla Leibold, our Chief Financial Officer and Andy Bowman, our Chief Credit Officer.

We are extremely pleased with the Q1 result and are excited that 2022 is off to a great start. In a quarter impacted significantly by geopolitical conflict, raising interest rates, yield curve inversion, inflationary pressures and the ongoing effects of the pandemic. We remain very focused on severe execution of our strategy while being very mindful of this rapidly changing environment.

Before I share my comments with you, please join me in saluting our team members and all their hard work and commitment in helping us achieve these highly significantly better than average results.

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

Looking at Slide four, at the core of our strategy is a true obsession with our clients. There are many ways to center a business strategy. You can be extremely competitor focused. You can be technology focused, product focused, business model focused, no cost focus, et cetera. However, in our view, being obsessively customer focused is by far the most effective strategy. The customer is at the center of everything we do. We have a unique high touch supported by high tech business model that is executed by our very experienced teams through a single point of contact model. So the team is fully capable of delivering the full service private banking through omni channels depending upon customer preferences and needs.

We view ourselves as a forward thinking bank and have recently focused on improving our brand, streamlining our offerings, as well as our underwriting as well as our portfolio management and all resulting in dramatically improved turnaround time, so that we are truly delighting our customers. We've also significantly improved our onboarding experiences and develop real-time b2b instant payments functionality for our business customers, that is paying huge rewards. And we believe we are just beginning to see some of those rewards.

Our technology, our products, and services and all our activities are designed to delight our customers in helping us remain focused and helping us to remain forward thinking to take on tomorrow.

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

On Slide six, we would like to briefly discuss ESG review, because we take that very seriously. In the spirit of just highlighting just one or two things, I'm pleased to share with you the two most significant aspects of our ESG report for 2021. First, we financially supported over 350,000 small businesses across America through our PPP program and believe we saved as many as 1 million jobs and 10s of 1000s of business establishments, with many, if not most being minority owned small businesses.

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

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

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

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

[Sam Sidhu, President and Chief Operating Officer]

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

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

Now moving to the balance sheet, we ended the quarter with $17 billion in core assets excluding PPP up 24% over the year ago quarter. Our loan book grew an impressive 8% year-over-year to $11.9 billion at quarter end with our loan pipeline and backlogs at all time highs levels across the franchise. Total deposits grew by 3.9 billion year-over-year, driven by monumental efforts from our commercial teams amplified by our digital banking team's success and deposit gathering associated with our Customers Bank Instant Token, or CBIT launch late last year.

Our digital asset banking team has brought in another approximately $500 million in non-interest bearing deposits since the end of the quarter, bringing the total digital asset deposits to $2.3 billion as of April 15. Strong asset quality is at the core of our franchise and we continue to have superior credit policies to peers with NPAs at just 23 basis points, and our coverage ratio at 1.44%. We continue to experience exceptional asset quality attributable to our disciplined risk management, which continues to be core strength and pillar. We have proactively tightened underwriting and will shift loan growth next to continue to maintain a pristine credit book as we wait and see the impact of the Feds actions.

Flipping to Slide nine, let me update you on our business line accomplishments and strategic priorities. This page helps to visually simplify our strategy and explains what makes Customers Bank so unique. Firstly, on community banking in the first quarter, we strengthened our presence and reputation our expansion geographies, laying the foundation for future loan growth and team recruitment. We also continue to grow our existing business lines. We've added several new relationship managers and executives to our existing teams, leading to healthy, strong high-quality end market growth.

Our SBA production grew by 14% quarter-over-quarter, and our digital small ticket [SMB] [ph] product picked up as well crossing $5 million and originations across dozens of loans, which is a testament to our technology enabled proprietary lending program.

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

We are on track to launch our digital asset lending vertical in the next few months further strengthening our commitment to our digital asset banking niche vertical. In the quarter, we also onboarded an experienced leader to launch and other technology enabled small ticket SMB small medium sized business lending products within our equipment finance specialty business.

Finally, on the point of diversified growth, we expect to achieve double-digit loan growth across all verticals, excluding our mortgage banking related vertical.

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

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

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

All in customer payments flows also commenced in the quarter totaling $7 billion. And while net deposits were mostly flat as of March 31 as you can see, in early April, we've benefited from large non-interest bearing deposit inflows. With our total CBIT-related deposits reaching $2.3 billion as of April 15. Our digital asset anchor customer base is diversified and led by exchanges, OTC desks, institutional investors, and stable coin issuers.

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

Our focus in 2022 will be on growing and strengthening our network by driving customer growth, API connectivity and engagement thereby attracting more inflows into our ecosystem. We are confident in our ability to add $7 billion in low to no cost EBIT related deposits to our franchise in the second half of the year.

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

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

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

Our relationship based multifamily business also grew by $218 million in the quarter. With 185 million of that production coming from existing and repeat borrowers. Our consumer installment business grew by $153 million in the quarter. However, in this environment, we believe it is prudent to keep these outstandings flat with a bias to potentially declining as we seek to further improve our credit risk profile. And frankly, we just want to focus low-risk verticals. To that point, we've had significant improvement in our low-risk loan mix. And it's worth mentioning that our pipeline and backlog in these verticals remains at record levels. We continue to expect an average of $500 million of quarterly net loan growth in 2022.

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

Our cost of deposits bottomed out within the quarter ended and ended out at about a 32 basis points spot rate.

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

[Carla Leibold, Chief Financial Officer]

Thanks, Sam. Good morning, everyone.

I'll keep my comments focused on four key topics. Number one, continued strong growth in net interest income generated by the core bank. Number two, strong liquidity combined with a well-diversified and managed investment portfolio that serve as asset sensitivity and being well positioned for future rate hikes and for strong capital position and accretion intangible value. I'll then wrap up by making a few remarks on revenue and expense trends.

Turning to Slide 13. I'll start with core net interest income and net interest margin excluding PPP. This slide shows a trend of increasing net interest income over the past five quarters, largely driven by strong growth in our core CNI book, including our specialty lines of business, combined with an increase in spreads as we continue to drive down our total cost of deposits by strategically running off higher cost rates sensitive deposits. Compared to the year ago quarter, first quarter 2022 net interest income from the core banks increased 33%.

You can also see from the chart on the right that we've continued to maintain and increase our loan yields, while reducing our cost of interest-bearing deposits by 23 basis points. Additionally, there has been a significant increase in the percentage of deposits that are non-interest-bearing year-over-year led by our CBIT launch.

Moving on to Slide 14. PPP loans totaled 2.2 billion at the end of March, there was over a 1 billion of forgiveness in the first quarter 2022, which resulted in deferred fee recognition of about 30 million, which was approximately 42 million less than the fourth quarter of 2021. Early in the quarter, the pace of forgiveness was slow but then picked up later in the quarter, resulting in higher diversity recognition in the first quarter than what was initially expected. Coming into the second quarter, the pace of forgiveness has slowed back down a bit. And as we've said previously, it's difficult to predict the timing of forgiveness. But we are projecting that of the roughly 60 million of deferred fees remaining to be recognized at the end of Q1, approximately two thirds of those fees will be recognized in the second half of this year.

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

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

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

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

I'll also make a few comments here about revenue and expense trends. Our non-interest income was 21.2 million for the first quarter 2022. That was an increase of 4.2 million compared to the prior quarter. This increase was largely driven by a 6.4 million of tax free [indiscernible] debt benefit in the first quarter 2022 partially offset by a couple of items. The first was that there were no consumer installment sales in the first quarter compared to about 700,000 net gains realized from consumer installment sales last quarter. And second, we realized about a million and half of gains from SBA loan sales in the first quarter, compared to about 1.8 million in the prior quarter. Over the next couple of quarters, we expect to hold the SBA loans on our balance sheet and earn the NII instead of settling for gains, which is a strategy that we've used previously.

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

As we said before, we remain very diligent in managing our expenses, but not at the expense of not making adequate investments to support efficient and responsible growth. As a result, we are not given specific guidance on non-interest expenses instead, we are focused on growing revenue, managing expenses, and achieving an efficiency ratio at or below 40% by early 2023.

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

In Q1, we used Moody's baseline forecast to reflect reasonable expectations on current and future economic conditions. We then added qualitative adjustments as considered appropriate to account for any uncertainty related to economic forecasts or incorporate any risks that may not have been considered in the model. Specific to our consumer installment books, we maintain internal lifetime loss rate models to inform our qualitative adjustments to come up with our total reserves for this book of business. Other cycle based macro economic models will likely give approximately 35% lower estimated lifetime loss rate. Accordingly, we continue to believe that we are very conservatively reserved in the portfolio entering into 2022 with an estimated lifetime loss rate of 5.68%.

And with that, I'll turn it over to Andy to talk more about asset quality.

[Andy Bowman]

Thanks, Carla, and good morning, everyone.

As noted on Slide 18, credit quality remains strong, as evidenced by decline in NPLs to only 43.9 million with 31 basis points of total loans and a correlating decrease in NPAs to only 23 basis points of total assets. Additionally, total charge offs for the quarter were only 7.2 million, equating to an annualized net charge offs to average total loans and leases of only 21 basis points. If you were to exclude PPP loans from this calculation, annualized net charge offs to average total loans and leases was only 27 basis points for Q1 of 22, which is right in line with 29, 27 and 26 basis points for Q4, Q3 and Q2 of 2021 when COVID associated stimulus was still in play.

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

Slide 19, 20 and 21 provide key attributes around our consumer installment loan portfolio and clearly evident how well-set portfolio has performed compared to the industry as a whole. As note on Slide 19, the portfolio carries a very strong weighted average FICO score of 730, a 99% of all FICO scores are greater than or equal to 680. It possesses an extremely strong and conservative weighted average of DTI is 16.5% and 72% of all borrowers have a DTI of less than 30%. It carries a robust weighted average borrower income level of $101,000, an 83% of borrowers incomes are greater than or equal to $50,000. The portfolio was also highly geographically diversified, and it's comprised predominantly of borrowers employed in non-discretionary spending dependent industries, which was a key driver behind the strong performance during COVID-19 and positions the portfolio extremely well, for continued strong performance during the current inflationary environment.

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

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

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

[Jay Sidhu, Executive Chairman]

Hey, thank you very much, Andy. So in conclusion, looking ahead, we continue to project sustainable and responsible organic core growth, and are very optimistic about the prospects of our company. We are focused on improving the quality of our balance sheet, as well as our deposit franchise and are not focused on growth just for the sake of growth. In addition, we believe strong asset quality is what will differentiate customers relative to many of our peers in this cycle. We continue to expect an average as you heard from my colleagues, 500 million of quarterly loan growth and significant digital asset-related deposit growth by year end 2022.

Through a combination of revenue growth and prudent expense management, we expect our efficiency ratio to be at or below 40% as you heard, Carla, and as you think we will achieve that by early 2023. Customers Bancorp stock at the close of the business on Friday, April 22, was trading at $42.84. And as you all know, that's only about seven times analyst estimates for 2023 and a little over tangible book value at March 31, 2022.

We continue to expect to meet or beat projections of core earnings, excluding PPP to gain 475.05 in 2022 and have a very good start in the first quarter, you can see that. And we believe that we will be well over $6 in 2023 and are reaffirming that guidance. As some of you may have noticed, we disclosed in our proxy this week that the top three executives at the company and that is Sam, Carla and myself, again decided to take all our 2021 annual bonuses in Customers Bancorp stock. We remain extremely bullish about our company.

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

[Operator]

Thank you. We will now begin our Q&A session. [Operator Instructions] And your first question comes from the line of Peter Winter from Wedbush Securities.

[Peter Winter, Wedbush Securities]

Thanks. Good morning. Jay, you maintained EPS guidance that you gave in January the [$475] [ph]. Just what are you assuming in terms of interest rate hikes and if you can just remind us what the impact is to net interest income from 100 basis point increase in rates?

[Jay Sidhu, Executive Chairman]

Carla, you want to take that on?

[Carla Leibold, Chief Financial Officer]

Yes. So we are factoring in about nine rate hikes, getting up to a rate of between two and a quarter to 250. And as far as net interest income, I'll make a couple of comments there focusing on, 68% of our assets are interest market rate sensitive. And our deposits betas are somewhere between $0.45 and $0.55 and then up 100 basis point environment. But also when we think about increasing net interest income, over the future period or in 2022, we're really looking at a combination of three things in that. The three levers rate, volume and mix, and all those will contribute to increased NII. So if you look at our full total four loans at the end of March 31, and you factor in about 500 million of quarterly loan growth, that'll get you in low, double-digit growth. And if you apply that to NII that will be a good indication of the increase in NII for 2022. I hope that's helpful Peter.

[Peter Winter, Wedbush Securities]

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

[Jay Sidhu, Executive Chairman]

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

[Peter Winter, Wedbush Securities]

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

[Sam Sidhu, President and Chief Operating Officer]

Sure, Peter. At any moment, I can take that. I think as we talked about the diversifications in the book to business, growth will be really focused on it's an extremely low credit risk, asset lines of business. We talked about the lender finance and the funds finance. So we are extremely focused on those lines of business and the positive indicator around those are variable rate loans as well. So we're also helping ourselves from an interest rate. volatility perspective.

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

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

[Peter Winter, Wedbush Securities]

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

[Jay Sidhu, Executive Chairman]

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

[Operator]

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

[Jay Sidhu, Executive Chairman]

Welcome, David and joining the coverage team.

[David Bishop, Hovde Group]

Thank you very much. Good to be covering it all. In the guidance, Jay, in terms of the average numbers, I think you mentioned 500 million per quarter. Just to remind you that as PPP and warehouse is at the core basis. Just curious what that excludes?

[Jay Sidhu, Executive Chairman]

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

[Sam Sidhu, President and Chief Operating Officer]

And all I would add to that, is David that our pipeline remain extremely robust. And if anything, we might positively surprise the second quarter, lower than 500 million.

[David Bishop, Hovde Group]

Got it. And then appreciate the charts. You sort of lay out the bills in excess liquidity or short-term liquidity, I guess it's about 4.3 billion, I think that's end of period and it's doubled over the past year. Do you see that normalizing back to the $2 billion level over this year or the next two years, just curious where you're sort of targeting that short-term liquidity to wind up over maybe the next six to eight quarters or so.

[Carla Leibold, Chief Financial Officer]

Yes, a couple of comments on that. And we see that pretty much being flat over the next couple of quarters when we think about liquidity, I'll just point out that we have $2.2 billion of PPP loans that are still on our books, which we expect from large majority of those are given by the end of the period, which essentially creates cash that can be reinvested to support the organic loan growth. As I mentioned in my prepared remarks, that comes in a little lumpy at times, if it's difficult to predict. On our investment security portfolio, we probably get about 90 million of quarterly cash flows, 360 million annually, which is also used to help support the organic loan growth that Jay and Sam were talking about. So looking out into 2022, we are comfortable, we have sufficient ample liquidity to support the loan growth.

[David Bishop, Hovde Group]

Got it. Then one final question noted in the earnings release the narrative about the BMCX servicing agreement and the savings of about 60 million pre-tax by next year in deposits. Just curious maybe the nature deposits, how much of those are non-interest bearing? And where will that 60 million come out of the runway? Is that coming out of expenses? Interest expense, just curious where we should think about that 60 million growing out upon the income statement? Thanks.

[Carla Leibold, Chief Financial Officer]

Yes. So that pre-tax 60 million is running through operating expenses and technology related bank communications, financial statement line items.

[Jay Sidhu, Executive Chairman]

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

[Operator]

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

[Steve Moss, B. Riley Securities]

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

[Sam Sidhu, President and Chief Operating Officer]

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

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

[Steve Moss, B. Riley Securities]

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

[Sam Sidhu, President and Chief Operating Officer]

Sure. I'll speak of five vertical, Steve that's helpful for you. If you look at our lender finance and our fund finance business, we typically starting at a benchmark plus 200 basis points, that's sort of where they can -- the smaller the loan size, the higher the spread and obviously increase in quoting rates and shorter term in duration. Other components of our growth this quarter as an example on multifamily. We are pricing or initiating term sheets that about 4.5% in that business right now. And as you would expect, on the residential mortgage side, north of 4%, as well.

[Steve Moss, B. Riley Securities]

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

[Sam Sidhu, President and Chief Operating Officer]

Sure, absolutely. So I think that the first -- so we didn't -- we added to existing teams, we changed the mix of some team, relationship managers and executives [Technical Difficulty] geographic expansion perspective sitting there where we are at this point in time, there are no immediate hires in in the pipeline that we expect to bring into the near term. However, as I mentioned, the focus sitting where we are today is really the presence establishing [Technical Difficulty] business overall. [Technical Difficulty] perspective as you can see the expansion markets are finding their footing and work in latter half of the year.

[Jay Sidhu, Executive Chairman]

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

[Operator]

Thank you. Your next question comes from the line at Matt Breese from Stephens Inc.

[Matt Breese, Stephens Inc]

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

[Sam Sidhu, President and Chief Operating Officer]

Sure. So we ran off a couple of 100 million dollars of CDs, several 100 million dollars of our what we call a cent of savings account product, digital savings account product, and other sort of market rate sensitive more market rate sensitive deposits that may not be fully reflected in our spot cost of deposits, but will benefit us from the deposit beta perspective and the 2020 rising rate environment.

[Matt Breese, Stephens Inc]

Understood, thank you for that. On the CBIT deposit, could you give some sort of sense of where you expect year end balances to be?

[Sam Sidhu, President and Chief Operating Officer]

Yes. The guidance that we have given is that we expect there to be several billion dollars of CBIT deposit growth in 2022, of which we've achieved just several 100 million of that to-date.

[Matt Breese, Stephens Inc]

Great. That's very helpful. Just my last one, on page 19 on the deck, you break out the consumer installments stats, and I'm particularly interested in how you've been able to shift the less than $50,000 in income cohort to 17% versus 29% last quarter, could you just give some color there please?

[Sam Sidhu, President and Chief Operating Officer]

Yes, absolutely. I don't have the data off the top of my head. But if you look at the appendix chart over time, which will help provide color I'm happy to feel the follow up conversation.

[Operator]

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

[Russell Gunther, DA Davidson]

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

[Jay Sidhu, Executive Chairman]

Yes, I'll take that first. And then, Carla, please add anything to it. What Carla mentioned to you is, that's our conservative deposit beta assumption, assuming an instantaneous 100 basis point increase in rates and that sort of thing. Now, realistically, it's going to be more gradual. And realistically, as we've shared with you that we're looking at least $500 million worth of earning asset growth with majority of that being variable rate. So you got to enter that into the equation also. And that's why we are sharing with you that we are asset sensitive, and we remain asset sensitive, rather than just focusing on the details on a quarter-by-quarter deposit beta. Anything you want to add to that Carla?

[Russell Gunther, DA Davidson]

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

[Sam Sidhu, President and Chief Operating Officer]

Sure, absolutely. Russell, I will take that. So we will take a – I think we first mentioned that we would be evaluating this vertical a couple of quarters ago. So we're taking a very prudent crawl walk approach initially as we lost this business focusing on some of our most traditional customers. Taking a cryptocurrency, specifically, Bitcoin as collateral regardless of low LTC and margin provisions is new in Customers Bank. However, it is a secondary source of collateral we'll only be lending to customers that we would otherwise consider lending to our existing credit program or credit policy. I think that's worth mentioning.

In terms of thinking about the growth again, it's really going to be focused on establishing a multi-product [indiscernible] balancing relationship with our most important institutional customers, as part of our CBIT platform and our deposit franchise. So we will grow as our customers would like us to grow over a period of time, but it's difficult to put a number on that at this point in time. And what I wouldn't say, give the the crawl walk approach that I mentioned, you should more or less assume as part of the $500 million of net quarterly guidance.

[Jay Sidhu, Executive Chairman]

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

[Russell Gunther, DA Davidson]

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

[Sam Sidhu, President and Chief Operating Officer]

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

[Operator]

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

[Frank Schiraldi, Piper Sandler]

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

[Jay Sidhu, Executive Chairman]

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

So we are not in the business of forecasting. And but I've already shared with you that we believe that it will be very difficult for the Fed to have a soft landing. And that's why we believe that there is a high probability of a mild to moderate recession. If that happens, the interest rate environment who knows what it will be, it all depends upon inflation, it depends on geopolitical situation. And that's why we will not make any depicts on interest rates. And we will remain neutral to somewhat asset sensitive because it's dependent upon the quality of our assets. It's the credit risk and what the strategies that we've been deploying, as you heard from my colleague, Andy Bowman, is that that asset quality and better risk management is our main focus. And that's why the pitches that we've identified, specialty lending, security based lending, are all secured loans. And they are all very much customer focused product and tech focused and we have an edge over traditional banks and we will continue to focus on those. And our teams are very confident that they will be able to meet or exceed the goals that we are sharing with you. And that's what we are focused on. And we will adjust our mix after we see results and not get into the business of forecasting interest rates.

[Frank Schiraldi, Piper Sandler]

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

[Jay Sidhu, Executive Chairman]

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

[Frank Schiraldi, Piper Sandler]

Okay. So those betas that Carla gave, I got a pretty good to continue to use throughout the year.

[Jay Sidhu, Executive Chairman]

Right.

[Frank Schiraldi, Piper Sandler]

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

[Sam Sidhu, President and Chief Operating Officer]

That’s fair, Frank, at this point of time, a lot of the growth of those are all new customers that are being onboarded in the calculations that we share over a period of time. Our digital banking team, different individual asset bank -- digital banking team is very emphatically integrated with the system's leaders across the franchise. And we're spending a good amount of time in other verticals, beyond digital assets, as well.

[Operator]

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

[Bill Dezellem, Tieton Capital]

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

[Jay Sidhu, Executive Chairman]

Sure, Bill. There are economic factors and growth factors, and then they are niches when you saw a negative GDP growth, there's so many reasons behind that. And that's impacting certain industries more so than others. And then you have inflation on top of it. That's why specialty lending and niche banking is, in our opinion, the future of banking and financial services. You can't be all things to all people, then you will get average results. But if you can do fantastic things in certain niches, you will get above average results. And so we are very disciplined on that and like to share with you our specialty lending businesses and niches that other units are digging into, which is purely based lending, irrespective of what happens to GDP growth businesses. And you will see more growth in those. But like Sam shared with you, our CNI loan in the community banking. That was very moderate 45 million or so that's reflective more so with the way GDP numbers are showing -- Google released this morning.

[Sam Sidhu, President and Chief Operating Officer]

And I would just add Bill, as you think about the specialty lines of businesses that we mentioned, our under finance business as an example is secured by a pool of collateral and an associated interest rate, which is in many cases based upon a lack of historical leverage and origination of loans, which is I think, important. So we'll track that over a period of time, our fund to net business very much linked to capital raising efforts, and while there may be temporary slowdowns or changes in GDP, as we all know, venture capital private equity fundraising, is at all time highs. And when you think about deployment of that capital, the deployment of the capital still maintain space that may be less leverage than or be more equity, having said that, those types of investors are still active across different macroeconomic environments.

[Operator]

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

[Michael Perito, KBW]

Obviously, most of my questions has been asked and answered at this point. But I just did want to drill down on a follow up question around kind of consumer lending, credit appetite and outlook here. And really kind of two parts to this question. I guess number one, when you look at the direct-to-consumer lending you guys are doing today? How do you guys try to factor in with your income range? I imagined this isn't totally relevant for all of your customers. But obviously, consumer balance sheets are a bit stronger than typical. And as you incrementally try to grow that book, just curious to how you factor that into your underwriting here. And secondly, on the banking as a service side, given you guys your north of 10 billion I imagined a good portion of those initial pipeline, candidates are likely in the consumer lending bucket and feel free to correct me, if I'm incorrect there. But just wondering what your plans are for those originations. Are those going to be balance sheeted? Are those going to be mostly sold and is there flexibility around that if the secondary market for consumer lending gets weaker? Thank you. Appreciate it.

[Jay Sidhu, Executive Chairman]

Yes, sure. I'll start off with the first question. We talked about the income levels from the borrowers. The model that we have is a proprietary model, a very detailed model, partly kind of mentioned before that the model itself is not purely a [indiscernible] based model, but we look at a lot of different attributes. And I think page 19 kind of indicates what those attributes are. But one of the key items we looked at is certainly income level, as we talked about, but the other more important key income lighting that we look at is more than impact and that kind of coverage this both from regardless as to the level of income, which is certainly important is more respected is the level of debt that the individual has.

We will continue to look at obviously lending into work through those borrowers that have higher personal income levels. We think borrowers with higher personal income levels have had upside benefit, because we talked about the escalation pay cycle, in the more middle market, professional careers. So that's helping to offset some of the pressure as well around the inflationary pressure. So we're very focused in our model on those two components, which is borrower income level, and then certainly the DTI level.

I'm going to kind of move the sand from more of a strategic analysis perspective is to how we're looking from an origination standpoint. But I think as we mentioned before, we're really looking right now, at pretty much a static position to hold the portfolio where it is, with the possibility of a slight decline in the overall portfolio. But as far as how we're going to handle those originations. And when those rotation outflow defer that. Sam a little bit indications versus old.

[Sam Sidhu, President and Chief Operating Officer]

Absolutely. So focusing on the banking as a service associated originations leading to the fee income. To kind of put it in perspective, assuming sort of linear inflation over the course of the year, you will have a fee income relationships with a consumer marketplace lender, as an example, in the several 100 millions up to a billion dollars of say annual origination would still never lead to more than a few million dollars on your balance sheet at any given time. Given that these are typically held on balance sheet for just a couple of days, even if you went to several billion dollars as you scale that business of origination, you'd still be more or less assuming a linear origination threshold and that sort of $10 million to $20 million at any given time.

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

[Michael Perito, KBW]

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

[Jay Sidhu, Executive Chairman]

Yes. I think it's important to note, I mean, regardless of whether we're doing it as intended to underwrite the spell, or underwrite the whole, it's the same strong credit criteria. We're not changing the credit underwriting criteria, the credit underwriting attributes of the individual loans, regardless of whether they're to be held on the balance sheet, or to be sold as a banking as a service sector. And the reason for that is exactly what you mentioned, in case that environment would dry up. And we didn't have to hold those loans on the books, they would be the same quality of the lens directly that we're donating to be held on to vote.

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

[Jay Sidhu, Executive Chairman]

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

[Operator]

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