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Customers Bancorp Inc
Earnings Call Analysis
Q4-2023 Analysis
Customers Bancorp Inc
The company reported a strong finish for 2023 with a core EPS of $1.90 for Q4 and annual core EPS of $7.72, comfortably surpassing the $6 goal for 2025. This achievement was a result of efficient deposit growth and solid loan origination, coupled with robust capital levels and asset quality. The company managed to grow its core deposits by $1.1 billion in Q4 by improving its funding base and repaying high rate wholesale CDs. On the flipside, loan balances witnessed a planned decrease of $600 million in Q4, as the company focused on disciplined lending and credit extension.
Financial growth metrics were impressive with a tangible book value increase by 22% in 2023 and a net interest margin (NIM) of 3.31%. The company's loan-to-deposit ratio now stands at 72%, showcasing significant balance sheet liquidity and signaling potential for loan growth of 10% to 15% in 2024.
The firm has been actively transforming its deposit structure while maintaining cost control. Noninterest-bearing deposits grew by over $1 billion, evidencing the strength of the company's deposit gathering capabilities. Simultaneously, the company has been bolstering its capital, with improvements in both Tangible Common Equity (TCE) to Tangible Assets and CET1 ratios. The TCE ratio is now over 7%, and the CET1 ratio has reached 12.2%.
The company demonstrated diligence in managing noninterest expenses, keeping them aligned with the guidance despite incurring a special FDIC assessment of close to $4 million, related to early 2023 banking failures.
Credit quality stood out as another strength, with low nonperforming asset ratios and moderate net charge-offs. Provision expenses in Q4 were lower than expected, benefiting from reduced loan balances due to strategic portfolio management decisions.
The company has set a positive outlook for 2024, with an anticipated growth in pre-provision net revenue (PPNR) of 10% to 15%. This is expected to be driven by high-quality deposit growth, reduction in wholesale funding, and planned loan growth, which would be fueled by existing securities and cash, rather than extending the balance sheet's size. To support this growth, target ratios for CET1 and TCE are set around 11.5% and 7.5%, respectively, with a tax rate between 22% to 24%.
In the last three quarters, more than $3 billion in core deposit growth has been achieved, indicating the company's success in enhancing its deposit franchise. The company's continued improvement in NIM, along with its commitment to incremental travel on this path, highlights a robust platform for enduring profitability.
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Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Customers Bancorp, Inc. Fourth Quarter and Full Year 2023 Conference Call. [Operator Instructions]
Thank you. David Patti, Director of Communications, you may proceed.
Thank you, Rob, and good morning, everyone. Thank you for joining us for the Customers Bancorp's earnings call for the fourth quarter and full year of 2023. The presentation deck you will see during today's webcast has been posted on the Investors web page of the bank's website at customersbank.com. You can scroll to Q4 '23 results and click Download Presentation. You can also download a PDF of the full press release at the 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 currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 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 Investors section of our website.
At this time, it is my pleasure to introduce Customers Bancorp Chair, Jay Sidhu.
Thank you, Dave, and good morning, ladies and gentlemen. Welcome to Customers Bancorp Fourth Quarter and Full Year 2023 Earnings Call. Joining me this morning are President and CEO of the bank, Sam Sidhu; Customers Bancorp CFO, Carla Leibold; Customers Bank CFO, Phil Watkins. I will give you some introductory comments and then my colleagues will provide details of the quarter and for the full year 2023 for you.
While the banking industry has largely recovered following the events from last spring, there is still a lot of uncertainty and lot of headwinds facing our industry. However, Customers Bank's differentiated strategy bucked industry trends gaining strong momentum in 2023 and we expect that to continue into 2024. We continue to execute on our strategic priorities and are pleased to report that we are delivering another strong quarter for our shareholders. We are also very excited about the prospects and look forward to sharing our outlook for 2024 with you later on in this presentation.
As a forward-thinking bank with strong risk management, we believe we are creating tremendous franchise value across the bank through execution of our profitable customer-centric model. In addition, we have and will continue to capitalize on market disruption as an opportunity to create new and deeper existing client relationships, resulting in stronger loan and deposit growth.
As you know, we are reporting $1.90 of core EPS for Q4 2023 with continued deposit transformation, higher margin, no expense growth during the quarter. We generated $1.1 billion of core deposit growth in the quarter. We used these deposits to improve the overall quality of our funding base, including the planned exit of BMTX deposits from our bank on December 1, as well as paying off about over $700 million of high rate wholesale CDs during Q4.
Capital levels increased substantially again with our tangible common equity to tangible asset ratio now over 7% and our CET1 increasing to 12.2%. We are extraordinarily proud of our ability to meet and exceed our capital goals that we outlined to you earlier last year. Asset quality remains exceptional with our NPA ratio down in the quarter and reserve levels are robust at almost 500%. We have only about a 1% loan exposure to the office sector of commercial real estate. And our average loan size to the offices are less than $4 million. We believe the office sector will continue to create challenges for the industry in the coming quarters.
In addition to the future benefit from continued improvement in our deposit franchise, as well as top quartile capital ratios, we are seeing attractive loan origination opportunities. These are primarily loans where we have a holistic and primary relationship with our client. We have ample liquidity and capital to support, a 10% to 15% loan growth in 2024.
Moving on to Slide 4. I'd like to take a moment to reflect back on the promises we made going back to our 2018 Investor Day, just about 5 years ago. Today, on the fifth anniversary of this Analyst Day, we are thrilled to say that we have delivered on all these promises, the promises that we made to you at that time. Here they go. Let me share those with you.
Number one, we are now, as I said earlier, 7% TCE ratio. And at that time, we were talking about perhaps getting to 7%. Number two, we've delivered 15% average annual tangible book value growth. And at that time, we were shooting for just under 10%. We've achieved a NIM of 3.31% and at that time, we were at 2.40% NIM. We have a core ROA of 1.22% and our goal was at least 1%. We are reporting a return on common equity of 18.3% and our goal was at least 10%. And we delivered $7.72 of core EPS in 2023, surpassing our $6 EPS goal for 2025. So we are at least two years ahead. And most important is that we maintained a strong risk management culture throughout this period.
Turning to Slide 5. We again reiterate our priorities to you which remain absolutely unchanged. They are, moderating growth during these uncertain times while strengthening our balance sheet and having a strong risk management culture. We are so proud of what we've accomplished in 2023 in an extremely challenging environment for our industry. Our commitment to risk management and a client-first mindset, where clients say, "wow" is positioning us well to navigate in this challenging environment.
I want to salute and express our gratitude and thanks to all our team members for their hard work and their continued dedication to serving our clients flawlessly. Lastly, we want to recognize all our investors for their support and confidence in us. As you know, Customers Bancorp was the #1 performing publicly traded bank stock in the United States in 2023 as measured by stock price and total shareholder return. Clearly, the markets are recognizing the strength of our performance, and we commit to doing everything in the long run and the short term to serve our clients and provide solid returns to our investors.
Before I pass the call on to Sam, I want to welcome Hal Goetsch to the call. Hal joins the call from B. Riley Securities, where he recently initiated coverage on Customers Bancorp. We want to thank all of the research analysts for their efforts and the insights that they bring to the bank and to the investment community.
With that, I'll turn it over to Sam to cover the key activity and results of the quarter in much more detail.
Thanks, Jay, and good morning, everyone. We will provide more detailed guidance in 2024 at the end of the presentation, but we did want to flag our key areas of focus for the year in my initial comments.
Number one, continuing our deposit transformation remains a key priority, which we will achieve through market share gains supported by treasury management and transaction banking build-outs. We've made significant strides in 2023, positively remixing 15% of our deposits in just the last three quarters alone. Having said that, we're just getting started and continue to have a strong pipeline, which we're looking to bolster with deposit focus, talent and teams.
Number two, as Jay mentioned, we bucked the industry trend by expanding margin in 2023. We'll look to sustain that momentum in '24 with continued improvement of our deposit franchise and also by remixing into higher-yielding loans.
Number three, we're focused on driving profitability through our steadfast commitment to operational excellence, and expanding fee income opportunities. The hard work in '23 to improve our technology and human capital infrastructure, we expect will pay huge dividends in '24 and beyond.
Number four, we will maintain -- we will continue to maintain a strong capital base and liquidity while growing our loan portfolio.
Number five, we will never deviate from our credit first principles. We will achieve this through ensuring the right client selection where we have a fulsome two-way relationship.
Number six, making our clients say wow, is what increases customer engagement and builds franchise value, especially given the void created by the recent market disruption.
Moving to Slide 7. You can see our GAAP financial highlights for the fourth quarter and the full year '23.
Turning to Slide 8. I'll comment on our core results for the quarter and year. In the fourth quarter of '23, we produced extremely strong results across all profitability metrics, earning $1.90 in core EPS on net income of $61.6 million. For the full year of '23, we produced core EPS of $7.72 on net income of $248 million. 2023 was an exceptional year in which we delivered a record $687 million in net interest income. This record is all the more impressive given that prior years benefited significantly to the tune of hundreds of millions of dollars from our efforts in PPP.
Our core ROA for the fourth quarter was 1.22% and our core ROE was 16.9%. For the full year '23, our core ROA was also 1.22%, and our core ROE was 18.3%. We continued our margin momentum in the quarter. The combination of our strong deposit growth and interest-earning asset yield increase led to margin expansion of 11 basis points in the fourth quarter to 3.31%. This was up from 3.2% last quarter after adjusting for the outsized accretion from the portfolio we acquired from the FDIC.
We continue to transform the quality of our deposit balances, which I'll provide more detail on shortly. The modest decline in deposits in the quarter was driven by the planned outflows of service deposits that we previously disclosed as well as by the repayment of over $700 million of high rate wholesale CDs. This is a very strong base for us to grow off of in '24. Credit quality remained strong as evidenced by our NPA ratio of just 13 basis points and reserve levels remained robust at almost 500% of NPLs. While we do not see any signs of weakness in the portfolio, we remain highly focused on portfolio management.
Turning to Slide 9. I want to provide some additional color on the impact of the delivery of promises Jay discussed earlier. Over the last 5 years alone, we have grown our balance sheet at a 17% compounded annual growth rate. But more importantly, we've also more than doubled our deposits over the same time period. We accomplished this growth without raising a single dollar of common equity capital. Our loan-to-deposit ratio is now 72% as compared to 120% at the end of 2018. And our liquidity position has increased about 10x with our cash and short duration available-for-sale securities portfolio available to provide us ample liquidity to reinvest into loan growth in '24.
Now let's turn to Slide 10 to discuss how this transformation has improved our core profitability. Over the same 5-year time period, we have increased net interest income by a 22% CAGR, and improved our net interest margin by more than 70 basis points. Diluted EPS is up by more than 4x, and our return on equity has increased by more than 900 basis points. While we are very proud of the transformation we have accomplished, we believe the best days for Customers Bank are ahead of us. The investments in talent and technology that we made over the last several years are reflected in our best-in-class performance metrics in '23.
Looking ahead, there are still many strategic opportunities for us over the near term. We continue to see a large opportunity to capitalize on the once in a generation dislocation in the banking industry putting commercial clients and most importantly, deposit teams in motion, especially in verticals where we have existing deep expertise. If we capture mere basis points of market share, it will have a material impact on our franchise and anything in percentage point terms will be truly transformational.
We have been extremely focused on operational excellence by improving our people, processes and technology and expect these continued efforts will pay dividends, driving positive operating leverage. This operational excellence is evidenced by the doubling of our balance sheet since 2018, but our employee count is down by almost 20% over a similar time period. As Carla will provide more detail on later, starting late in 2022 and accelerated early in '23 we undertook efforts to exit nonstrategic relationship to materially increase our capital levels. These efforts are now bearing fruit as we have ample risk-weighted capital and liquidity to fund strategic franchise-enhancing loan growth. We look forward to delivering for our clients and shareholders again in '24 and beyond.
Turning to Slide 11, the highlight of the franchise. We again generated strong core deposit growth of $1.1 billion in the quarter. This represents our third consecutive $1 billion-plus growth quarter and enabled us to repay $743 million in high-cost wholesale CDs in the quarter. The $3.1 billion of deposit growth in just the past three quarters represents a 15% positive remix of our deposit franchise. It is worth noting that our noninterest-bearing deposits increased by over about $1 billion over the same time period and $2.5 billion over the course of 2023. This is a huge testament to the power of our team in action.
Similar to last quarter, I want to highlight not just the quantity but also the quality and granularity of this deposit growth. The growth we achieved was a team effort across the franchise. Once again, more than 20 of our deposit channels saw growth in the quarter. More than 40% of these deposit channels experienced growth of $25 million or more, demonstrating the broad-based nature and quality of our deposit transformation. Total new commercial accounts opened in the quarter again was impressive and in excess of 500.
As expected, our cost of deposits increased slightly by 15 basis points in the quarter, due in large part to the planned noninterest-bearing service deposit outflows. I'd notice -- I'd note that our interest expense continued to trend in the right direction, declining by $3 million in the quarter, positively impacting our net interest income. This is in contrast to all of the industry and driven by our deposit gathering successes. We remain deeply focused on the quality and stability of our deposits. And at the end of the quarter, 77% of our deposits were either insured or collateralized. This metric keeps us in a very strong position relative to regional bank peers. Even after our success in the quarter, our core deposit pipeline remains robust at approximately $1.5 billion as we continue to backfill the previous growth. We anticipate onboarding this pipeline over the next two to three quarters.
Turning to Slide 12. Here, we highlight both the success we've had in gathering core deposits as well as in paying down wholesale funding. The $3 billion of inflows in the last couple of quarters has been used to pay down more than $2.3 billion of wholesale CDs and $850 million of FHLB advances, but there remains a significant and impactful opportunity ahead. Approximately $2 billion of wholesale CDs will come due in 2024, which provides a significant value creation opportunity as we look to convert our deposit pipeline over the next coming quarters. While this opportunity is meaningful, it is important to remind everyone that like most banks, there will always be a place for some level of wholesale funding in our balance sheet.
Moving to Slide 13. Our net interest income was $173 million in the fourth quarter. This number is in line with our previous quarter, adjusting for the outsized accretion. Despite the modest reduction in interest-earning assets, our net interest margin in the quarter was 3.31%, which exceeded our $3.20% to 3.25% target guide for the quarter and represents 11 basis points of margin expansion on an apples-to-apples basis. We hope to continue this trend of funding mix and cost improvement in '24.
With that, I'd like to turn the call over to Carla to provide additional detail.
Thank you, Sam, and good morning, everyone. On Slide 14, you can see the trends in our loan portfolio, the yield on loans and our loan-to-deposit ratio. We reduced our loan balances by about $600 million in the fourth quarter as we remain disciplined on loan prices and selectively extending credit and using balance sheet capacity for holistic banking relationships. The consumer held for investment loan portfolio continued to decline, giving normal planned runoff while our consumer held-for-sale loan strategy continues to gain momentum.
In the fourth quarter, we achieved our $10 million annual run rate goal for fee and fee-like income from our held-for-sale program. We expect that to continue in 2024. As a reminder, this fee like income comes with strong credit protection. We have completed our strategic loan portfolio remix and are excited about resuming loan growth. As you will hear from Sam on our 2024 guidance, we have strong conviction in our ability to resume loan growth across the bank and to do so at accretive yields. We will reinvest securities cash flows, excess cash balances and deposit growth this year into new loan originations.
Today, our cash and securities are earning roughly the federal funds rate. Once deployed into loans, that liquidity will generate approximately 300 basis points of additional yield based on recent origination trends. We have an enviable loan-to-deposit ratio compared to our regional bank peers, given the success and continued momentum of our core deposit generating initiatives. Our strong liquidity position provides us the flexibility to generate holistic relationship-based loan growth without significantly increasing the overall size of the balance sheet.
Moving to Slide 15. We are pleased to report another quarter of core noninterest expenses in line with our guidance. Like many banks our size and those much larger, we incurred a special assessment from the FDIC as a result of the banking failures in early 2023. Our onetime expense associated with this special assessment was close to $4 million and was fully accrued in the fourth quarter. Our core noninterest expense to average assets remains best-in-class at 1.67%. Our core efficiency ratio also remained strong at 47%, which was in line with our third quarter ratio after adjusting for the outsized accretion in that period.
We will discuss our forward expectations later in the presentation, but I want to provide a few points of commentary right now. We committed significant resources during 2023 to find expense optimization opportunities that we can redeploy to create customer satisfaction and shareholder value. Importantly, none of these expense reduction opportunities will take away from client-facing positions, risk management and compliance or critical technology investments. In fact, these are the areas we plan to enhance even further by redeploying savings. Many of our anticipated expense savings will come from items like contract negotiation, vendor optimization and reduction in outside service utilization.
On Slide 16, we continue to operate with robust levels of liquidity as evidenced by more than 200% of immediately available liquidity to uninsured deposits. Total overall liquidity remained strong at $11.4 billion at year-end 2023. During the fourth quarter, we redeemed $340 million of callable Federal Home Loan Bank advances, which had a cost of close to 6%. We also sold $295 million of securities at roughly book value. The combination of these two actions had a positive impact on our capital levels, and will have a positive impact on margin going forward.
On Slide 17, we highlight a very important component of shareholder value, growth in tangible book value per share. In 2023 alone, we grew tangible book value per share by an impressive 22% to $47.61. We also have $4.34 of AOCI marks that will be recovered into tangible book value per share going forward. We expect to recover about $1.50 of that in 2024. The 22% growth in tangible book value per share in 2023 compares favorably to our regional bank peers that generated 13% growth.
Our longer-term track record is even more differentiated. If you look over the past 5 years, we've generated a compounded annual growth rate of 15% while our regional bank peers have generated only 4% growth. We believe we are among the best in the industry on this metric. Based on our current outlook for earnings and recovery of AOCI in 2024, we also expect to end 2024 with more than $55 of tangible book value per share. I'll also point out that our tangible book value and GAAP book value are virtually the same.
Turning to Slide 18. Our TCE ratio ended the fourth quarter at over 7%, which was an increase of 50 basis points in a single quarter and over 100 basis points in the last two quarters. AOCI continues to negatively impact this ratio by about 64 basis points. Our estimated CET1 ratio ended the fourth quarter at 12.2%, which was an increase of 260 basis points for 2023. Adjusted for AOCI, this ratio was 11.2%, which is top quartile among banks with an asset size between $10 billion and $100 billion. The improvement in our CET1 ratio of 260 basis points is among the top 5% of all publicly traded U.S. banks during 2023. In 2023, we executed successfully on our goals and significantly improved our capital levels. Given the continued uncertainty in the market, we feel it is prudent to continue to maintain higher levels of capital going forward.
On Slide 19, credit quality in our portfolio remains strong across all metrics. Non-performing loans ended the fourth quarter at $27 million, and our nonperforming asset ratio was just 13 basis points. Net charge-offs overall came in line with our expectations. Commercial net charge-offs remain at very low levels and consumer net charge-offs remain within our modeled expectations. Our provision expense of $13.4 million came in well below expectations in the fourth quarter, primarily due to the reduction in loan balances held for investment, which benefited provision expense by roughly $6 million. Absent this, provision would have been in line with our previous estimates. Our reserve level in dollars declined modestly quarter-over-quarter given the lower loan balances I just discussed.
We feel we are well reserved at a coverage ratio of 114 basis points of total loans held for investment, which increased 2 basis points during the fourth quarter. We remain extremely well positioned for the potential challenges ahead for the commercial real estate market. The office and retail sectors of commercial real estate each only account for approximately 1% of our total loan portfolio and continue to perform well.
With that, I'll pass the call back to Sam to discuss our outlook for 2024 and some concluding remarks.
Thank you, Carla. Turning to Slide 20. We wanted to provide you our outlook for 2024. We've broken our guidance into three categories. Firstly, our financial targets. These metrics included ROA, efficiency ratio and net interest margin. You will note that as opposed to providing specific expense guidance, we will manage the business to an attractive efficiency ratio. We believe this provides us the flexibility to make investments if we see meaningful positive operating leverage.
Secondly, from a growth outlook perspective. Our deposit growth story in '24 will be focused on continuing and building off the success we achieved in 2023. Modest growth in overall balances with a focus on bringing in more high-quality deposits will allow us to further reduce wholesale funding. We expect loan growth to resume in 2024. We're seeing attractive opportunities across our franchise led by our national corporate businesses. The strength of our capital and liquidity position provides us the ability to book 10% to 15% loan growth. As we mentioned previously, we anticipate this will be funded with securities and cash in '24 as opposed to meaningfully increasing the overall size of our balance sheet. These efforts should allow us to generate PPNR growth between 10% to 15% in '24 after adjusting for the PPP, NII and Q3 outsized accretion income.
Number three, operating assumptions. Our operating assumptions are consistent with what we disclosed with you over the course of the year. We will target a CET1 ratio of about 11.5% and a TCE ratio of about 7.5%. Our tax rate is expected to be between 22% and 24%.
With that, I'd like to finish on Slide 21 with some concluding perspectives. This was another incredibly strong quarter and year that we're very proud of at Customers Bank. I'll mention again, we generated over $3 billion of core deposit growth in the last three quarters alone, significantly improving and transforming the quality of our deposit franchise. Continuing to improve our deposit franchise remains our top priority in '24, and we are prepared to continue this march with our robust pipeline.
Our net interest margin improved substantially over the course of the year and drove higher profitability on a more liquid and better capitalized balance sheet. Our industry is looking to reach a NIM trough by the middle of this year, while we achieve that in 2022 and have increased since then. We attained our goal to build capital at an extraordinary pace due to strong organic earnings generation and a relatively flat and optimized balance sheet. Our credit quality remains exceptional, but we will stay vigilant in monitoring our portfolio.
Our business model is highly focused on risk management and our ability to perform in all macroeconomic environments. With our differentiated and now deposit-led business model and the strategic opportunities ahead of us, we believe we are very well positioned for success in the years to come.
With that, I'd like to open the call to any questions you may have.
[Operator Instructions] Your first question comes from the line of Hal Goetsch from B. Riley Securities.
Congratulations on a terrific year and quarter. The loan growth guidance is simply an outlier and pretty terrific in this environment. Can you give us a feel for the areas or industries that are contributing to this growth? And if I could ask one follow-up on expense growth. It's been flat for the last three quarters. And what can we expect for expense growth in 2024? Thank you.
Thanks, Hal. Really appreciate it, and welcome officially and formally. So firstly, to focus on the loan growth and the loan portfolio. 2024 is going to be a year of franchise-enhancing loan growth as we replace the nonstrategic assets we removed beginning in the -- in the first quarter, accelerated in the second quarter of the year with a capital call, nonstrategic line sales and then the runoff that we've targeted in the second half of the year, which has also helped us build our capital levels.
So really bilateral and in many cases, deposit-rich customers, which include venture banking, fund finance. We also are expecting contributions from community banking C&I. We also like our fixed rate equipment finance business. But all in all, we're remaining very selective. But with a 72% loan-to-deposit ratio, we have a tremendous amount of flexibility on our balance sheet.
So '23 was the year of deposit transformation. And '24 is -- that's going to continue in '23, but '24 is really going to be rebuilding the loan book frankly, to directionally close to levels that we started at the beginning of 2023. So the pipelines are strong, and hopefully, that answers your question on the growth part of your question.
Sure, sure. The second question you had was, I believe, on noninterest expense. So I think we've done a really good job. Carla talked about a couple of things. Firstly, we've managed our quarterly number at about $89 million, plus or minus, of core noninterest expense over the last three quarters. She also talked about some operational excellence initiatives with some detail.
And really, our focus, as you saw in the guidance slide is going to be managing to an efficiency ratio. And we will continue to focus on trying to drive savings in the core recurring expense base. Having said that, we'll continue to invest wherever we see opportunities. You heard me talk about deposit teams and really, we won't hold back on expenses and reinvesting those savings.
However, we will always hold half the governor of that efficiency ratio. So a long way of saying we'll look to -- I think we're sort of at the high 40s right now. We're going to get to the mid-40s in '24, and we'll look to, at a minimum, look to maintain directionally our core expense base, but really driving that revenue growth, which is going to help us get to that efficiency ratio target.
Thank you very much.
Your next question comes from the line Casey Haire from Jefferies.
So apologies if I missed this, but can you guys -- your NIM guide of 3.20% to 3.40%, what kind of Fed funds forecast is embedded within that? And what kind of deposit beta are you assuming if you do have cuts in there?
Casey. I'm happy to take that. And Carla, feel free to jump in with any clarification that I miss. So the NIM guidance is pretty wide. There's a lot of deposit remixing and loan remixing that's happening. You also heard me talk about the deposit side, the $2 billion plus or minus more of wholesale CDs that are maturing in '24.
So really, on the high end of the range we would sort of assume, cuts that would be more in line with the Fed dot plot, but you could have faster loan originations that happened earlier in the year as opposed to middle to later part of the year. And it could assume higher pace and faster pace of deposit inflows at lower cost earlier in the year versus later. And then the inverse really on the lower end of the range. So the range to be clear, is about 3 to 6 cuts depending on the market and the Fed dot plot. So on the lower end of the range would be higher and faster cuts and really the inverse of what I just described.
Got you. Okay. So 3, 6 cuts, 6 cuts would -- I would assume, get you to that 3.20%. 3 would be to the higher end of 3.40%. And then just underneath that, what kind of -- like apologies -- the deposit beta, like in the first...
Yes, it's embedded. It's really embedded in the guidance. The way to think about deposit betas on the way up, we had a high deposit beta, which really impacted us in '22, but really tapered off in '23. And in fact, we peaked in the first quarter of last year. High deposit beta, high cost of funds benefits you on the way down, and we expect a high beta on the way down.
Got you. Okay. And just lastly, on your -- the deposit remix, so $2.2 billion of wholesale CDs maturing this year. First off, what is the rate on those maturities? And then if I'm doing the math correctly, it looks like you've got core deposits up $1.5 billion to $2 billion. And if all-in deposits are growing low single digits, there's going to be some rollover of that $2 billion. Just wanted to make sure that's correct.
Yes, Casey, good question. So overall, we'll look to remix most, if not all of that into -- with core deposit growth. It really depends on the overall pipeline and mix. The cost of that in this year is actually pretty close to 5%. So there's a tremendous opportunity from a cost of funds perspective.
So hopefully, one of the things I did mention is that we're down to about 18% of wholesale CDs from our peak a couple of quarters ago. Our business model is branch-light. So there's always going to be a place for some portion of wholesale funding in our balance sheet, and we'll look to be thoughtful about recasting any small portion of that over the course of the year. But again, most, if not all of that, we'd look to remix through the course of the year with core deposits.
Your next question comes from the line of Peter Winter from D.A. Davidson.
I wanted to ask about the balance sheet sensitivity. I mean as of 3Q, the balance sheet is fairly asset sensitive. So I'm just wondering were you able to reduce any of that sensitivity in the fourth quarter? And what's the plan on trying to reduce some of that in '24?
Sure. Absolutely, Peter. So a high rate environment should be most challenging for a bank like us, given that we don't have the retail network. However, we [ neutered ] that with the deposit trends and really the positive mix shift into noninterest-bearing lower cost deposits over the course of last year. The down rate is going to be beneficial to us from an asset sensitivity perspective, as you know, there are limitations from a shock perspective and a spot perspective in the sense that our K is going to be out in a couple of weeks. But even if you look at our September 30 numbers, noninterest-bearing deposit growth increases your asset sensitivity.
However, rolling off of fixed rate wholesale CDs into floating rate deposits decreases your asset sensitivity. So we're very prepared for declining rates and while we're moderately slightly asset sensitive. Today, the shock that you'll sort of see in those types of financials is not necessarily representative of how we will actually operate in a gradually declining rate environment, which is what we and the market overall expect directionally, whether it's 3 or 6 to be determined.
Okay. And then just how do we think about average earning assets from fourth quarter level? I mean positive outlook on the loans, but funded with excess cash and securities cash flows. Just how do we think about the average earning asset growth rate?
So I think I talked about the 10% to 15% growth rate. If you take the midpoint of that range, really you can sort of directionally see you're getting back to 12/31/22 in terms of our directional loan balances, that earning asset mix shift is really going to be coming from cash and securities as opposed to any changes in the balance sheet. So you can sort of think of the average earning assets as moderately flattish.
I'd also mention that I think we've disclosed our securities portfolio is somewhere in the low to mid-5% range on a blended basis. Our cash, as you can probably appreciate, is generating something directionally similar. And our incoming loan yields are typically, especially for some of our national corporate businesses, which is where greater than 50% of the expected growth is planned to come from, it sort of gives you an extra 300 basis points plus or minus spread above what those earning assets are currently yielding.
Got it. Just my last question. You guys are in some of these businesses of the failed banks last year and then you, of course, bought Signature's venture capital banking portfolio from the FDIC. Are you seeing a lot of opportunities to add more bankers to the platform?
Yes, Peter, that's a -- it's a great question. I think you sort of heard me talk about market share gains and the hundreds of billions of impacted customer deposits and loans from the failed institutions. And I think that what's important about our business is, we haven't added any new business lines or new business verticals. We happen to have a lot of high-quality, low-risk, high-growth opportunity, commercial verticals at our bank existing today.
From a lending perspective, we have very strong lenders across the franchise. From a deposit perspective, I think, you're absolutely right, there will be opportunities for us to find teams and individual performers in motion because clients are in motion. Clients have already changed banks once or twice in the past 12 months and folks are looking to find high-quality commercial-oriented platforms like ourselves to be able to port into.
Got it. Thanks, Sam.
Absolutely.
Your next question comes from the line of Michael Perito from KBW.
Hey guys, good morning. Thanks for taking my questions. So obviously, the guide for '24 is pretty thorough. I just had a couple of high-level questions. I'd love some color on, if that's all right.
Number 1 is just you guys are pretty clear and laid out the remixing opportunities for '24. But I was wondering if you could go a layer deeper just on the mindset around balance sheet growth. Like what are the pieces of the equation when that comes back into consideration in more earnest? Is it a certain capital level? Is it a certain amount of liquidity remixing or deposit mix when you guys will start to consider growing the balance sheet? I realize it's not '24 consideration. But just as we look out to '25 and maybe even '26 in the next quarter or two. Just trying to get a better sense of your thought process around when balance sheet growth might and could resume.
Thanks, Mike. Yes, absolutely. So firstly, starting from a capital perspective. We hit our minimum target of 7% by the end of the year, which was really important to us. We expect in the first half of the year, we would hope to achieve at least a 7.5% TCE. I think from a regulatory capital perspective, we've more than cleared and gotten to top quartile levels. We think it's important to be at that 7.5% type range.
Focusing on the inside of the balance sheet for a time period and then I'll address the latter part of your question sort of a bit of more of a medium to longer term cast. From a loan growth perspective, I think, we've pretty much covered that from sort of a transfer of cash and securities to loans within the asset side of the balance sheet.
From a deposit perspective, we are -- while we're top quartile or top decile and all the other most important profitability and balance sheet metrics, I think, from a self-awareness perspective, from a deposit side, we're still on the higher end and we'd like to continue to improve the mix and reduce the cost and the cost sensitivity of those deposit customers over the course of the coming quarters and years, and that's really what our focus is going to be on. You heard me talk about deposit-led growth. I think the real differentiator for Customers Bank today is the customers and the teams that are in motion that are going to really help us enter 2025 and beyond are going to help us build deposits first internally and then a deposit-led growth in '25 and beyond, maintaining our current capital goals, which we hope to achieve pretty quickly.
That's helpful color, Sam. And then just you mentioned the expense guide kind of shifting to the efficiency ratio -- gives you guys flexibility to invest where you see opportunities. Just was wondering if you could maybe spend a minute, not that you guys need more because you've obviously been very busy and done very well. But what initiatives or what does that mean? Like what are you going to look to invest in? Is it new business lines? Is it just adding more people in the business lines you've added over the last two years? Just would love another layer deeper on that as we think -- once again about the kind of forward outlook and growth opportunities.
Sure. Absolutely. Our reinvestment for the near to medium term is really going to be focused on continuing to build out the infrastructure from -- you heard about sort of treasury management, marketing, a lot of the support functions that allow us to have the breadth of products and services, generate fee income, enhance the customer experience. Those could also sort of brought -- lead into sort of technology and other AI type initiatives, which will help enhance the customer experience and customer service. But the real focus from a true material sort of noninterest expense perspective is going to be on people that help us service and acquire new customers really focus on those deposit customers.
So you think the biggest area for investment will probably be growth-facing people as you guys continue to scale infrastructure.
It's absolutely right. Yes, there's a lot of folks that have had logos on their business cards changed in the past 9 months, and there's a lot of folks that have elected to change the logos on their business cards who are now looking to change again.
Great. And then just one last one for me. Just would love a minute on kind of where you guys are at on the technology road map. I mean, any kind of internal investments in your core or other capabilities? Just not really kind of an earnings impactful question necessarily. I'm sure it's baked into your budget and efficiency ratio guide. But just would love any flavor you can give on where you guys are spending some money on the technology and infrastructure side?
Yes. Sure, Mike. Happy to also take that. So I think that we're always looking to streamline and improve the effectiveness of our technology platform. We were one of the first banks going back 7 or 8 years ago to invest in middleware that sits on top of our legacy core. We are probably on the third iteration of that today and continue to enhance it.
We're also in the midst of, again, this is not something that has required a ton of investment because we have the people at our institution. We have developers. We have API developers. We have a lot of experts who have come from both big and small institutions who can help us continue to enhance our technology platform, but we're really looking to rewire and rearchitect things that sit even above and below the middleware. And we're happy to share some more information on that over time. Again, it's not requiring investment, but it's really going to enhance and streamline the way that we look to port in and add new technology providers and also how we currently service our customers. So that's one.
Again, similarly, on some of the now, I guess, more legacy type software providers like a Salesforce or nCino where multiple years into probably second or third contract negotiations and whenever those come up, which come up in the next sort of 12 months or so, we typically look to pivot and reset and we use that as an opportunity to redesign and think about what we've learned over the past couple of years, think about sort of the new business lines. And in many cases, what's really interesting is some of the new team members that we bring on have different ways of doing things that we can sort of export to the rest of our organization in a very positive way.
So hopefully, that gives you a bit of flavor. I touched on AI as well. And these are the types of things that are very low stakes, test cases that we continue to expand upon exploring across the organization. But again, these are all things to enhance the customer experience and to streamline operations. Nothing that's requiring a tremendous amount of investment. But what's important is that we truly are at the cutting edge of thinking about these types of investments and initiatives.
Great. No, definitely helpful. Appreciate it. Have a good weekend.
Your next question comes from the line of Steve Moss from Raymond James.
Sam, on the deposit pipeline here, just curious if you could give a little color on the underlying mix whether there's a mix shift this quarter here. And just also what you're thinking is roughly the average cost of deposits as they're expected to come on?
Sure, absolutely. Steve. So just to sort of recap, I think I mentioned this earlier, it was broad-based across the franchise. This is a $1.1 billion of core deposit growth, not dissimilar at all to last quarter. We had almost two dozen, with 20 of our deposit channels that saw good growth, and these channels had growth of $25 million or more individually, which really sort of helps put a pin in the broad-based nature and the quality of this -- of the growth.
About 1/3 to put it more -- with more specificity came from private client groups in New York, about 1/3 came from our financial institutions group and the balance was more broadly spread across the organization. So it's a little bit of a shift from -- towards more of our private client groups versus last quarter, which was more focused on the Venture Banking Group because of the migration of the portfolio at the end of the second quarter that really brought in those customers in the third quarter.
But I think what's more relevant is to just to zoom out and focus on the $3 billion over the past couple of quarters for a second because I think that really puts color on the total transformation. So about 1/4 of that came from our private client groups, 15% to 20% came from the Venture Banking Group, 20% from our financial institutions group, and the balance was spread across the organization like fund finance, commercial real estate, equipment finance, consumer and others. So it's also worth mentioning, as we added $3 billion of core deposits, we also increased our noninterest-bearing deposits by about $1 billion over the same time period. So hopefully, that gives you color on where the deposit growth came from.
The pipeline is very similar. So I don't need to sort of rehash it. But I think on the venture side, the team was more on transitioning customers in the third quarter. Fourth quarter was outgoing business development, and we're going to start to see the customer growth after a foundational quarter in sort of the first half of this year.
I think you also asked about rate. So all in rates when accounting for the noninterest-bearing balances are coming in not so dissimilar to last quarter and sort of that mid-3% range right now. So I think that we're optimistic. We're getting close to an inflection point in the interest rate hiking cycle. So hopefully, this is where things will continue. Having said that, I think, it's very important to note, we're not going to miss market share opportunities by standing on ceremony, especially given all of this dislocation here. So if we need to bring in true primary customer relationships and have a portion of those deposits [ to be at market ] rates, we won't shy away from that.
Okay. Great. I appreciate all that color there. And then similar question on the loan growth side here. You mentioned the VC fund finance, community bank, C&I and equipment finance as drivers of loan growth. Just kind of curious, do you view like fund finance and community bank as the primary drivers relative to VC and equipment finance. Just how do we kind of think about that mix and the opportunities you see?
Sure. So in terms of originations, I think you hit the nail on the head. It's really it's fund finance, venture banking, equipment finance, health care, on the corporate side and then community banking really will be on the sort of the more traditional C&I and nothing really to report on CRE.
What's worth noting on venture banking is, as you can appreciate, these lines are typically not like, say, a fund finance line where their average -- typically average outstandings are hovering within a tight range. So you have a sense of what a commitment leads to in terms of outstanding. These are typically slow draws. So we may have originations, and that also helps to be the catalyst to bring over deposit relationships, but we don't expect draws and outstandings really in the first half of the year.
Okay. Great. Appreciate all the color. Most of my questions have been answered, nice quarter.
Your next question comes from the line of Frank Schiraldi from Piper Sandler.
Just as you talk about maintaining higher levels of capital here in the near term, and you mentioned, I think, 11.5% CET1 for, I assume, for 2024. Just curious if -- what you think the right level for the bank is longer term? Is the TCE ratio a bit of a governor on that? Or any sort of targets maybe when things calm down a bit and a little more certainty in the marketplace where you think the right level of capital is.
Sure. Frank, I appreciate the question. So from a CET perspective, I think, we had set an ambitious goal at the beginning of the year of 11%, 11.5%, which we crossed and really got to top quartile from a regulatory capital perspective in the third quarter.
TCE, as you rightfully noted, has really been our governing constraining capital level, which we've gotten to sort of what I would call the minimum of a target range and expect in the near term in the next quarter or two to be at that 7.5% plus type range. And that gives us flexibility if we do feel that deposit growth is -- deposit mix is more or less complete and deposit growth could potentially lead to balance sheet growth, but that's not something we expect in the next couple of quarters. So I think 7.5% feels like the right target from a TCE perspective.
So as we think about going off of there and sort of casting a bit more of a longer-term range, I think, we've always talked about a broad range of 7% to 8%. I think now that we're talking about a minimum level of wanting to get to that 7.5%. I feel like that is going to be our more medium-term target. Our organic capital generation has really ramped up, and we expect to continue to operate within that sort of minimum range.
Okay. And then I believe you're just under 20% total brokered at this point on deposits. And it sounds like given maturities over the next 12 months that probably should fall below 10%. Just curious if there's any sort of a hard line in terms of where you want to get below? You mentioned brokered or wholesale is part of the mix for a bank going forward. So just curious on that front.
Good question, Frank. And yes, we're at 17% today or as of 12/31 and declining even further. So I think we're more or less at the level where we would have targeted that we wanted to get to. I think even getting -- building off further from here, it's really going to be dependent on core deposit growth. So I do think that we'll continue to make significant headway as the year progresses, getting closer to that 10% plus or minus range.
There's no immediate target. There are benefits, and I think the bias and stigma for any bank for some portion of wholesale contractual insured CDs as part of an overall funding base and funding strategy, especially for a commercial-oriented nonretail branch-based bank makes sense. It's something we'll continue to evaluate over time. I don't have a specific number for you in mind, but do feel that we're going to continue to significantly reduce even from the 17% we have today.
Okay. And then just on the -- sorry if I missed it, but on CBIT deposits, in the past, you've talked to think about a 15% max sort of from a standpoint of concentration. Is that kind of where these are sitting now? And then as you think about core deposit generation, how do you think about it? Is this still core? I mean, obviously, if we get some rate contraction that could become a little less attractive in the near term unless you move to a fee model. So just curious where those are and how you're thinking about that business longer term.
Sure. Absolutely. So the answer to your first question is, yes, we have and continued to. And frankly, it's been very, very stable. So $0.2 billion, plus or minus, again in the quarter. So -- on an average deposit perspective. So that's constant for three quarters in a row. So we're managing it very well and also managing it well with our customers and holding those in cash.
On a longer-term basis, we'll continue to evaluate as rates evolve. We're in discussions with customers, we're providing business-critical services to customers and holding operating accounts where those customers cannot necessarily fully operate without the technology we are providing. So I think we feel very privileged to be in that type of position. Our customers are very privileged to be working with us. Over time, as rates decline, we're still at a significant NIM at today's rates. And so there's several hundred basis points before that would necessarily be below our NIM average, and there are different things that we're exploring and including fees over time that we'll continue to evaluate. But we're not really holding any excess funds there. These are truly sort of payment services and operating accounts at current levels.
Your next question comes from the line of Matthew Breese from Stephens Inc.
Just looking at loan growth guidance for the year, it implies kind of a rough figure $1.6 billion. I know you talked about coming from cash and securities. Could you break down for us how much do you expect to come from cash and how much from securities?
Sure. It's -- I'll give you sort of rough directional numbers, Matt, just sort of based on maturity schedules and cash flow amortization. It's typically going to be in that range of $600 million to $800 million that's going to come from the securities book. And the balance would come from cash, and we're at a 72% loan-to-deposit ratio today even with sort of thinking about the high end of the range would still be -- have a [ 7 handle ] below 80% or below from a loan-to-deposit ratio. So hopefully, that gives you some governors and some framework to think about that.
That's great. That's what I mean there. And then going to the NIM, it sounded like the pipeline's blended yield is in that kind of 3.50% range. It's not too dissimilar from where we are now. Is that 3.50% a good proxy for where we might see peak deposit costs in '24? And when do you expect that to occur?
So it is -- I think you sort of heard me reference, we're sort of at that overall inflection point from a deposit perspective. We also talked about the wholesale CDs continuing to decline. I think it's worth mentioning that from a growth perspective, you also heard me say that we're not going to be imprudent about taking market share. Our interest expense can and should continue to decline even before rate cuts.
So yes, while the output of a cost of interest-bearing deposits may change, the deposit mix is really going to be the main driver of ups and downs. Interest expense should be maintained. And ideally, it should trend downwards on the sort of flattish type deposit base. So we feel privileged to be in this type of a trend and we feel confident in sort of our deposit pipeline and backlog.
Okay. And then two other quick ones. The first one is just in regards to the specialty lending balances were down around $400 million this quarter. And I was curious, what was the driver of that? What happened there and expectations for that kind of line item for 2024?
Sure. As I mentioned before, it was sort of targeted. These were lower margin, slightly below 300 basis points, 250 plus or minus type spread from that particular business line from the specialty. It was within our Fund Finance business, specifically focused on our Lender Finance business. These loans were really rolled off in late December. We'd sort of planned for them and did -- an opted and elected not to renew. So nonstrategic from a business line as well as a customer relationship perspective, nonstrategic from a deposit perspective and nonstrategic from a primacy of relationship perspective. So hopefully, that gives you some color, and we'll look to -- that gives us sort of more opportunity to refill that with more strategic loan growth in the year.
Understood. Okay. And then the last one was just appreciating that credit metrics were solid. NPAs are basically flat at 14 bps or 13 bps. I did see that substandard loans increased about 20% quarter-to-quarter. And I was curious what happened there, and is there anything worth mentioning?
Yes. So yes, the substandards did increase, but that -- it's actually really related to a single credit that migrated in the portfolio. And it's worth noting on that, that we actually have 100% coverage of the loan amount in cash from the borrower at the bank. So it's a bit of a unique situation. And since the quarter, there's actually been some positive developments on that credit as well. So we wouldn't be surprised to see that reupgrade during the quarter. So really not anything that we're worried about.
Okay. Just curious, what was the loan tied to in terms of commercial real estate consumer?
It was something our commercial finance, equipment finance business. So again, it's a large relationships, $60 million plus. I don't know the exact number, and it's 100% backed by cash.
Got it. Okay. That's all I had.
Sure.
Your next question comes from the line of Bill Dezellem from Tieton Capital Management.
Nice quarter. So relative to your guidance about loan demand, given that that's a bit unusual for the industry right now, would you talk to us about what you've seen in terms of loan demand changes or trends over the last four months or so, please?
Sure. Thanks for the question, Bill. So two major things to highlight that I haven't already covered on the call today. Firstly is that our lending teams have been sitting on their hands for the past 12 to 15 months, really. And I think that there's a lot of pent-up demand from existing customer relationships, even when not taking into account new opportunities.
That's amplified by there being now fewer competitors in many of our national corporate verticals, which I've sort of highlighted what the components of those are earlier in the call. So the combination of the pent-up demand plus fewer competition and our sort of focus on these national low credit risk verticals, it's not a stretch for us. And because we were targeted in reducing our nonstrategic assets, it's really just getting our portfolio back to where it was 12 months ago. So it's not a stretch, and it's all relative to our size and the business lines that we're focused on.
And then have you seen that loan demand change and get stronger over the last four months? Or basically, the demand has been there, you just have -- your bankers have just been in a holding pattern.
Yes. Over the last three to four months, it really hasn't changed much. It's just been that our discipline has been on making sure we focused on capital and having a very strong base to build off of. So I haven't seen a material change. And I think what's also important to note is we're not CRE dependent like many of our peers, and I think that's really helping to benefit us in the sense that we have a broader, more C&I commercial-oriented base that's helping to source this input.
That's very helpful. And I know we're running a little long here, but one final question. Long term, not in 2024 but beyond, how are you thinking about the loan-to-deposit ratio? Where -- what's the range that you find as a comfortable place to settle into?
Sure. So I think I talked about between sort of where we are in 80% plus or minus for this year, likely sort of staying in the sort of the mid- to high 70s. Longer term, we've been sitting on very prudent cash balances, and part of that is by nature of the events of March of last year. Longer term, where we used to be at 120% in 2018, mostly driven by some of our focus on our Mortgage Warehouse business, which we felt comfortable in sort of given the short duration and liquid nature of that portfolio and going to the higher end of the overall peer group. We feel probably more in the mid-80 range, feels like a more medium term, but it's something we'll continue to communicate about in the coming 12 to 24 months.
Great. And thank you again for the questions and congratulations on the solid results.
Thanks, Bill. Appreciate it.
There are no further questions at this time. Mr. Sam Sidhu, I turn the call back over to you for some final closing remarks.
Thanks so much, everyone. We really appreciate your continued interest in and support of Customers Bank. We look forward to speaking with you next quarter. Thanks so much, and have a great day and a great weekend.