Customers Bancorp, Inc. (CUBI) Q4 2021 Earnings Report, Transcript and Summary

Good day. Thank you for standing by and welcome to the Customers Bank 2021 Fourth Quarter and Year-End 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. To ask a question during the session, [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] Thank you. I would now like to hand the conference over to your speaker today, Mr. David Patti, Director for Customers Bank. Sir, please go ahead.

Thank you [Indiscernible] Good morning, everyone. Thank you for joining us for the Customer Bancorp's Earnings Calls for the Fourth Quarter and year-end of 2021. The presentation deck you will see during today's webcast has been posted on the Investor Relations page, the bank's website at www.customersbank.com. You can access the deck by hovering over and clicking on the line Earnings Presentation. Our Investor Presentation includes important details that we will walk through on this morning's webcast. I encourage you to use, download, or print the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and 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 Form 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. Now at this time it's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you very much, Dave, and good morning, ladies and gentlemen. Thank you so much for joining us today this morning for the year 2021, as well as Q4 2021 investor call. 2021 in our opinion, was a remarkable year for the company. And please join me in saluting our team members for their unwavering commitment, their dedication, their hard work, in helping Customers Bank make huge, remarkable achievements. We're so proud of our team, and as you will see later, that in the presentation today, we also had the privilege of attracting talent this past year or two from several very well-known high performing institutions. Now on to our presentation, joining me this morning is Sam Sidhu Chief Executive Officer of Customers Bank, Carla Leibold the Chief Financial Officer of Customer's Bancorp, as well as Andy Gorman, the Chief Credit Officer of Customers Bank. In 2021, we achieved record quarter earnings for the full year of $343.6 million or $10.20 per share, up 187% over full year 2020. And Q4 2021, core earnings of a $100 million or $2.92 per share, up 83% over Q4 '20. Core EPS excluding PPP for the full-year was $4.41 per share, up 90% over full-year 2020 and well above our guidance of $4 for the year 2021. Our vision for growth has remained a part of our story since the beginning. As you can see in Slide 4, we inherited or got involved with Customers Bank back in 2010 by making 4 small investments of $17 million in this company, which was a problem institution at that time. In a span of 12 years, Customers Bank has grown from this $250 million problem bank into a digital -first, technology-driven financial institution, with assets of approximately $20 billion, which equates to a staggering figure of about 40% and clearly puts us as a top 100 bank in the United States. Onto some other accomplishments as promised in January of 2021, we divested BankMobile which began BMTX and we're pleased that we were able to provide a special distribution of BMTX stock to our shareholders valued at approximately $75 million in Q1 2021. We are now also preparing for the exploration of the deposit servicing agreement with BMTX by the end of this year. We expect that due to our success in generating considerably above average low cost core deposits, these explorations will be accretive to our net income by about $60 million pre -tax in 2023 and beyond. We also funded in 2021, either directly or indirectly, about 256,000 PPP loans totaling $5.2 billion, bringing the total PPP loans funded to over $10 billion and to over 350,000 small businesses across America. We earned close to $350 million of deferred fees from SBA through the PPP loans, which is significantly accretive to our earnings and capital levels as these loans are doing now forgiven by the government. This initiative not only helped save over 1 million American jobs, but also would have added approximately $300 million to our common tangible equity by the middle of this year. In October 2021, we launched a block chain-based instant payment token that immediately began serving our growing array of B2B clients who want the benefit of instant payments and generated close to 2 billion of no-cost, no or no cost deposits in only 90 days. We will provide more details about this initiative in a few, but now let's get on to the financial highlights. First, from the earnings perspective, I'll focus on the current quarter earnings Slide 6. We earned a record $2.92 in core earnings, which represented a net income of $100 million, as I shared with you earlier, and that's up 83%. This translates to a [Indiscernible] and common equity of 33.7% return on average assets of 2.11 and pre -tax, pre -provision ROA of 2.67. And our margin, net interest margin, was 2 -- 3.12% for the quarter. Now moving onto the balance sheet, we ended the quarter with $16.5 billion approximately in core assets excluding typically. Our loan book was $11.3 billion at the end of the quarter. C&I was up about 45% or $1 billion. Consumer loans were up about 40% or $500 million. Commercial real estate owner occupied was up about 80% or $83 million. Construction loans, up about 41% or $58 million. As you saw, some risks in the multifamily business, so we will continue to [Indiscernible] the decline, but that's turned around. You saw an increase in our Multi-Family Loan in the fourth quarter and you should continue to index a much greater growth this year because we see that as a really good -- feel-good credit quality, good asset quality as of now as we are building that pipeline. Our loan pipeline overall, and our backlog have grown to an all-time high level across the franchise, and we expect loan growth to continue into 2022 at double-digit levels. Total deposits this past year grew by $5.5 billion year-on-year, driven by monumental efforts from our commercial teams, amplified by our digital bank team's success in deposit category associated with our Customers Bank Instant Token or CBIT. And we brought in as I've shared with you earlier, about $2 billion in low-cost and no-cost deposits. Demand deposits are up 131%. Our non - [Indiscernible] were up 90%. And all this growth while maintaining excellent credit quality. Strong asset quality is at the core of our franchise and we continue to have superior credit quality compared to the period with NPAs at just 25 basis points and reserves to NPLs of about 278%. I want to thank you for all your continued support and it's amazing to think that we are just a young company and getting started in the next phase of our growth. I will now turn it over to Sam Sidhu, the President of CEO and CEO of Customers Bank to take you through more details. Sam?

Thank you, Jay. Another incredible quarter capping off a record year for our company. Flipping to Slide 7, let me update you on our strategic priorities. Both are incredible accomplishments in 2021 as well as our ambitious roadmap for 2022, which we are hyper-focused on delivering. This helps explain what makes Customers Bank so unique and what has driven incredible value creation for our shareholders. In 2021, CUBI was the number 1 bank stock in the country and we expect that our innovation and unique business model will continue to drive strong returns for our shareholders. In 2020, we laid out a plan for what we said could achieve significant value creation for our shareholders and we are proud to have delivered on that guidance resulting tremendous return. Firstly, on community banking on the slide. In 2021, we recruited several new teams covering new geographies in Texas, Florida, and the Carolinas and the Pennsylvania capital region, plus a reboot of our Chicago office. This brought the annual total to 4 new expansion markets. We also added several new relationship managers and executives to our existing teams over the course of the year, as well as in the last quarter. We are also focused on continuing to grow our existing business lines. As previously stated we began maintaining and we will now begin to grow our multi-family portfolio. SBA originations grew by over a 150% in the year and we also achieved our target of quadrupling our gain on sale fee income by ending the year with $6.2 million in total income. In terms of 2022 community banking priorities, we will continue to recruit regional C&I teams. In fact have several conversations in flight. Our community verticals are expected to grow by about 10% or more. While SBA is expected to grow by over 50%, albeit off of a lower base. Moving to specialty lending in the middle in 2021, we expanded our next verticals and launched 3 new lines last year. Fund finance, technology, and venture capital banking, as well as the financial institutions group. These new verticals are close to our existing core competencies, enabling strategic cross-sell to existing customers. To help emphasize this, in the last quarter we had over $350 million of referrals from existing customers. In general, these verticals operate with inherently low credit risk, as you heard from Jay, come with deposit-rich clients and are supported by high-operating leverage characteristics. Our existing verticals also performed incredibly well in the year, with lender finance growing by 77%, real estate specialty lending by 60%, and equipment finance by 27%. We also importantly outperformed on our mortgage warehouse target of about $2 billion ending at $2.4 billion. In 2022, in specialty lending, we will continue to recruit lending teams to support future growth in our existing verticals. And we will evaluate new verticals, including digital asset lending. This year, new lending verticals, including real estate specialty lending, which was technically formerly launched just prior to '21, are expected to cross over $1 billion in cumulative outstandings. Over time, each of these new verticals is expected to be at least a billion-dollar plus individual business line. Moving to the right side of the page to digital banking and our technology efforts, we have established ourselves as a leader in technology and innovation in the digital banking and FinTech space and in the banking industry more broadly. In 2021, we successfully completed a tech reorganization hiring a number of new key senior executives and team members. We also completed a corporate re-branding and website relaunch, which has been very well received by our customers, and the market. And very importantly, we achieved the big milestone in the quarter, crossing over half a million customers acquired through our digital banking platform. At Customers Bank, we have created a unique, extremely profitable credit-led Neobank within our bank that is acquiring consumer and small and medium-sized business customers, sourced through digital channels at scale. Moving to the digital consumer more specifically, our direct personal loan origination business topped $1.7 billion of [Indiscernible] lifetime loan source, underwritten and funded through our credit program since inception. We ended with a digital personal loan portfolio of $1.5 billion. In terms of digital small and medium-sized businesses or SMB, we funded over 250,000 PPP loans in the year, bringing our total, as you heard from Jay, to 358,000 PPP loans for $10.3 billion funded, generating approximately $350 million in origination fees for the bank. We have now attracted $1.9 billion in CBIT-related deposits in the first 90 days of launch. Finally, we launched a Banking-as-a-Service effort for our FinTech lending partners. As we look forward to 2022, we will be seeking to add a number of Digital First Consumer and SMB products to our portfolio to offer multi-product relationships to our half-a-million plus digitally native customer base through credit cards, term loans, revolving lines of credit in the coming quarters. This presents a tremendous opportunity for our data science and digital marketing teams who are advancing our data analytics to help our team prioritize products on the roadmap as well as create digital cross-sell journeys for this customer base. Importantly -- last but not least, we expect over $5 million of run rate revenue in 2022 as a result of our banking as-a-service efforts, which we expect to increase to $15 to $20 million in revenue in 2023. Moving to Slide 8, as we evolve from a community bank to a digital forward super community bank and beyond. Our talent needs have shifted significantly and the slide here shows firms we have recruited talent from in the last year. We've hired from best-in-class organizations in each of the new required competencies related to our strategic priorities. We've also found that our entrepreneurial environment and our rapidly scaling business is an exciting draw for team members from much larger, and in many cases, much more tech-oriented institutions, who in turn bring best practices, and deep industry experience to Customers Bank. Flipping to Slide 9, a quick recap on the exciting launch of our block chain based instant payments platform, as well as our creation of the Digital Asset Banking team. The circle on the left lays out the vertical opportunities as we see them today with our initial primary focus on new customer acquisition led by the digital asset verticals. We launched with approximately 25 customers in our soft launch and are creating sticky customer relationships strengthened by a powerful payments network effects. Our focus in 2022 will be on growing and strengthening our network by driving customer growth, API connectivity and engagement thereby attracting more inflows into our ecosystem. We are in full launch mode now and expect significant customer and deposit growth in 2022. Moving to Slide 10 on PPP. Here we lay out a summary of the PPP balances at year-end, which continued to decline. In addition to the purchase of the $529 million portfolio in the third quarter, we purchased another $313 million portfolio for similar discount in the fourth quarter, adding several million dollars of additional PPP revenue, most of which will realize in 2022. As Jay mentioned, we saw a slowdown in PPP 3 forgiveness application momentum, which surged after our technology partnership with the SBA on the Direct Forgiveness platform. Voluntary forgiveness has remained slow in January. This impacted NII versus consensus, but this is a timing move. It's a question of when not if, and this will be pushed into 2022. We still had about $90 million of deferred origination fees, which we expect to be recognized mostly this year. Moving to Slide 11, we are incredibly proud of our record loan growth in the quarter, which is setting us up nicely for 2022 and tracking well ahead of the industry. We were very tactical throughout '21 gearing up for the launch of CBIT by adding commercial teams and our expansion geographies and lending verticals. These teams will be ramping up significantly in 2022. Jay walked through some loan growth characteristics. But to summarize, loans, excluding PPP and mortgage warehouse, grew by a billion dollars in the quarter, or 18% year-over-year. We have had significant improvements in our loan mix and our pipeline and backlog remained at record levels. We are reaffirming our guidance of an average of $3 to $500 million of quarterly loan growth with a bias to the upper end, which we expect to be double-digit loan growth this year. Moving to deposit growth next on Slide 12, we had an incredible year with $5.5 billion of growth or 48% year-over-year. Importantly, our non-interest bearing deposits were up 89% to $4.5 billion. As we laid out last quarter, we took a number of actions with the addition and future expectation of significant low to no cost CBIT deposits and have further reduced our cost of funding 36 basis points for the quarter and 29 basis points spot rate. These initiatives coupled with the reduction in mortgage warehouse GDAs of about $500 million, which was linked to market activity, as well as lower seasonal student deposits down $300 million resulted in a slight quarterly decline in balances. However, this was in line with our expectations. Many banks have bottomed out on deposit cost reduction opportunities facing the backdrop of a rising rate environment, but we expect to still have room to grow supported by our deposit remix and significant CBIT deposit growth potential. With that, I'll pass it to Carla to run through the rest of the financials.

Thank you, Sam. And good morning, everyone. I'll keep my comments focused on 5 key topics. The first is strong growth in net interest income generated by the core bank. Number two, ample liquidity resulting in significant investment portfolio growth and the ability to fund future organic loan growth. The third, asset sensitivity and being well-positioned for future rate hikes. Fourth, exceptional credit quality. And number 5, significant accretion in capital and tangible book value. Turning to slide 13, I'll start with coordinate interest income and net interest margin, excluding PPP. This slide shows the trend of the increasing net interest income over the past five quarters, largely driven by strong growth in core C&I and consumer loans. Compared to the year-ago quarter, fourth quarter 2021, net interest income increased 18%. You can also see that we've maintained our loan yields quarter-over-quarter, while continuing to drive down our cost of deposits. Additionally, there has been a significant increase in the percentage of deposits that are non-interest-bearing year-over-year, as well as a 26 basis point decline in the cost of interest-bearing deposits. Moving on to Slide 14. You can see tremendous growth in our liquidity position, particularly in the back half of 2021. Our investments portfolio has more than tripled year-over-year, and has doubled over the prior quarter. At year-end 2021, we had about $6.3 billion of liquidity, which includes committed borrowing capacity of close to $2 billion. Our investment portfolio remains well diversified with the majority of the portfolio invested in MBS and CMOs. Our overall strategy remains unchanged in that excess cash is first used to pay down any higher costs or wholesale funding before it is deployed in investment securities and then ultimately used to fund organic loan growth. Slide 15 shows the re-pricing characteristics of our interest earning assets. I'll make a few comments here. First, 64% of our interest earning assets are market sensitive meaning that Net Interest Income will increase in a rising rate environment. And second, given the transformational improvements that we've made in our deposit franchise over the past year or so, we are expecting our deposit costs to be significantly less sensitive to rising interest rates. From a deposit beta perspective, we've internally modeled using 15% to 25% in an up 25 to 50 basis points scenario, and 40% to 50% in an up 100 basis points scenario. Briefly turning to Slide 16. A few high-level comments related to credit quality and reserve level. Overall, our asset quality remains exceptional, our credit reserves are strong and our near-term credit outlook remains stable. For 2021, we have less than $3 million of commercial charge-offs. And all of our prior commercial loan deferment became current by year-end 2021. Moving to Slide 17, this slide really highlights the significant improvement in our total risk-based capital over the periods presented. The estimated total risk-based capital at the end of fourth quarter 2021 is up about 139 basis points over the year ago period despite the $82.5 million preferred stock redemption in the third quarter of 2021, which on a standalone basis decreased total risk-based capital by about 70 basis points. At December 31st, 2021, our TCE ratio excluding PPP, was 7.5% up 111 basis points from the 6.4% reported a year ago. This accretion is driven by the profitability of the core bank, as well as PPP related revenues. At December 31st, our tangible book value was 37 spot 21. That's up 33% year-over-year. Lastly, if you [Indiscernible] pro forma in the remaining $90 million of deferred PPP origination fee, our tangible book value is at or above $40. And with that, I will turn it back to you, Jay.

Thank you very much, Carla. And as you can see, we are really proud of these remarkable achievements of our team and we are very upbeat about the future prospects of our company. Looking at the way we summarized on Slide 18, we expect strong core above-average, double-digit growth in loans as well as low-cost core deposits, while maintaining our above industry average credit quality. And we are focused on improving the profitability, as well as bringing our efficiency ratios in the low 40s within the next 12 months to 24 months, through a combination of revenue growth and prudent expense management over the next 2 years to 3 years. We are very well-positioned for higher interest rate environment. As we heard from Carla, with 64% of our interest-earning assets expected to be market sensitive, and the low deposit beta in the current environment. We modeled in 3 rate increases in 2022, and we believe that there is a possibility that the rate increases will continue into 2023. However, it doesn't matter to us, because we believe that it'll be prudent for us to remain somewhat asset sensitive. From a strategy and point-of-view for the best-in-class tech contiguity of Customers Bank, is a huge friend of ours, compared to the rest of the industry, and we believe that this had allowed us to be a major participant in the PPP program, which generated $300 million of approximately $300 million of common equity for our shareholders. And it's also helped us incubate new lines of businesses that we believe will support our sustainable above average growth over the coming years. The financial benefits of PPP aside, we project our recurring core earnings power to be in that $4.75 to $5 range in 2022, and well above $6 per share in 2023, 2 or 3 years ahead of our previous guidance of $6 by either 2025 or 2026. We believe our stock is attractively valued, creating about 1.5 times the yield current adjusted tangible book value, like Carla explained that the number is about at least $40 a share. And it's less than 10 times our guidance of 2023 earning. And we see huge upside potential for our shareholders. I'm also pleased to share with you that 100% of our team members at end-of-year 2021 were shareholders of the bank. With that, I would like the Operator to please open it up for Q&A.

Thank you, and as a reminder, [Operator instructions] One moment, please, for our first question. And our first question comes from the line of Casey Haire from Jefferies. Your line is open.

Yeah, thanks. Good morning, everyone.

Hi.

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

Sam you want to take this?

Sure. Good morning, Casey. As we think about 2021, 2021 was a back end of the year for many banks, with the first half of the year being relatively slow as we all recall, and have a block set of our memories. Having said that, as we look forward to 2022, we will be building off of the momentum that we created in the fourth quarter. To put a little bit of a finer point on the loan growth, it was led by our specialty businesses: 1. Fund finance grew by about $250 million in the quarter. 2. Our lender finance business grew by nearly 300 billion in the quarter. So as we look forward in 2022, we gave guidance of $300 million to $500 million in Q3. We've adjusted that to the higher end of that range, closer to an average of $500 million per quarter in 2022.

Gotcha. Thank you.

And I think, Casey, as I also mentioned, we see opportunities in the multi-family area that you only saw a $100 million growth, like I mentioned to you, we are seeing much greater than that. I think the mortgage warehouse business, we expect that color was probably going to get flooded. And if that does happen, we think the MDS projections are not going to be correct and that you might see the mortgage warehouse business also do better than what most of the folks in the industry are expecting. But we haven't factored -- we have a model -- that will be [Indiscernible].

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

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

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

Casey, I can take that one. First, just want to comment that expense management is always of focus for us at Customers Bank. And consistent with last quarter, our fourth quarter results had certain non-recurring or transitory items that I think it's important to understand. Quickly walking through them, there was about $9 million in the fourth quarter. The third quarter had about $8 million of non-recurring expense items. But in the fourth quarter, we had about $3.5 million of increased incentive accruals that was really tied to the record 2021 financial performance that we incur -- we achieved. Secondly, there was about $1.6 million of -- it's described as occupancy related expense, but it's really for the relocation of the bank's headquarters. There was some flooding in our previous headquarters that resulted in a move that took place to a much more efficient and attractive location. That was recorded in our fourth quarter results. We also had $1.8 million of the increased technology and servicing-related expenses that was tied to growth in BMTX service deposits. And then there was another $1.2 million of increased charitable contributions, corporate sponsorships, some of which were ESG -related. And then we had miscellaneous, a couple 100,000 which totaled about $9 million. So when you look at the trend for the second, third and fourth quarter, you can see that our -- what we think of as core expenses remained relatively stable at around $70 million to $71 million. And so when we are thinking about the expense guidance, going out into 2022 and 2023, we think the right measure to really focus on, is not the absolute level of expense growth. But really that efficiency ratio and making sure that the growth in revenue surpassing. The expense growth and that efficiency ratio that we're focused on. And we gave guidance in 2023 is to get to the low 40, so that will exclude some of the key PPP related revenues, as well as the expenses associated with the deposit services agreement throughout 2022, you should expect to see increasing efficiency ratios, and then to in 2023 seats that 20 below 40%

Okay, great. Thanks, Carla. I appreciate that. Just last 1 for me. On the '23 EPS guide of well over $6, just want to make sure I'm thinking about this right. Assuming you get to that high $4 number in '22 and then you have the bank mobile deposit service agreement lapsing, which is about a $1.35 that puts you in around $6.25. And that doesn't factor in anything from growth or any benefit from rates on an asset-sensitive balance sheet, correct?

Yes, that's correct.

Okay. Thank you.

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

Good morning. Guys, you reconfirm EPS guidance this year $4.75 to $5 and you had given that guidance in October, but the interest rate environment is more favorable and I'm just wondering, at one point Jay, you mentioned that your model assumes 3 rate hikes, but is that included in the guidance of $4.75 to $5?

Yes, Peter, who knows, generally speaking, we give overall gentle guidance, not a precise number on the models that we are running the company at. So yes we are asset sensitive. We do have some flaws on certain aspects of our loan portfolio. We have -- those things have also been factored in, but going forward, I think the real earnings power of our company will be very evident in the second half of 2022, as well as leading into 2023. And the opportunities to really accelerate the global Net Interest Income as a result of the higher rate is not going to be evident because of a higher is invariably there until March of this year. We factored all that in, that's why we're very bullish on 2023. And rather than give you precise numbers, we are only going to continue saying well above six stocks. This year, GAAP earnings will be well above up 7 [Indiscernible]. Again, because of PPP.

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

Yes.

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

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

Okay. Thanks, Carla. And then just -- Sam, just on the CBIT launch, 1, it's good to see that it's -- it looks like you're rolling it out about a quarter earlier than you originally had planned. And I'm just wondering if you have any type of guidance in terms of deposit growth or customer growth from the CBIT initiative.

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

Okay. Thanks, Sam.

Sure.

Your next question comes from the line of Michael Perito from KBW. Your line is open.

Hey, good morning, everybody.

Hi, Mike.

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

Sure. Absolutely. Mike, I think the way to think about the soft launch, as you mentioned, it was tactical. It was to take time to pressure test the technology, the infrastructure, processes on boarding payments. But it was also to spend time working with very key customers in this space, to think about where, where they need to be, to grow their businesses, what they're looking for, from their bank partners over a period of time. The addition of the team members is very helpful and critical for that. So we'll, as we mentioned, we look to double the customer base in the first quarter. We are adding more customers with API connectivity. Think of that as automation for payments, and we are expanding the relative networks of the hubs and spokes that we previously described of each of the various market participants and the digital assets sub-verticals. That's the way to think about how we're road-mapping over the course of the year. Now, over the course of the year, we may also add lending, which we talked about, and other legacy, as well as cutting edge products and services for the over Digital Asset Banking coverage.

Okay. And when you talk about digital asset lending, is that due to elastic collateralize USD loans or are there other products that you guys are exploring?

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

Got it. Okay. Helpful. Thank you. And then on the BM Technologies termination or expiration, rather, of the service -- deposit service agreement. The $60 million costs that you guys will pick back up, what is that exactly? Is that servicing costs? Is that -- I believe that you guys were honoring the debit interchange rate of BankMobile even though you guys moved over $10 billion. Is that incorporate in there? Just trying to get a better sense of what actually makes up that number and what will be moving away? And then just secondary on that, the accretion also assumes that you will replace the loss deposits with new deposits fully and at a comparable rate, conservatively is that correct also?

Yes I'll take that. So Mike yes, so we will have CBIT deposits grow -- they are expected to be replacing those, they are -- right now those deposits are costing us about 30 basis points and that we expect to replace them with lower costs than that. And yet, the $60 million number includes our deposit servicing costs as well as any they call agreements that you have with BMPX. At that time, as you know when we set up this agreement, was in 2019 and the rates were heading up and we were flat maximum 30 basis points for deposit. That's why we locked them up with owning assets these are profitable to us, but they will become much more profitable to us, when you look at the overall operating expenses plus cost of funds both of those categories will be coming down. And that's why we are confident that we will be able to transfer $60 million of accretion as a result of this strategy.

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

Yes, Mike, that's correct.

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

I'll start off and then ask Carla to give you a lot more color on that. Overall, we are looking at not significantly increasing our balance sheet, but improving the quality of the balance sheet. And by that I mean by having much greater stable, core deposits replacing our higher cost deposits. And then of course, this BMTX termination of the deposit servicing agreement is going to be accretive to us. We see, Sam and Carla can run through some of those numbers with you. There's going to be quite a bit of capital depletion this year, as well as into next year so we are very disciplined about maintaining our capital ratios. At the same time. So when you combine all that up. From a modeling point of view, you should assume that somewhere in that $17, $16 to $18 billion by quarter net average balance sheet, we bring the total size of the balance.

Yeah. And then from a reserving perspective, obviously, we don't give any forward-looking provision expense guidance per se. Our coverage ratio right now is about 156 which we feel we are adequately if not conservatively reserved. Internally, when we're modeling out that far, I think we're still looking at that $10 to $15 million quarterly provision expense which makes sense, and it's what we're using to internally model. Is that helpful, Mike?

Yes. Thank you guys for taking all my questions. Appreciate it.

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

Good morning.

Morning.

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

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

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

Your question was on loan pricing?

Yes.

I think as you can see from our average yields, we've been able to maintain our loan pricing pretty much during this time period, on the different categories. As such, the fund finance, which is specialty lending, other areas, which are really very strong credit quality. They're all variable rate loans and the pricing, you should expect that to be adjusted as the rates go up on that portfolio. In the Multi-Family area, since we are back in that business now, we've seen about 3.5% or so average yield. And that the consumer sector is being a lot of pressure. Everybody has suddenly finding consumer to be attractive [Indiscernible] ahead of the game, and so there's a lot of tension around the higher credit quality consumer where you should [Indiscernible] compression in that sector such as I think in the mortgage warehouse things, like I talked about float. We have instituted floats of 1% in the mortgage warehouse business and now going over to software or some other index, we are removing the float. In the short period of time, it could be a slightly lower view, but we like it because the portfolio, we expect it to be at the lowest level in the first quarter. And before it starts to build up, we can prepare, we'll be increasing the rate. So we think that we will be able to benefit from that. The margins on that would be about the same as what you've seen in the past.

Okay. All right. Thank you very much. Appreciate all the color.

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

Good morning.

Hey Frank good morning.

Just wanted to ask on the 2023 guide. Any sort of -- you talked about the expectations for really more Balance Sheet optimization than growth. Just kind of curious if you can give and I guess I get back into that. But ROAA expectations shins that you need to kind of hit to get to that $6 plus.

I think Frank, we are factoring all those in, so it will be the ROAA in that 1.21% to 1.25% range. You can figure that out. And then we are -- you are absolutely correct. Our priorities are both balance sheet optimization as well as a growth. And we will all the time evaluate, which is the best optimum way for us to allocate capital and look at making sure that the end result is optimization of shareholder value creation. So that's what we're focused on.

And Carla sorry if I missed it I know you -- I cost a tangible book comments, 10 book value per share comments. But as far as the TCE ratio for 2022, have you shared expectations there?

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

Right, on tangible book value per share.

Yeah

And then on the TCE ratio.

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

Okay, sorry, I misspoke [Indiscernible] and I guess 7.5% is still, I'd say a bit below the peer group. Given that the opportunity CBIT side, given the opportunity on the C&I side, Jay, what do you -- your thoughts on the potential for offensive capital rates in the near-term.

We continue to always be in the best way to allocate our capital, at this time, we have no plans retiring the process, but we will always evaluate which is the best opportunity and the best option available for us to drive shareholder value. We continue to always evaluate all options.

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

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

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

That's right.

That's right.

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

That's correct.

Okay. All right great. Thank you.

Thank you, Frank.

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

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

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Presenters, please stay on the line for the post-conference.