Customers Bancorp, Inc. Q1 FY2022 Earnings Call

Good day. Thank you for standing by and welcome to the Customers Bancorp Inc., First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Thank you. I would now like to hand the conference over to your speaker today, Mr. David Patti, The Communications Director for Customers Bancorp. Sir, please go ahead.

Thank you, Ludi and good morning, everyone. Thank you for joining us for the Customers Bancorp's Earnings Call for the first quarter 2022. The presentation deck you will see during today's webcast has been posted on the Investor Relations page, the bank's website at www.customersbank.com. You can scroll to Q1 ’22 results and click download Presentation. You can also download the PDF of the full press release at this spot. Our Investor Presentation includes important details that we will walk through on this morning's webcast. I encourage you to download and use the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is really anticipated. Please note that these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and Form 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of the website. At this time it's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you, Dave, and good morning, ladies and gentlemen. I too want to welcome you to the Customers Bancorp Inc., Q1 2022 investor call. Joining me this morning are Sam Sidhu, the President and Chief Operating Officer of Customers; Carla Leibold, our Chief Financial Officer and Andy Bowman, our Chief Credit Officer. We are extremely pleased with the Q1 results and are excited that 2022 is off to a great start. In a quarter impacted significantly by geopolitical conflict, raising interest rates, yield curve inversion, inflationary pressures, and the ongoing effects of the pandemic. We remain very focused on executing our strategy while being very mindful of this rapidly changing environment. Before I share my comments with you, please join me in saluting our team members and all their hard work and commitment in helping us achieve these significantly better than average results. From a risk management perspective, we are viewing this challenging operating environment, which may possibly result in a mild to moderate recession in 2023. Our execution of strategies and guidance for 2022 and 2023 assumes the existence of such an environment next year. We would like to take about five minutes in each of our quarterly calls to discuss with you our unique strategy, as well as providing you an update on the results of our major strategic initiatives. Looking at Slide four, at the core of our strategy is a true obsession with our clients. There are many ways to center a business strategy. You can be extremely competitor-focused, technology-focused, product-focused, business model focused, no-cost focused, etc. However, in our view, being obsessively customer-focused is by far the most effective strategy. The customer is at the center of everything we do. We have a uniquely high-touch supported by high-tech business model that is executed by our very experienced teams through a single point of contact model. The team is fully capable of delivering full-service private banking through omni channels depending upon customer preferences and needs. We view ourselves as a forward-thinking bank and have recently focused on improving our brand, streamlining our offerings, as well as our underwriting and portfolio management, resulting in dramatically improved turnaround time, so that we are truly delighting our customers. We've also significantly improved our onboarding experiences and developed real-time B2B instant payments functionality for our business customers, which is paying huge rewards. We believe we are just beginning to see some of those rewards. Our technology, products, services, and all our activities are designed to delight our customers, helping us remain focused and proactive in taking on the future. On Slide five, you can see that our vision for growth has remained a part of our story since the beginning. We took over a failing bank with our own money and formed Customers Bank that has grown organically from a $200 million problem bank into a very strong customer-focused financial institution with about $19 billion in assets. This equates to a CAGR of about 40%, placing us in the top quartile of banks in our peer group. On Slide six, we would like to briefly discuss our ESG review, which we take very seriously. In highlighting just one or two aspects, I'm pleased to share that we financially supported over 350,000 small businesses across America through our PPP program and believe we saved as many as 1 million jobs and tens of thousands of business establishments, many of which are minority-owned. We also financed over $40 million of solar energy products in 2021, and our team members have garnered recognition for our wellness initiatives. We have made significant investments in diversity and inclusion, initiating several projects to improve in this area. At Customers, we are laser-focused on maintaining our credit quality better than most peers, increasing total revenues at an above-average rate, managing our expenses, improving our efficiency ratios by cutting bureaucracy, and continuing to deliver positive operating leverage and superior bottom line results. We will never compromise on effective risk management principles, especially regarding maintaining our credit quality. I truly appreciate your continued support and interest in our company. It’s remarkable to think that we are just getting started on several very innovative and exciting strategic initiatives, and we believe we have significant runway ahead of us. At this time, I'd like to turn it over to Sam to provide you with more details on some of these initiatives. Sam?

Thank you, Jay. Good morning, everyone. This is Sam Sidhu, President of Customers Bancorp and President and CEO of Customers Bank. Another great quarter, in fact, a record first quarter at Customers Bank. It has been a very strong start to the year. We continue to gain momentum and benefit from impressive and responsible growth across the company, showcasing the broad and diversified strength of the franchise. Let me briefly summarize our results. First, from an earnings perspective, we earned $2.18 in GAAP EPS, representing income of about $75 million and marking an impressive 116% increase over the year-ago quarter. Core earnings were $2.19, and stripping out the benefits of PPP Income, we earned $1.47. Our core ROCE was 24%, and ROA was 1.63% or 1.24%, excluding the benefit of PPP. The net interest margin came in at 3.32% for the quarter. Now moving to the balance sheet, we ended the quarter with $17 billion in core assets, excluding PPP, up 24% over the year-ago quarter. Our loan book grew an impressive 8% year-over-year to $11.9 billion at quarter end, with our loan pipeline and backlogs at all-time high levels across the franchise. Total deposits grew by $3.9 billion year-over-year, driven by monumental efforts from our commercial teams, amplified by our digital banking team's success and deposit gathering associated with our Customers Bank Instant Token, or CBIT, launched late last year. Our digital asset banking team has brought in approximately $500 million in non-interest-bearing deposits since the end of the quarter, bringing total digital asset deposits to $2.3 billion as of April 15. Strong asset quality is at the core of our franchise, and we continue to implement superior credit policies in comparison to our peers, with NPAs at just 23 basis points, and our coverage ratio at 1.44%. We continue to experience exceptional asset quality attributable to our disciplined risk management, which remains a core strength and pillar of our business. We have proactively tightened underwriting standards and will shift loan growth next to continue to maintain a pristine credit book as we wait and observe the impact of the Feds actions. Flipping to Slide nine, let me update you on our business line accomplishments and strategic priorities. This page helps to visually clarify our strategy and explains what makes Customers Bank unique. Firstly, on community banking in the first quarter, we strengthened our presence and reputation in our expanding geographies, laying a solid foundation for future loan growth and team recruitment. We also continue to grow our existing business lines, adding several new relationship managers and executives, leading to healthy, quality-driven growth in end markets. Our SBA production grew by 14% quarter-over-quarter, and our digital small ticket product exceeded $5 million in originations across numerous loans, which is a testament to our technology-enabled proprietary lending program. Moving to specialty lending, we continue to recruit specialty lending teams and bolster our existing team to support future growth. We are witnessing industry-leading diversified loan growth in our specialty verticals. Our new lending verticals have already achieved outstanding balances of $434 million since inception, secured in very robust asset classes with deposit-rich customers. This growth has been supported by significant customer referrals and is well diversified across existing and new verticals. We are on track to launch our digital asset lending vertical in the next few months, further strengthening our commitment to our digital asset banking niche. In the quarter, we also onboarded an experienced leader to launch other technology-enabled small-ticket lending products within our equipment finance specialty business. Finally, regarding diversified growth, we expect to achieve double-digit loan growth across all verticals, excluding our mortgage banking-related vertical. Moving to digital banking and our technology efforts, we have established ourselves as a leader in technology innovation, both in digital banking and the wider fintech space, as well as in the banking industry. In terms of our digital consumer business, we continue to refine our portfolio mix towards a directly sourced program. We're pleased to report that our digital SMB bundle remains on track for a pilot launch in the next quarter. Regarding CBIT, after a successful soft launch, we kicked off a full launch in January of this year. We are proud to report that we have substantially exceeded our first quarter customer growth expectations and quadrupled our customer base to approximately 74 new customers, totaling over 100 customers at the end of the quarter. This is a testament to our compliance-first, best-in-class onboarding process and recognition of our industry-leading technology infrastructure platform, which is driving long-needed innovation within incumbent banking institutions. Our customer pipeline is very robust, and we anticipate accelerated growth in the second quarter. All customer payment flows began in the quarter totaling $7 billion. While net deposits were mostly flat as of March 31, as you can see, in early April, we benefited from large non-interest-bearing deposit inflows, with our total CBIT-related deposits reaching $2.3 billion as of April 15. Our digital asset anchor customer base is diversified and includes exchanges, OTC desks, institutional investors, and stablecoin issuers. In just a few months, Customers Bank already banks several of the largest players in each of these categories. A number of customers have indicated after onboarding that they will shift their primary banking relationship to Customers Bank, which speaks to our innovative approach to service and experience via a high-touch, high-tech banking model. Our focus in 2022 will be on growing and strengthening our network by driving customer growth, API connectivity, and engagement, thereby attracting more inflows into our ecosystem. We're confident in our ability to add $7 billion in low- to no-cost related deposits to our franchise in the second half of the year. Moving to the next slide, loan growth and mix. We're already seeing the benefits of our 2021 efforts to establish new lending verticals, which has contributed to diversified loan growth in the quarter. Our teams have posted another billion-dollar-plus quarter in net originations, excluding mortgage warehouse, with $559 million net after accounting for that business decline, representing 8% year-over-year net growth, 5% of quarterly growth, and about 20% annualized growth. This growth comes primarily from floating-rate originations, which will help increase our future assets and activity. This growth is well above our $500 million average quarterly loan growth guidance, despite a significant decline of over $500 million resulting from the rising rate environment in our banking to mortgage companies business line. This business, however, is now down to 15% of loans, which will significantly reduce seasonality and earnings volatility. Specialty CNI led the growth, with over $500 million of our loan growth coming from our lender finance and fund finance verticals combined. We're thrilled with the performance of our highly secured and structured fund finance business being led by a team of senior executives we recruited last year from JPMorgan and Bank of America. This vertical has not encountered $1 of credit-related charge-offs historically. Our relationship-based multifamily business also grew by $218 million in the quarter, with $185 million of that coming from existing and repeat borrowers. Our consumer installment business grew by $153 million in the quarter. However, in this environment, we believe it is prudent to keep these outstandings flat, with a bias towards potentially declining as we seek to further improve our credit risk profile. And frankly, we want to focus on low-risk verticals. To that end, we've seen a significant improvement in our low-risk loan mix. Moreover, our pipeline and backlog in these verticals remains at record levels. We continue to expect an average of $500 million of quarterly net loan growth in 2022. Flipping to deposits on Slide 12. As we stated at the end of the third quarter and again at year-end 2021, we continue to remix our deposit franchise, thanks to the growth of our commercial and CBIT deposit franchises led by low-cost and non-interest-bearing deposit growth. Our non-interest-bearing deposits at the end of the quarter represented nearly 30% of total deposits at $4.6 billion. We have strategically run off nearly $2 billion of CDs and other high-cost, market-rate sensitive balances in the last two quarters, setting up a strong foundation for 2022. Our cost of deposits bottomed out during the quarter and ended at about a 32 basis points spot rate. With that, I'll pass it to Carla Leibold, our Chief Financial Officer, to run through the rest of the financial highlights.

Thanks, Sam. Good morning, everyone. I'll keep my comments focused on four key topics. First, continued strong growth in net interest income generated by the core bank. Second, strong liquidity combined with a well-diversified and managed investment portfolio that serves as asset sensitivity, positioning us well for future rate hikes, along with a strong capital position and intangible value accretion. I’ll then wrap up by making a few remarks on revenue and expense trends. Turning to Slide 13. I'll start with core net interest income and net interest margin excluding PPP. This slide shows a trend of increasing net interest income over the past five quarters, largely driven by robust growth in our core CNI book, including our specialty lines of business, combined with an increase in spreads as we continue to manage our total cost of deposits by strategically running off higher-cost rate-sensitive deposits. Compared to the year-ago quarter, first quarter 2022 net interest income from the core banks increased 33%. You can also see from the chart on the right that we've consistently maintained and increased our loan yields while reducing our cost of interest-bearing deposits by 23 basis points. Additionally, there has been a notable increase in the percentage of deposits that are non-interest-bearing year-over-year, driven by our CBIT launch. Moving on to Slide 14, PPP loans totaled $2.2 billion at the end of March, and there was over $1 billion of forgiveness in the first quarter 2022, which resulted in deferred fee recognition of about $30 million, approximately $42 million less than the fourth quarter of 2021. Early in the quarter, the pace of forgiveness was slow but then accelerated later in the quarter, leading to higher fee recognition in the first quarter than initially expected. Coming into the second quarter, the pace of forgiveness has slowed back down a bit. As we've mentioned before, it's hard to predict the timing of forgiveness, but we project that of the roughly $60 million of deferred fees remaining to be recognized at the end of Q1, approximately two-thirds will be recognized in the second half of this year. Turning to Slide 15, you can see tremendous growth in our liquidity position, particularly in the back half of 2021. Our cash and investment portfolio has more than doubled over the past year. In the first quarter of 2022 that growth has slowed, with total cash and investments at approximately $4.4 billion, relatively flat from fourth quarter 2021. At the end of Q1, we had about $7.8 billion of total liquidity, which includes a committed borrowing capacity of $3.4 billion. Our investment portfolio remains well diversified, with over 53% comprising MBS and CMOs. At the end of Q1, our portfolio yield was 2.21% with a relatively short duration of a little over two years. Additionally, around 50% of our investment securities are floating rate. Slide 16 shows the repricing characteristics of our interest-earning assets. I'll make a few comments here. First, 68% of our interest-earning assets are market-sensitive and will benefit from a rising rate environment. Second, due to the transformational improvements we've made in our deposit franchise over the past year or so, we anticipate our deposit costs to be significantly less sensitive to rising interest rates. From a deposit data perspective, we've internally modeled using 45% to 55% and then up 100 basis point interest rate shock. Moving to Slide 17, we continue to maintain strong levels of capital. The estimated total risk-based capital at the end of the first quarter of 2022 was approximately 12.9%, and our TCE ratio excluding PPP was 7.3%. As of March 31, 2022, our tangible book value was $37.50, which was up about 25% year-over-year. I'll add that increased unrealized losses deferred in AOCI of about $58 million related to our ASF debt securities negatively impacted the TCE ratio by approximately 30 basis points in Q1 and also negatively impacted our tangible book value by about $1.75 per share. Regarding revenue and expense trends, for the first quarter 2022, our non-interest income was $21.2 million, marking an increase of $4.2 million compared to the prior quarter. This increase was primarily driven by a $6.4 million tax-free benefit in the first quarter 2022, partially offset by other items. The first was that there were no consumer installment sales in the first quarter compared to about $700,000 net gains from consumer installment sales last quarter. Secondly, we realized approximately $1.5 million of gains from SBA loan sales in the first quarter, down from about $1.8 million in the prior quarter. Over the next couple of quarters, we expect to hold the SBA loans on our balance sheet and earn net interest income instead of settling for gains, which is a strategy we've utilized previously. Regarding expenses, as anticipated, our non-interest expenses declined by $7.7 million to about $74 million in the first quarter, largely due to one-time or transitory items discussed last quarter, including higher compensation related to higher incentive accruals last quarter due to 2021 record performance, higher occupancy costs related to relocating the bank's headquarters, and enhanced ESG-related contributions and corporate sponsorships recorded in the fourth quarter of 2021. As previously mentioned, we remain very diligent in managing our expenses, but not at the expense of necessary investments to support efficient and responsible growth. As such, we are not providing specific guidance on non-interest expenses; rather, we remain focused on growing revenue, managing expenses, and achieving an efficiency ratio at or below 40% by early 2023. Moving on to provision expense in the first quarter 2022, we recognized $16 million largely due to growth in our direct origination, as well as growth in residential and multifamily loans. Our allowance for credit losses on loans and leases at the end of Q1 was $146 million, up by about 6% from the $138 million recorded at the end of last year. Since adoption, we've utilized Moody's lifetime loss rate models to determine our allowance balance at the end of each quarter. In Q1, we applied Moody's baseline forecast to reflect reasonable expectations on current and future economic conditions. We then added qualitative adjustments as appropriate to account for any uncertainties related to economic forecasts or associate risks that may not have been considered in the model. For our consumer installment books, we maintain internal lifetime loss rate models to inform our qualitative adjustments to calculate our total reserves for this business. Other cycle-based macroeconomic models will likely yield approximately 35% lower estimated lifetime loss rates. Accordingly, we believe we are conservatively reserved in the portfolio entering 2022, with a projected lifetime loss rate of 5.68%. With that, I'll turn it over to Andy to discuss asset quality further.

Thanks, Carla, and good morning, everyone. As noted on Slide 18, credit quality remains strong, as evidenced by a decline in NPLs to only $43.9 million, representing 31 basis points of total loans and a correlating decrease in NPAs to only 23 basis points of total assets. Additionally, total charge-offs for the quarter were only $7.2 million, equating to an annualized net charge-off rate to average total loans and leases of only 21 basis points. Excluding PPP loans from this calculation, the annualized net charge-off ratio to average total loans and leases was only 27 basis points for Q1 of 2022, aligning closely with 29, 27, and 26 basis points observed in Q4, Q3, and Q2 of 2021 when COVID-associated stimulus effects were in play. Although we are extremely pleased with the performance of our portfolio, we remain committed to maintaining a strong reserve position given the uncertainties associated with the current social, economic, and political climates. Our reserve coverage ratio, excluding PPP loans, is 1.44%, equating to a 333% coverage of total NPLs. Slides 19 through 21 provide key insights into our consumer installment loan portfolio, clearly illustrating how well this portfolio has performed compared to the industry as a whole. Notably, our portfolio carries a strong weighted average FICO score of 730, with 99% of all FICO scores being greater than or equal to 680. It maintains a strong weighted average DTI of 16.5%, with 72% of all borrowers indicating a DTI of less than 30%. Furthermore, it boasts a robust weighted average borrower income level of $101,000, with 83% of borrowers earning $50,000 or more. The portfolio is also highly geographically diversified and predominantly consists of borrowers employed in non-discretionary spending-dependent industries, which was a key driver behind strong performance during COVID-19 and positions the portfolio well in the current inflationary environment. In summary, our consumer installment loan portfolio's annualized net charge-off ratio of 1.63% for Q1 of 2022 is slightly below the average annualized net charge-off rate of this same portfolio of 1.64% for the last three quarters of 2021, which were heavily influenced by COVID-19 economic stimulus. Finally, our current allowance for credit losses for the consumer installment portfolio is robust at $107.8 million based on a lifetime loss rate of 5.68%. While we anticipate increased charge-off rates as the portfolio naturally seasons, we remain confident that our reserves will more than suffice at this time. With that, I will conclude my section and turn the presentation back over to Jay.

Thank you very much, Andy. In conclusion, looking ahead, we continue to project sustainable and responsible organic core growth and are very optimistic about the prospects of our company. We are focused on improving the quality of our balance sheet, as well as our deposit franchise, and we are not focused on growth just for its own sake. Additionally, we believe strong asset quality is what will differentiate Customers relative to many of our peers in this cycle. We continue to expect an average of 500 million of quarterly loan growth, along with significant digital asset-related deposit growth by the end of 2022. Through a combination of revenue growth and prudent expense management, we expect our efficiency ratio to be at or below 40% by early 2023. Customers Bancorp stock at the close of business on Friday, April 22, was trading at $42.84, which is only about seven times analyst estimates for 2023 and just over tangible book value as of March 31, 2022. We still expect to meet or beat projections of core earnings, excluding PPP to attain $4.75 in 2022, and we have made a very good start in the first quarter, as you have seen. Furthermore, we believe we will be well over $6 in 2023 and are reaffirming that guidance. As many of you may have noticed, we disclosed in our proxy this week that the top three executives at the company—Sam, Carla, and myself—decided to take all our 2021 annual bonuses in Customers Bancorp stock. We remain exceptionally bullish about our company. At this time, I would like to ask Ludi to please help open it up for Q&A.

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

Thanks. Good morning. Jay, you maintained EPS guidance that you provided in January of $4.75. Just what are you assuming in terms of interest rate hikes, and could you remind us about the impact on net interest income from a 100 basis point increase in rates?

Carla, would you like to take that on?

Yes. So we are factoring in about nine rate hikes, reaching a rate of between 2.25% and 2.50%. In terms of net interest income, I'd like to make a couple of comments. About 68% of our assets are interest market rate sensitive. Our deposits' betas hover around $0.45 and $0.55 in a 100 basis point environment. When we look at increasing net interest income, we're really considering three levers: rate, volume, and mix, each contributing to increased net interest income. Therefore, if you assess our total loans as of March 31 and factor in approximately $500 million of quarterly loan growth, you'll see that this will indicate low double-digit growth in net interest income for 2022. I hope that's helpful, Peter.

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

Peter, we'll let you make some estimates. We just provide conservative guidance.

Okay. Sam, in the prepared remarks, you mentioned that you were tightening the underwriting standards. Could you provide some more detail on what you are doing?

Sure, Peter. I can address that. As we discussed, our focus on diversification in the book will primarily target extremely low credit risk asset lines of business. We're concentrating on lender finance and fund finance, and we are firmly committed to those lines. Our positive indicators in these areas are variable rate loans, which also help mitigate interest rate volatility. As previously highlighted, we have been tightening our underwriting standards, especially in light of the rapidly increasing rate environment instigated by the Federal Reserve. Additionally, we are conducting a thorough analysis of every credit coming up for maturation, loan maturity, or rate reset, ensuring that those credits will continue to perform in the current rate environment, and taking the necessary steps to mitigate our exposure to those credits. I hope that provides clarity, Peter.

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

Yes, Peter. We assess our capital allocation regularly, and we currently have all the tools available to us, enabled by 10b-1. We did buy back a small amount of our stock in the first quarter. We will continue to be opportunistic in our approach, and if we believe that the optimal strategy, considering the market's condition is to repurchase shares, we will do so. However, we believe the opportunities for responsible growth remain very promising for us. Therefore, buybacks are not a priority but remain an option available to us.

Thank you very much. Good to be covering it all. Regarding the guidance, Jay, in terms of the average numbers, I think you mentioned $500 million per quarter. Just to clarify, that excludes PPP and warehouse, right?

David, that is excluding PPP, but it does include warehouse. For instance, in the first quarter, we achieved that target with $1.1 billion of net originations excluding warehouse and PPP, and over $550 million in net growth excluding PPP.

I would just add that our pipeline remains exceptionally strong. We might potentially surprise positively in the second quarter, possibly exceeding the $500 million expectation.

Understood. I appreciate the detailed charts you shared regarding excess liquidity or short-term liquidity; I think it's about $4.3 billion at the end of the period. It’s doubled over the past year. Do you anticipate that normalizing back to the $2 billion level over this year or in the next two years? Where do you target that short-term liquidity to end up in the next six to eight quarters?

Yes. To add a couple of comments on that, we expect liquidity to remain relatively flat over the next couple of quarters. Importantly, we still have $2.2 billion of PPP loans on our books, the majority of which we expect to have forgiven shortly, essentially converting to cash that can be reinvested to support our organic loan growth. As I mentioned in my prepared remarks, those flows can be somewhat unpredictable. Our investment security portfolio typically generates about $90 million in quarterly cash flows, totaling about $360 million annually, which will also be used to support organic loan growth discussed by Jay and Sam. Thus, we are comfortable with our liquidity to support loan growth in 2022.

Got it. One final question regarding the BMCX servicing agreement and the projected savings of about $60 million pre-tax by next year in deposits. Can you provide insight into how much of those are non-interest bearing deposits? Where will that $60 million impact be reflected in the income statement?

Certainly. That pre-tax $60 million is running through operating expenses and technology-related items. The average cost of those deposits has been approximately 30 basis points over the last few quarters, which you can factor in to determine the potential impact on our core deposits.

I'll start with EBIT here. Sam, you mentioned accelerating client adds in the second quarter; could you quantify how you're thinking about the pace for the upcoming quarter? Additionally, could you provide some context around the mix of clients you're adding?

Absolutely, Steve. As we've guided, we aimed to double the approximately 25 customers we had by year-end within the quarter. At the end of January, when we announced our full launch, we were pleased to report that within 60 days—especially with nearly a dozen new team members added in the past one or two quarters focused on onboarding and compliance—we exceeded our initial expectations, tripling our guidance to about 75 new customers, with 74 precisely. Looking into the second quarter, our pipeline is beginning to build as we process these rapid onboarding customers. Regarding the mix, as is typical, large customers represent smaller parts of the total customer base but larger amounts in the total deposit base. Thus, most of our new clients in the next couple of quarters will focus on the institutional investor side, while significant, stable deposit growth will stem from exchanges, OTC desks, and stablecoin providers.

Great. That's helpful. Switching over to loan pricing, what's the blended new money yield on originations, particularly regarding your finance verticals?

Certainly, Steve. For our lender finance and fund finance businesses, we typically start our pricing at a benchmark plus 200 basis points. As rates increase, smaller loan sizes lead to higher spreads, while shorter durations result in increased quoting rates. In terms of our multifamily business, we are currently pricing term sheets at approximately 4.5%, while on the residential mortgage side, we're above 4%.

Thank you. I see you mentioned additional recruiting efforts; can you provide any insight into your plans regarding new hires as the quarter progresses? I also observed in the deck that you're looking into adding further CNI teams in adjacent markets; any additional context you can share?

Certainly. So regarding our team, we've added to existing teams and modified the mix. From a geographic expansion perspective, there are currently no immediate hires in the pipeline that we expect to bring on in the near term. However, as I mentioned earlier, our goal is to solidify our presence and establish our business overall while ensuring our expansion markets find their footing in the latter half of the year.

From our view on new lending based offerings, we believe there will be attractive prospects with teams known for strong credit quality, ensuring you can expect us to launch and see results in the second half of this year.

I wanted to revisit the deposits; we noted significant swings in balances this quarter. You mentioned running off balances likely to be higher beta. Could you provide some context on this process?

Certainly. We recently ran off a couple of hundred million from CDs, several hundred million from our higher-interest-sensitive products, such as digital savings accounts, and other market-sensitive deposits. These changes may not be fully reflected in our spot cost of deposits, but they will benefit us in terms of deposit beta during the rising rate environment.

Understood, thank you for that. On the CBIT deposits, could you provide insight into your expectations for year-end balances?

Indeed, our guidance indicates we anticipate several billion dollars of CBIT deposit growth in 2022. To date, we've achieved a few hundred million of that target.

That's very helpful. I also wanted to draw attention to page 19 of the deck where you break out consumer installment metrics. I'm particularly interested in how you've managed to adjust the cohort of those earning less than $50,000 to 17% from 29% last quarter. Could you share some color on that?

Certainly! Unfortunately, I don’t have the specifics off-hand, but reviewing the appendix chart over time should provide clarity. I'm happy to follow up with additional details after this call.

I wish to circle back to the deposit data discussion briefly. The target of 45 to 55 seems particularly high considering all the non-interest-bearing growth success. What's your outlook on your ability to outperform that, and what that might mean for the NII guidance Carla provided earlier?

Yes, I'll address that first, and Carla, feel free to add your perspective. What Carla shared is our conservative deposit beta assumption, which takes into account an instantaneous 100 basis point increase in rates. Realistically, it will likely be more gradual, and as we've mentioned, we expect $500 million worth of earning asset growth, most of which will be variable. We remain asset sensitive and are focusing on securing quality as opposed to just the details on a quarterly basis. Anything to add, Carla?

I appreciate that, thank you. Switching gears, you mentioned launching digital asset lending over the next few quarters. Can you elaborate on the expected balance sheet growth in that vertical and whether this is factored into the $500 million quarterly guidance this year?

Absolutely. As we mentioned previously, we're taking a prudent, step-by-step approach to establishing this vertical. This will focus heavily on our existing customers. However, it is noteworthy that our approach to crypto involves lending against securities like Bitcoin, which involves lower levels than typically associated and is based on quality existing customer relationships. While it's challenging to provide an exact number at this time, you can generally assume this will be incorporated into our $500 million net quarterly guidance.

In the first half of the year, our asset growth will be more concentrated on the asset side, transitioning to the liability side in the latter half. We are confident in achieving projected growth targets, as Carla mentioned, which reinforces our commitment to nurturing our revenue growth and expenditure management.

Thank you. I will apologize in advance for this macro question. Could you reconcile your view on achieving loan growth in light of the GDP announcement coming in at negative 1.4%?

Absolutely, Bill. When faced with negative GDP growth, there are numerous contributing factors that affect specific industries differently; regulatory influences are undeniable, leading us to adjust expectations based on those dynamics. In contrast, we believe that niche banking, particularly in specialty lending, is critical for securing above-average results. We focus on high-quality, secure loans aimed at those niches rather than competing broadly across all categories. This disciplined approach to specialty and niche lending is essential for achieving positive results, irrespective of broader economic trends.

To add on that, keep in mind that our lender finance business uses a secured pool of collateral and interest rates, which have historical backing in terms of origination, ensuring secure return rates. While GDP influences are present, venture capital and private equity fundraising remains robust and will drive growth irrespective of the broader macroeconomic backdrop.

My questions have mostly been addressed, but I want to ask a follow-up regarding consumer lending, credit appetite, and outlook. Specifically, how do you consider income range in direct-to-consumer lending? Recognizing that consumer balance sheets are stronger relative to usual fluctuations. Additionally, on the banking as a service aspect, many initial pipeline candidates seem to fall within consumer lending. Will these be balance sheet loans or primarily sold, and is there flexibility in your approach?

On the first question, our proprietary model for underwriting assesses many aspects, including borrower income levels. We consider borrowers' debt-to-income ratios closely as well, allowing for better forecasting and ensuring that applicants possess adequate financial health and the potential despite differing income levels due to inflation impacts. Secondly, with regard to consumer loans through banking-as-a-service, we have relationships established with institutional clients and are committed to offering loans that align with our traditional underwriting credentials. Through this process, our threshold for holding loans increases alongside market variability, meaning should secondary considerations decline, we maintain a high standard for originating loans aligned with our overall credit strategy. Thank you very much for your interest in our company. Feel free to reach out if you have further inquiries, and have a great day.

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