Q4 2023 Customers Bancorp Inc Earnings Call

Participants

David Patti; Communications Director; Customers Bancorp Inc

Jay Sidhu; Chairman of the Board, President, Chief Executive Officer; Customers Bancorp Inc

Presentation

Operator

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) David Patti, Director of Communications.
You may begin.

David Patti

Thank you, Rob, and good morning, everyone. Thank you for joining us for the Customer 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 investor's web page of the bank's website at customers, bank.com. You can scroll to Q4 23 results and click download presentation. You can also download a 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 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 investor section of our website. At this time, it is my pleasure to introduce customers. Bancorp chair, Jay Sidhu.

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 center. Do Customers Bancorp CFO, Karla labeled customers, bank CFO, Phil Watkins. I will give you some introductory comments and then my colleagues will provide detail to 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 a lot of headwinds facing our industry. However, customers, banks 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 EUR1.1 billion of core deposit growth in the quarter. We use these deposits to improve the overall quality of our funding base, including the planned exit of BMTX. deposits from our bank on December first 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 CET. one, 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 is 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 the 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 five 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. We have 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 delivered 15% average annual tangible book value growth. And at that time, we were shooting for just under 10%. We've achieved the name of three 31. And at that time, we were at two 40 M. We have a core ROA of one 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 CAD6 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 number one performing publicly traded bank stock in the United States in 2023 as measured by stockprice 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 Howard goes to the call how joins the call from B. Riley Securities, very recently initiated coverage on Customers Bancorp. We want to thank all of the research analysts for their effort 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 on 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 buildouts. 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 team number two. As Jay mentioned, we bucked the industry trend by expanding margin in 2023, and 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 a while 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 and 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 one 22 and our core ROE was 16.9%. For the full year 23. Our core ROA was also one 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 remains 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.
Yes.
Turning to slide 9, I want to provide some additional color on the impact of the delivery of promises James discussed earlier, over the last five years alone, we have grown our balance sheet at up 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 10 times 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% kegger and improved our net interest margin by more than 70 basis points. Diluted EPS is up by more than four times, 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 a mere basis points of market share, it will have an immaterial 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 relationships 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, and 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 non-interest 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 non-interest bearing service deposit outflows. I 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 success. 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. Just metrics 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 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 that will always be a place for some level of wholesale funding 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 three 31, which exceeded our three 2325 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 Karla to provide additional detail.

But 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 pricing and selectively extending credit and using balance sheet capacity for holistic banking relationships.
Consumer held-for-investment loan portfolio continued to decline given 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, 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 in 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, one-time expense associated with the special assessment was close to $4 million and was fully accrued in the fourth quarter. Core noninterest expense to average assets remains best-in-class at 1.67% core efficiency ratio also remained strong at 47%, which was in line with our 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 are 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 and 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 EUR11.4 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 we'll 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 and $0.61. We also have $4 and $0.34 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 book value per share in 2023 compares favorably to our regional bank peers that generated 13% longer term track record is even more differentiated. If you look over the past five years, we've generated a compounded annual growth rate of 15%. While our regional bank peers have generated only 4%. 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. ALCI. continues to negatively impact this ratio by about 64 basis points. Our estimated CET. one ratio ended the fourth quarter at 12.2%, which was an increase of 260 basis points for 2023. Adjusted for ALCI. This ratio was 11.2%, which is top quartile among banks with an asset size between 10 and 100 billion. The improvement in our CET. one ratio of 260 basis points is among the top 5% of our 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 remained strong across all metrics. Nonperforming 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. Provision expense of $13.4 million came in well below expectations in the fourth quarter, primarily too 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 estimate. 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 two 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, Karla.
Turning to slide 20, we wanted to provide you our outlook for 2024. We have 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 book 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 PPPNII. and Q. three outsized accretion income as 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 an EM 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 have you may have.

Question and Answer Session

Operator

(Operator Instructions) Hal Goetsch, B. Riley Securities.

Good morning, everyone, and 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 to 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 on the loan growth in the loan portfolio, 2024 is going to be a year of a franchise enhancing loan growth as we replace the non-strategic assets we remove beginning in the in the first quarter, accelerated in the second quarter of the year with the capital call, nonstrategic land 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 now Community Bank C. and 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 a year of deposit transformation, 20 fours 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 it of your question so now making 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. And she also talked about some operational excellence initiatives with some detail. And really our focus, as you saw on 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 space. Having said that, we'll continue to invest wherever we see opportunities. But 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 have the governor of that efficiency ratio. So long way of saying, we'll look to I think we're sort of at the high high 40s. Right now, we're going to get to the mid 40s in 24 and we'll look to at a minimum, you'd 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.

Thank you very much.

Operator

Casey Haire, Jefferies.

Yes, thanks. Good morning, everyone. So apologies if I missed this, but can you guys your new guide of three 20 to 3 40, what what kind of Fed funds forecast is embedded within that? And and what kind of deposit beta Are you assuming if you do have cuts in their?

Good morning, Casey, I'm happy to take that. And Karla, you know, feel free to jump in with any clarification that I miss. So the new 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 some 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 a higher pace and faster pace of deposit inflows at lower costs and 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 three to six cuts dependent depending on the market and the Fed dot plot. So the lower end of the range would be higher and faster cuts. And really the inverse of what I just said Got you.

Okay. So it's three six cuts, six cuts would I would assume gets you to that three, 23 would be the higher end of three 40. And then just one And underneath that, what kind of like apologies of the deposit beta It sure, looks like on the first.

So 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 have benefits you on the way down, and we expect to have a high beta on the way down.

Got you. Okay. And just lastly on your you'll see the deposit Remec, so 2.2 billion of wholesale CDs maturing this year from first up, what is the 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 to 1.5 to $2 billion and if all end deposits are growing low single digits, if there's going to be some rollover of that 2.2 billion, I just wanted to make sure that's Yes, Casey, good, good question.

So overall, we'll look to 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 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.

Very good. Thanks, guys.

Thank you.

Operator

Peter Winter, D.A. Davidson.

Good morning. Tom, I wanted to ask about the balance sheet sensitivity. I mean the 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 sharp and absolutely, good morning, Peter.

So a high rate environment should be most challenging for a bank like like us, given that we don't have the retail network however, we knew that with the deposit trends and really the positive mix shift into non-interest bearing lower cost deposits over the course of last year, the downgrade 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 that net our September 30th numbers, non-interest 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 in the market overall, expect directionally, whether it's three or six, you know, to be determined.

Okay. And then just how do we think about average earning assets from fourth quarter level? I mean we have a positive outlook on the loans, but funded with excess cash and securities cash flows. Just how do we think about the average earning assets growth rate?

So I think I talked about the that 10% to 15% growth rate. If you if you take the midpoint of that range, really you can sort of directionally see you're getting back to 1231, 22 in terms of our directional loan balances, that term earning asset mix shift is really going to be coming from cash and securities as opposed to any changes in the balance sheet as you sort of think of the average earning assets as moderately flattish. And 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 sort of gives you an extra 300 basis points plus or minus spread above what those earning assets are currently yielding? Kind of.

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 FKC., are you seeing a lot of opportunities to add more bankers to the platform?

Yes, Peter, that's a great question. And I think you sort of heard me talk about market share gains and hundreds of billions of impacted customer deposits and loans from the failed institutions. And I think that what's important about our businesses. We haven't added new 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 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 important.

Thanks now.

Absolutely.

Operator

Michael Perito, KBW.

Hey, guys. Good morning. Thanks for taking my questions. So obviously, the guide for 2014 pretty sorry. I just had a couple of high-level questions. I'd love some color on if that's all right. Number one is just you guys were 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 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 our deposit mix. When you guys will start to consider growing the balance sheet, you 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% TC. And I think from a 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 I'll address the latter part of your question sort of a bit 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 lead growth. I think the real differentiator for for customers bank today is the of the customers and the teams that are in motion that it's going to really help us enter 2025 and beyond are going to help us build deposits first, internally and then deposit led growth in 25 and beyond, maintaining our current capital goals, which we hope to achieve pretty quickly.

That's helpful color, Sam, thanks. And then just you mentioned the expense guide kind of shifting to the efficiency ratio to give you guys flexibility to invest where you see opportunities. Just wondering if you could maybe spend a minute now that you guys own it anymore because you've obviously been very busy and done very well. But put it 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?

I'm just would love another layer deeper on that as we think once again about the kind of forward outlook and growth opportunities, Sharp and 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. And this could also sort of broad bleed 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 areas for investment will probably be, yes. Growth facing people as you guys continue to scale.

Infrastructure wouldn't absolutely right. Yes, there's a lot of folks that have had logos on their business cards changed in the past nine months. And there's a lot of folks that have elected to change the logos and their business cards who are now looking to change again.

Great. And then just one last one for me on just would love a minute on kind of where you guys are at on the technology roadmap. I mean, any kind of internal investments in your core 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 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 seven or eight years ago to invest in middleware that sits on top of our legacy core. We are probably in the third iteration of that today and continue to enhance that. 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 and API developers. We have been 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 re-architect things that said, 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 support it and add new technology providers and also how we currently service our customers. So that's that's one, you know, again, similarly on on some of the now, I guess, more legacy type software providers like a Salesforce or and you know, we're multiple years into probably second or third contract negotiations and whenever those 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 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 on AI. as well, and these are the types of things that are very, 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 investments and initiatives.

Great. No, definitely helpful. Thanks, Sam, for taking my questions. Appreciate and have a good weekend.

You took.

Operator

Steve Moss, Raymond James.

Good morning, Tim, on the deposit pipeline here, just curious if you could give a little color on the underlying mix and whether there's a mix shift or this quarter here? And just also what you're thinking of roughly the average cost of deposits as I expect to come on.

Sure, absolutely. Good morning, Steve. So just to sort of recap, I think I mentioned this earlier, it was broad based across the franchise. This is the 1.1 billion of core deposit growth, not dissimilar at all to last quarter, we had almost 2020 of our deposit channels that saw good growth in the these channels had a 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 a third, to put it more with more specificity came from private client groups in New York, about a third 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 and broaden those customers in the third quarter. But I think what's more relevant is to just zoom out and focus on the $3 billion over the past couple of quarters for many quarters for a second because I think that really puts it puts color on the total transformation.
So about a quarter 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 and equipment, finance, consumer and others.
So it's also worth mentioning as we added 3 billion of core deposits. We also increased our non-interest bearing deposits by about 1 billion over the same time, same time period. So hopefully, that gives you color on mean known 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. And after a foundational quarter and sort of the first first half of this year. I think you also asked about rate.
So all in rates when accounting for the non-interest bearing balances are coming in, not so dissimilar to last quarter into that mid 3% range right now. And so I think that where we're optimistic, we're getting close to an inflection point in interest rate hike cycle. So hopefully this where things will continue, having said, but I think it's very important to note, we're not going to miss, yes, market share opportunities by standing on ceremony, especially given all of this dislocation here so if we need to bring in a true primary customer relationships and have a portion of those deposits be at market rates, we won't shy away from that.

Okay, great. Appreciate all that color there. And then a similar question on on the loan growth side here, you mentioned the VC fund finance. Can you bank C&I and equipment, those drivers, loan growth just kind of curious, what do you view like fund financed and Community Bank as the primary drivers relative to these income financial? 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, healthcare, 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 on on on CRE, what's worth noting on Venture Banking. As you can appreciate, these lines are typically not like say, a fund finance line where their average typically average outstandings are hovering in it within a tight range. 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 be the catalyst to bring over deposit relationships, but we don't expect draws in outstandings really the first half of the year.

Okay. Great. Appreciate all the color. Most of my questions asked and answered next quarter.

Thank you.

Operator

Frank Schiraldi, Piper Sandler.

Morning, Tom, just as you talked about maintaining higher levels of capital here in the near term? And you mentioned, I think, 11.5% CT. one four assume for 2024. Just curious if from what you think the right level for the bank is longer term. Is the TC. 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 on 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 11.5%, which we crossed and really got to top quartile from regulatory capital perspective in the third quarter. PTCE., as you rightfully noted, is has really been our governing constraining capital level, which we've gotten to sort of what I would call a 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 a 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 for us, but TCE. perspective. So as we think about going off of there, and sort of casting a bit a bit more of a longer-term range. And I think we've always talked about a broad range of seven to eight. 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 it 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 sounds like given maturities over the next 12 months, that probably should fall below 10%. Just curious if there's and it's sort of a hard line in terms of where you want to get below on. You mentioned, you know, brokered or wholesale is part of the mix for a bank going forward. So just curious on that front a good question, Frank.

And yes, we're at 17% today or as of 1231 and declining even further. So I think we're more or less at the at that level where we would have targeted that we wanted to get to. I think even getting building off further from here is 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 that 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 or non-retail 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 we do feel that we're going to continue to significantly reduce even from the 17% we have today.

Okay. And then just on the I'm sorry if I missed it, but on C-BASS deposits in the past you've talked, I think about it a 15% on Max sort of, you know, 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 is this still core? I mean, obviously, if we get some some rate contraction that could become a little less attractive in the near term unless 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 so the answer to your first question is yes, we have and continue to and frankly, it's been very, very stable. So 2.2 billion plus or minus again in the quarter. So sort of caught up 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 in a longer-term basis. We'll continue to evaluate as rates evolve. We're in discussions with customers. We are providing business critical services to customers and holding operating accounts and where were those customers cannot necessarily fully operate without the technology we're 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 will, we're still at a significant at today's rates. And so there's a several hundred basis points before that would necessarily be below our RNIM. average. And there are different things that we're exploring and including fees over time that will continue to evaluate that. But we're not really holding any excess funds there. These are truly sort of payment services and operating accounts at current levels.

Great. Okay. I appreciate all the color. Thanks.

Operator

Matthew Breese, Stephens, Inc.

And good morning, everybody. And 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 you expect to come from cash and how much from Securities.

Sure, Tom, I'll give you sort of rough directional numbers, Matt, just sort of based on maturity schedules and cash flow amortization, that's typically going to be in that range of 6 to 800 million that's going to come from the securities book on the balance would come from cash, and we're at a 72% loan-to-deposit ratio today, even with the sort of thinking about the high end of the range would still be seven a seven 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 sounds like the pipeline's blended yield is in that kind of three 50 range. It's not too dissimilar from where we are now. Is that three 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 the wholesale CDs continuing to decline. I think it's worth it's worth mentioning that from some from a growth perspective, you also heard me say that we're not going to be imprudent about taking taking market share our interest expense and I can and should continue to decline even before rate cuts. So yes, while the output of our 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 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 deposits 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. I was curious, what was the drivers that what happened there and expectations for that kind of line item for 2024?

As I mentioned before, it was sort of targeted these were lower margin, slightly below 300 basis points to 50 plus or minus type spread from that particular business line from the specialty as it was within our fund finance business, specifically focused on our lender finance business. These these loans were really rolled off in late December. We sort of plan for them and did an update and elected not to not to renew. So non-strategic from a business line as well as a customer relationship perspective, nonstrategic from a deposit perspective and non-strategic from a primacy but relationship perspective. So hopefully that gives you some color, and we'll look to that gives us sort of more more opportunity to refill that with more strategic loan growth in the in the unlisted.

Okay. And then the last one was just appreciating that credit credit metrics were solid. Npas were basically flat at 14 bps or 13 bps. I did see that substandard loans increased about 20% quarter over quarter. And I was curious what happened what happened there and is there anything worth mentioning?

Jay Sidhu

Yes. Hey, Matt, good morning. So yes, the substandards did increase by 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 and in cash from the borrower at the bank. And so it's a bit of a unique situation. And since the quarter, there's actually been some some positive developments on that credit as well. So we wouldn't be surprised to see that re upgrade during the quarter. So really not not anything that we're worried about.

Okay. Just curious what was the on the loan tied to in terms of commercial real estate consumer, there was something our commercial finance and equipment finance business.

So again, it's a large large loan, large relationships, 60 million plus. I don't have the exact number and 100% backed by cash.

Got. Okay. That's all I had. Thanks for taking my questions, sir.

Operator

Bill Dezellem, Tieton Capital Management.

Thank you and 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, Tom. Thanks for the question, Bill. So up to two major things to highlight that I haven't already covered up to on the call today. Firstly, is that our 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. And 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 early on 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 a it's not a stretch for us and because we were targeted and reducing our nonstrategic assets. It's really just getting our portfolio back to where it was 12 months ago. So it's a it's not a it's not a stretch and it's all relative to the to our size and the business lines that that we're focused on.

Thank you, Sam. 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's really hasn't changed much. It's just been that our discipline has been on on on making sure we focused on 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 I'm 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 and 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? We're what's the range that you find as a comfortable place to settle into short

So I think I talked about between sort of where we are at 80% plus or minus for a for this year, likely sort of staying in sort of the mid to high 70s. Longer term, we've been sitting on very prudent cash balances. And a part of that is by nature, 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 in 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 years 12 to 24 months.

Great. Thank you. And thank you again for the questions and congratulations on the solid solid results.

Thanks, Bill. Appreciate it.

Operator

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.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.