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Customers Bank doubles down on tech banking with an eye on low-cost deposits

As the fallout of Silicon Valley Bank's collapse continues to ripple through the venture banking segment, Customers Bank is poised to take market share at a rapid clip.

The Malvern, Pa.-based bank is on track to more than doubling the loans issued to venture capital firms and their portfolio companies through the acquisition of a $631 million loan portfolio from the Federal Deposit Insurance Corp (FDIC). Customers Bank currently has over $400 million of such loans under the Tech & Venture Group, which was launched in January 2022 and now accounts for 3% of the bank's overall loan portfolio.

The new loans, previously owned by former Signature Bank, attracted Customers Bank in part due to the portfolio's national footprint, said Samvir Sidhu, the bank's president and CEO and the vice chairman of the parent organization Customers Bancorp Inc. As many venture capital-backed companies are revisiting their banking strategy after the recent bank failures, Customers Bank wants to build a national recognition of its brand in the technology industry, he said.

"There's a lot of dislocation because a number of these customers are looking for a new banking relationship, and we check all of the boxes," Sidhu said in an interview.

Alongside the loan purchase, Customers Bank is separately hiring about 30 bankers who originated those loans at Signature. The bankers have been on the payroll of the FDIC for a transition period, since the buyer of Signature, Flagstar Bank NA, did not buy these loans, Sidhu noted. Flagstar, the bank unit of New York Community Bancorp Inc., acquired substantially all deposits and certain loan portfolios of Signature Bridge Bank NA on March 19 from the FDIC, excluding roughly $60 billion of loans.

Through organic growth, it would take years to build and retain banking relationships in a new industry, but the new hires and their relationships should significantly accelerate growth.

"What we had planned to do over a three- to five-year period, we have an opportunity to do in one fell swoop over one or two quarters," Sidhu said.

Most of the new hires have started working at Customers, and the rest will join the bank around July 1, he added. They will help expand the bank's footprint in Austin, Texas; the Bay Area; Boston; Southern California; Chicago; Denver; Raleigh and Durham in North Carolina; and Washington, D.C.

Although Customers Bancorp stock was one of the most volatile during the turmoil seen in March, it has now recovered to the levels at the beginning of the year, while the KBW Nasdaq Bank Index is still down over 22% year-to-date on June 27.

Lower deposit costs

Potential deposit growth that comes along with the loans was another driver to pursue the assets, Sidhu said. The bank could add twice as many deposits as loans over time based on its estimation of the loan-to-deposit ratio in the technology banking vertical.

Despite adding new relationships, the bank won't necessarily expand the overall deposit base materially over the next 12 to 18 months, Sidhu said. It will instead use the new deposits to replace some high-cost deposits and reduce the concentration on larger depositors.

"For example, if we have a $25 million dollar depositor, we might tell them, we'll pay you less rate, but we'll keep [$15 million]," Sidhu explained. "If you want higher rate, maybe you should send those excess deposits to another institution."

The executive said on the first quarter earnings call that it is shifting away from high-cost deposits in a bid to expand net interest margin throughout 2023 to 3% or higher. As of March 31, it had $17.7 billion in total deposits with an average cost of 3.32%.

The management has guided to onboard $2 billion in core deposits over the next six months or so in recent meetings, Piper Sandler analysts wrote June 16.

The new portfolio will bring in smaller companies at early stages, which Customers views as low-cost deposit source. This is because early-stage companies typically have smaller balances in noninterest bearing accounts to support operations, unlike larger depositors who often have more idle cash that they seek high yield on, Sidhu explained.

Crypto, BaaS verticals growth capped

The efforts to pursue new relationships in technology banking comes as Customers Bank is capping its growth in the cryptocurrency vertical and in banking-as-a-service, where banks provide depository, lending or payment services to end customers through fintech companies that act as intermediaries.

The bank has an internal threshold on letting deposits from crypto companies exceed 15% of the total, and it has been getting close to this cap in the past few quarters, Sidhu said.

Crypto-related deposits accounted for 11% of total deposits as of March 31, and may reach the 15% cap by the end of the second quarter, Hovde Group analyst David Bishop wrote in an equity research report.

Anecdotes from the liquidation of Silvergate Capital Corp. and the failure of Signature Bank in March underscored the high volatility of crypto-related deposits and high compliance risks in areas like anti-money laundering, leaving many banks hesitant to increase the exposure.

In banking-as-a-service, Customers Bank is set to end the relationship with BM Technologies Inc. in June 2024, CFO Carla Leibold said on the first quarter earnings call. Customers Bank held $1.1 billion of deposits originated by the fintech company that provides banking services to the higher education industry as of Dec. 31, 2022. BM Technologies has planned to transfer about half of those deposits to new bank partner First Carolina Bank

The partnership with BM Technologies will be the last one of this type, where Customers Bank takes deposits on behalf of a fintech and shares interchange income, Sidhu said. Such relationships are more suitable for community banks under $10 billion in total assets, because they are exempted from the Durbin amendment and can charge higher interchange fees. Customers Bank passed the $10 billion threshold in 2019.

"We'd look to maintain the deposit relationship of the entity, as opposed to their customers," Sidhu said.