Q3 2020 Customers Bancorp Inc Earnings Call
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Ladies and gentlemen, this the operator today's conference call is scheduled to be getting momentarily until that time. Your lines will again be placed on music hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the customers Bancorp Inc. third quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode. After.
After the speaker's presentation, there will be a question and answer session to.
Good question during the session you will need to press star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Dave Patty Director of corporate Communications. Thank you. Please go ahead.
Thank you Carol and good morning, everyone. Thank you for joining us for the customers Bancorp third quarter 2020 earnings webcast.
Earnings release was issued last night, along with her that's the presentation.
Both are posted on the Investor Relations page of the company's website at Www Dot customers Bank stepped up.
Our investor presentation includes important details.
Walk through all this morning's webcast and I encourage everyone to both the topic.
Before we begin we would like you're lucky it's some of the statements we make today, maybe considered forward looking <unk>.
These forward looking statements for somebody to low risk 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 for this presentation.
We undertake no obligation to update.
These forward looking statements.
Light of new information or future events.
To the extent required by applicable securities laws.
Please refer to our FTC Farley, 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 FTC or by visiting the Investor Relations section of our website at.
At this time, it's my pleasure to introduce oppose Bancorp's CEO, Jay Sidhu, Jay the floor is yours.
Thank you very much Dave and good morning, ladies and.
Gentlemen, thank.
Thank you so much mortgage.
To join us for the call this morning.
Joining me today Dickies.
There'd been Chief Executive officer of customers bring good Karma unrivaled are cheaper natural customers Bancorp Underbanked, let's answer do not like Germany, Chief operating officer, Oscar banker and Jim Collins said, Who's our Chief administrative officer of course, we're bank and then de Bowman, our chief credit.
Sure well, let customers know bank now.
We aren't really thrilled to report another strong quarter of financial results. Despite a challenging economic environment as you know our GAAP income.
$7 million are gone or 48 per diluted share there's no.
Hundreds said Bluebird Q3 right.
29 feet there.
Fair enough revenues are up 42% over last year, while the elderly.
Friends grew 10% and this is done during the time periods and we faced headwinds from the Durbin.
And ER applications, the durbin going out into two Jim.
Before I open up and discuss a little bit about hurdles like today.
The members.
As long as non executive management team no arms, so privileged and we are also privileged to be working with an exceptional team.
And I really want to.
Thanks, Tim and recognize them for their absolute commitment and hard work that to help reviews are these kind of results.
Today, we will.
Organize our presentation into the five or six subsection outputs. Good we'll be able to discuss with you. Our financial highlights then we will talk about capital trends and as well as our strategy.
To improve our capital.
No major strength of our company, you got credit quality, and Doug and Andy Bowman will discuss that in detailed review.
We will briefly discuss our strategic priority and then we will the board question and answer I'll discuss our outlook as long as the guidance for you for 2020, 2021 and as long as the longer term.
Okay.
At this time.
Look at the five of our Investor deck just.
Just a very brief overview of the customers Bancorp and our franchise so be it.
Concluded.
September Thirtyth with a 13.8 billion in quarter after 11.6 billion in loans and leases and pointed billion in total deposits reached 21% were non interest bearing demand deposits. One one for the percent of adjusted pre tax pre provision on our way.
And unlike many institutions in our.
In our peer group, who are trying to rationalize the offices branch offices.
We only operate but very few of them and we are actually shrinking 20% of the branches of the dots that you see on this page we are on high performing.
Unique.
Community Bank or digital bank with very strong business banking focus as well as personal banking and then of course, you will know about the bank mobile technologies and I'll talk about that a bit later.
If you look at slide six on on Investor deck.
Like I mentioned to you our company today.
Unlike many other has been built by organic growth into a very relationship driven commercial bank and and we started off with just about 10 years ago.
By this management team, taking over a $250 million after feeling bank with 40% nonperforming loans and from that kind of for foundation.
We've grown today.
The 14 billion high performing bank and so that's why I want to emphasize and recognize the exceptional and highly experienced management team.
It's running customers bank from a credit and a risk culture, that's been a strength of ours, because we have lived with it and and we believe that the credit culture is the bonus by having the tremendous emphasis on the credit side of the balance sheet and good times.
And that is the only way you come across well during tough times like today and I am sure you will see that when Andy makes his presentation from our longer term strategy point of view. This company strategy is built upon a single point of contact model or private bank.
Well a privately held that there's some times, we also call. It high touch supported good Hi Tech. We think this is a unique differentiating approach. We believe this applies both to businesses as well as to their consumer banking and we think this is a model.
Which when you combine that with the digital world and their Digitization, that's taking place in every single industry, we think that for years to very franchise enhancing.
Our platform and Thats why we are building can be have already built in house digital bank and digitizing every single operation is a company based upon their high touch supported by high Tech approach, but.
Well, we are totally committed to continuously improving our balance sheet and capital allocation is a key component of our aster Andone generation strategy and as you know we are very very committed to all too at the same time on.
That short term and long term goals do not run this company on a quarter to quarter basis. We run this company for building short term as well on a long term shareholder value and that is why we have been consistent in sharing with you. Both our short term as well as our long term goals and our long term goal is.
$6 per share annualized recurring easier with improving metrics.
Touch and increasing significant that you over the coming years.
If you look at slide eight.
On the Investor deck you.
You can see the earnings like I mentioned.
Don or 40 years in core earnings up.
20, and like I said Durbin is expected to impact us by $7 billion to $10 billion in the second half of 2020, and then and so many other institutions have to go through M&A and all that kind of stuff to overcome durbin and and we have been able to and we intend to be able to supply.
That's really deal with that and stay on course, we expect a woman in fact, well over $100 million in pretax income as a result of our PT PD Lone parent majority of this we believe now will be recognized in the first half of 2021.
From an auto related point of view on quantity gone over that but one other thing I'd like to add is our efficiency ratio was 50.7% September thirtyth.
And we have intentions of improving upon it.
Over the next couple of quarters.
He will be talking a lot about asset quality, but let me share with you because we are so proud of it there at 930 odd years were 34 basis points.
Those two loans in excess of 2%.
And our loan loss provision.
When delivered decreased little bit in the third quarter, we actually took a more conservative approach by having 100% emphasis on our on the base case scenario Moody's and we believe of conservatism is relevant and very important in this kind of an environment we could up.
Just get by having noted this quarter, but.
But we chose to be more conservative commercial.
Commercial criticized loans were wondering 2.5% of total loans and not to Florida, we can be able to talk about a significantly improved the Hitler only 2.6%.
Our loan portfolio point of view.
We are continuing to improve our franchise and enhancing and having a little bit of a different different composition of our loan portfolio with more diversification loan.
Loans and leases, excluding PPP increased 101.4 billion.
See an idhone loans over the year grew by 23% and onboard over $400 million and as part of our strategy. We continue to decrease the multifamily loan balances. However, they will stabilize at sort of the kind of level. We are really really proud to do.
Talk to you.
Improvement in franchise value, but the quality of our deposits on demand deposits were up 71% and non interest bearing demand picks up 21% of total deposit.
From a capital point of view, our bank capital ratios were on expected to grow very meaningfully over the next two to three quarters and stood at 930. The CP one was a little over 10% total risk based capital was over 11, and a half and our tier one leverage was at a lower overall.
9% we are.
Both book value at 930, as you know was about $26 and our tangible equity.
It's over 100 billion because we were successful over the last few years do they reported equity and have been a very opportunistic way and when you add our competition and on per foot, we are well over $1 billion in tangible equity and we are creating at about 43% but.
September Thirtyth book value I don't want to be at about four times 2020, and 2021 earnings if.
If you look at slide nine.
Talking about capital now we have hit the low point of our capital, which was actually a very interestingly. We did this because it is going to position us for us coming shock correct on growth of capital over the next few quarters our participation in the.
Hitech protection program is going to add fairly significant value for our shareholders and the tangible common equity.
We showed is the plated right now primarily due to the temporarily large balances tied to PPD loans as well as temporarily inflated warehouse loans to mortgage companies and we expect the loans to mortgage companies to be down over $1 billion, but into next who.
The month and that will materially improve our capital ratios on PDP ratio to total assets is expected to be about 8% and our total capital ratio organically.
By the end of 2041 is expected to be about 414%.
And the TV Tc ratio, excluding DPP loans is expected to actually reach about 7%.
By the end of fourth quarter, 2020, and Thats up from a low of just under 6% at September Thirtyth two.
2020.
And moving on to slide 10, I mean, like I mentioned, maintaining strong credit quality to remain a priority for customers Bancorp and at this time I'd like to Im. So pleased to re introduced to you Andy Bowman, our Chief Credit Officer, a colleague of ours for the last about 10 years very very excluding.
And the business to go over some of the credit metrics with you Andy.
All right. Thank you Jay and good morning, everyone.
I'd like to take a few minutes to share with you can fly evidencing. Our continued strong credit performance and continued commitment to overall credit quality throughout the organization.
As outlined on slide 10, our credit quality remains strong we feel very good about how our portfolio is holding up against many economic social political pressures brought about by quoted the team.
As Jay has already mentioned, we're NPK decreased 34 basis points, mainly due to the excess successful sale of a large class a commercial office building npis.
Third quarter.
Tom we don't see any significant.
Accretions moving forward. In addition, we continue to aggressively move that additional loosening of our sole remaining large npis of approximately $18 million and hope to have the matter resolved by the end of the first quarter of 2014.
Although we are extremely pleased with our performance we've opted as James mentioned to retain a strong reserve position given the continued uncertainty associated with the social economic impacts of page 19, and the political landscape.
Perfect transition moving on to slide 11.
Slide 11 outlines our seasonal and reserve build which is predicated upon a detailed portfolio by portfolio assessment based on various macroeconomic factors impacted by Covidien 18.
Hi, individual portfolio attributes as impacted by said no.
Next Nicole the gating factors. We serve also takes into account actual charge off rate and the level of long performing assets, where the end result for Q3 being reserve.
$55.6 million or just over 2% of loans held for sale, which equates to approximately 245 coverage of nonperforming loans.
And we are confident.
Now with this level of reserves were well positioned to deal with the residual effects of COVID-19 moving into 2040 won't.
Moving on to slide 12.
The bank's criticized and classified loan levels remain modest over remained fairly consistent over the past four quarters standing at 2.56%, excluding PPP loans as of quarter end.
We're expecting some modest increases in our criticized and classified numbers moving forward primarily.
Primarily due to the banks conservative approach in ratings and deferrals intersections 40 13 at the cares Act as criticized and classified assets. Although this is a fairly conservative approach is one we feel strongly about it accurately depicts the higher level of risk associated with such a deferment and allow.
Just to factor into our seats will be killed calculation said deferrals and the elevated level of risk associated there.
More importantly, we continue to carefully assess are criticizing classified assets on an ongoing basis and each time, we do not see any real level of migration into non performing status.
Transitioning to slide 13.
Overall, we have witnessed a steady decline as James mentioned in different ways with people almost 1.2 billion.
Gradually declining to 750.5 lines as of July 24, and declining even further to 302.02, 0.6%.
Third quarter end.
We have seen steady decline in virtually all loaded industry classifications with the sole exception being within our commercial finance groups watercourse motor coach portfolio, but that does only half of the total aggregate portfolio of only $37 million, which are less scrap is only a minor component of the overall thanks.
Polio.
Looking at the individual commercial portfolios. If you look at 36% of the Cnine referrals were principal only.
93% of the Investor Cree, a multifamily deferrals will face volatile.
More importantly, 53% of our hospitality deferral once again open.
Oh principal.
Overall, the looking at total commercial deferral, approximately 61% of all of our commercial default were profitable only so far which continue to pay interest.
In addition to the great progress we've made in our commercial portfolio all three of our customer sorry came along.
Posted significant decline from different over the past months as well.
Moving forward, we look for continued declining deferments within both our commercial and consumer portfolios.
Moving to slide 14.
I firmly believe that we all believe the organization that the diversification of our commercial loan portfolio positions us well moving indicated 19.
A significant portion is representing lending activity to industries that have not been significantly impacted or impact at all.
Mortgage warehouse lending specialty finance lender financing as well as significant portions of our seed I wasn't occupied three portfolios.
Manufacturers wholesalers and service Asian professionals.
This slide outlines our exposure to interest identified as risk due to open 18, and the good news gain that these industries, a quake only 5.8% of our total loan book at quarter end.
The bank's greatest anguish exposure is that in the hospitality industry, which at quarter end, we had 449 in aggregate exposure.
Hi, its only 3.5% in the bank's total loan portfolio.
With $126 million earnings were 34.3%, but again as I outlined on slide 13, 53% of those deferrals were pretty volatile.
And other than hospitality the bank remains very little exposure to the at risk industries, such as energy utilities, how does universities retail sales value and entertainment and we have no active to forget that this time in the industry segments.
Sticking with the hospitality industry and moving on to slide 15.
We gave it appropriate to share with you some key characteristics around our hospitality portfolio and why we are bullish as to what the ability to further whether the Santana.
First nearly 19% or roughly 82 million, our operating at 95 or greater capacity under government contracts for transitional housing.
Another 18% or roughly 76 million comprised of high end destination hotels located predominantly in case, any Jersey, Avalon, New Jersey, and long Island, New York and operating at near capacity levels throughout the summer will 'cause have ample liquidity to continue to support operations.
74% for roughly 318 billion supported by some form of personal recourse.
Guarantee agreements.
And finally, approximately 81% roughly $349 million represent flagged facilities with the majority of the non quite facilities being the destination hotels and noted previously.
Again, if you note on slide 13.
The hospitality to firms have continued to decline.
And 53% it was deferrals or principle is default.
In addition, declining deferring we've also seen graduating from be occupancy rates.
I'm happy to report that no hospitality loans transitioning nonperforming status.
Third quarter of this year.
Slide 16, although not as being at risk industry, saying there has been considerable focus around the performance of healthcare loans throughout this pandemic, we wanted to share with you that our healthcare portfolio, which equates to approximately 310 million. It has performed very well with no required.
Deferred payments and no delinquencies at.
At this time the portfolio Thomas is approximately 5500 bed and geographically dispersed we think it's already being in New York, New Jersey, and Pennsylvania market, given the bank's traditional trade area although.
Although the insurance payer mix is both private and government. The majority is comprised with Medicaid and Medicare, which both increased reimbursement rates to help skilled nursing centers offset the increased cost associated with COVID-19 endemic such as PV need staffing needs.
Decreased occupancy rates finally, the portfolio is predominantly real estate secured we think a chardy alone back.
Backed by personal guarantees.
Slide moving on to slide 17, Garishly here to slide 16, we also thought afraid to share some key characteristics throughout our multifamily investment grade portfolios.
As evidenced on this slide the bank has gradually moves to reduce its overall multifamily investment pretty exposure over the past few years and this trend continued throughout point Tony.
The decision to reduce exposure was driven by desire to create a more balanced credit portfolio.
Overall, the portfolio has performed well mainly due to the use of conservative underwriting standards as evidenced by low LTV in place Conservative debt service coverage ratios and financing of assets held finished storage, we strong urban settings, such as New York and Philadelphia.
The portfolios are well seasoned with an average weighted light since origination of three and a half years ever multifamily perspective are centered around historically less volatile workforce housing.
At the end affirmative steadily decrease as collection rates have improved.
Based upon current trends deferment finished portfolio should continue to decline worldwide.
Overall, the portfolio is predominately comprised a satisfactory well stabilized properties owned and managed by experienced professionals.
And we have very little construction exposure.
That said despite the impact the pandemic has had an urban areas. We are pleased to share with you how well, our New York City and Philadelphia.
Multifamily portfolio will perform well, we feel is indicative of our strong underwriting process and focus on only doing business with seasoned and highly experienced owners and operators.
In wrapping up my side of the presentation and moving on to slide 18.
On slide on this slide and laid up in key.
Within our banking and mortgage company portfolio, we should is extremely robust in the third quarter as evidenced by the approximate 55% bookings increased year over year, if the volume increase coming from both refinance and purchase activity given the current rate environment.
It's also worth mentioning that this line of business has a fairly low credit risk profile given the relatively minimal all period of on average 20 days of sub 100% financing rate versus traditional market sale rate of between 205% and on average 90 to 95.
Microsemi below 13, conventional and Thats Fannie Freddie Ginnie eligible.
Overall, we are extremely pleased with our performance in this line of visits they are anticipating some decline in volume in the fourth quarter and into 20 will do the seasonal run all and a slowdown in refinance activity and the introduction of the adverse market fee of 50 basis points by Fannie and Freddie beginning to show.
The first of this year, which will impact the refinance business.
In closing I'd like to thank you for your time this morning and at this time.
Turning the presentation over to sands to do our Vice Chairman and Chief operating Officer, Sam the floor is yours.
Thanks, Andy Good morning, everyone.
Beginning with slide 19, we wanted to take an opportunity to continue to update you on previously disclosed information.
In our consumer installment portfolio.
As discussed we have a very highly diversified portfolio with over a 740 average FICO no subprime loans at 21% debt to income ratio over 100000 dollar in borrower incomes.
Flipping to slide 20.
Here, you will see that our Sci direct and CB marketplace Center portfolios continue to remain strong and performed materially better than the industry.
At peak, our portfolio has remained less than half of the industry average and CB direct loans are approximately 70% below the industry average.
As Andy referenced earlier, our installment loan koeppen deferrals for down to 1.2% at quarter end and since then have dropped further to 1% as of last week.
Our CD direct forbearance is now down to just nine basis points.
With 30 day, plus delinquencies at only 60 basis points. Both of these numbers are on top of where we were at the end of February prefect.
Finally charge offs are trending approximately 40% better in the portfolio than we had projected year to date at only $21.4 million versus about $35 million, which as you can appreciate it's significantly less than our 6.5% Cecil reserve.
As you can see we continue to be very pleased with overall portfolio performance and the data driven approach to onboarding, new customers and portfolios and the bank has proven to be industry, leading and franchise answering.
Moving to slide Slide 21, we highlight one of our biggest achievements over the over the past one to two years, which has been the improvement in our deposit mix.
We are and will continue to be less reliant on borrowings going forward than we have been historically, although this may not be fully apparent today due to the PPP liquidity facility.
Our borrowings to asset ratio should settle in the mid to high single digit range PPP, Paydowns, which is a fraction of our historic levels.
And finally, our cost of deposits as dropped further to 67 basis points versus.
Versus 1.82% in the year ago quarter and is expected to continue to drop further in the coming quarters. Initially assisted by approximately $500 million of Cds maturing in the fourth quarter, which we would expect to reprice with at least 100 basis point reduction.
Moving to outlook on slide 23.
We will continue to focus on building franchise value by leaning into an expanding our community banking strategy using our single point of contact high touch supported by high Tech model.
We expect approximately 7% to 10% overall cnine loan growth led by approximately 10% plus and our national low risk businesses.
Sta lending seven a lending which has a hybrid national and community banking business assisted by the government guaranteed as a business line that we love and given the adoption of technology and experience in working with BP program. We expect this low risk business line to grow by approximately 50% or more than 2021.
Additionally, we expect multifamily to manage to about a one and a half billion dollar balance and as Jay mentioned loans to mortgage companies between a two to two and a half billion dollar balance and 2021.
Moving to slide 23, this slide reinforces our fintech and technology related priorities customers bank, a strong and agile technological capabilities and our team has helped create a digital banking platform that we have augmented when a fintech partner ecosystem from.
From a digital lending perspective, we are expanding on our direct to consumer installment lending strategy by adding new product lines there.
As well as expanding into commercial lending and 2021.
Our PDP efforts have shown us that small medium size businesses around the country have been underserved and we're working on advancing our proprietary platforms to develop an industry, leading digital lending platform to serve them.
Our first expected material commercial launch will be in a digital frontend to augment our robust in house M&A lending business, where we have already built a reputation for expedited processing.
We will achieve this through the use of a smart credit box and scoring model along with workflow automation and processing.
With that I'll pass it on to Karla to discuss our financial guidance.
Yes.
Thanks, Dan and good morning, everyone.
Moving on to the financial guidance on Slide 25, we believe we are well positioned to execute on our 2020 2021 and 2026 objective.
Loan growth, excluding PPP in mortgage warehouse balances.
Thanks, This is averaging a more high single digits over the next several quarters.
Total assets are projected to be between 12 and 13 billion years.
In 2020, excluding the PPP learn and subject to refinance activity impacting our loans to mortgage company. Our total risk based capital ratio is expected to see 12% by year end 2020, and it'll be around 14% by year end 2020.
Our preferred equity or not the carbon 2020 or 2021.
We project the NIM to be an acute 90% to 3% range for the full year 2020, excluding cdknine and operating expenses.
I wanted to be flat to up modestly over the next few quarters.
According the impact of the Bankmobile divestiture, we will maintain discipline in controlling our operating expenses, while continuing to invest in the future improving positive operating leverage.
Effective tax rate is forecast to be between 20 and 21% for 2020.
Our PPP revenue.
On target and the program is expected to earn.
Hundred million pretax origination fees.
Well the rate up $3 in core EPS is expected for 2020, and 2021 and we're still on track for $6 import EPS for 2026.
Our 2020, NIM expansion and profitability targets will be achieved by maintaining or improving asset quality even in stressed hearing.
Leasing future allow.
The allowance for credit losses provision expenses.
On the asset side.
Major global well, focusing on maintaining or increasing asset yield pickup.
Disciplined pricing on originations a high credit quality, while also protecting spread by building in Q4.
And on the deposit side, we will continue to grow core deposit.
Turning to experience weak pricing in 2020.
Active and the teams that we expect to onboard in the next few months some of them are related to some bonuses.
They will be taking from their previous employer.
So we see this as a very very opportunistic time to attract tremendous talent to support the execution of our strategy and to look for those that news that's coming from us over the next few months number two is we touched on digitization of the bank.
And Nick.
Questions, Jim Collins, our chief administrative officer would be happy to discuss that with you and that is that there has been a very significant effort. Its not just new it's been going on for a while and we have been expenses.
And investing towards achievement of our objectives in that area and we have also combine that now with the zero based budgeting initiative thats going on throughout the company and that's why we're very hopeful that we will be able to moderate the core expense growth excluding.
Moving event mobile technology related expenses, and and we should still be able to add.
And absorb the additional incremental expenses.
For revenue generators that we are tracking.
From a credit quality point of view I couldn't agree more with.
That the strength of our company is the credit quality and you should not expect any surprises based upon what we see today and it's our very data driven analytical analysis bottoms up and stress testing that we do at the loan level as well as stress testing from a corporate.
The impact point of view.
The entire portfolio and we are very confident about the quality of our assets.
Next item is on bank mobile technologies and Bankmobile technologies that we stated as is on target.
Excuse me and it's expected to close.
Divestitures sometime at quarter fourth quarter, but we have no intention of owning any.
Any equity or having any influence on bank mobile technologies.
At all over over an extended period of time at all and it is going to being developed by our and supported by us to be totally independent company totally independent of customers Bancorp with no influence whatsoever by customers Bancorp and.
NCPS organization.
That continues to support the under banked as well as other opportunities tremendous opportunity.
That did see going forward and we believe this will add significant value for our shareholders over a longer period of time.
And the last item I'd like to touch base on his stock buybacks before.
Before we open it up for questions and answers as you can well imagine there is not a significant opportunity for us in the very near future to think about stock buyback, but our board of directors as well as the management is looking at various opportunities if the environment and if the market.
The market continues to not value.
Customers Bancorp stock at the appropriate Mark a peer levels.
We are working on scenarios to shrink the company and have massive stock buybacks, so that the appropriate valuation.
Company is being reflected bye bye.
By into the value of the organization.
We will believe that the company should be valued at your level and we are not looking at above peer levels and Thats why ready Cardless shared with you our 2026 core EPS targets as well as our 2020 and 2021 targets as well as the improvement in in our capital raise.
Ratios. We believe every option is on the table for us to take steps to increase.
Shareholder value, including buying stock back at significant discounts to tangible book, so that the retail I'd like to request you to open it up for questions and answers.
As a reminder to ask a question you will need to press star one on your telephone twice Sky. Your question TESTOPEL key please standby, while we compile the culinary roster.
Our first question comes from the line of Steve Moss with B. Riley security.
Yes.
We think we could start with the PPP applications.
Curious here as to.
Yes.
What level of forgiveness application, you've seen just kind of how you're thinking about processed.
Hey, Good morning, Steve This is Sam I'd be happy to take that so as you can appreciate there had been some delays.
From the Sps perspective.
From forgiveness acceptance as well as from Congress as perspective from.
And putting out.
Central like forgiveness for smaller loan size.
So our our projection that we had shared previous quarter still holds that we expect approximately 90% of loans to be forgiven.
Approximately 95% of our loans and about half of our loan balances.
Our below $150000 and as Jay mentioned, we would expect given where we are at the at the end of the year and with the election coming up that's the case.
Yes will likely be a first half or more likely a Q1 hopefully of that.
Okay.
So just in terms of applications in process. The current time, it's putting in more is kind of terrorism anymore, yeah, it's less than 5% of our overall loans, which were north of 100000.
Okay. That's helpful.
And then in terms of just on the mortgage warehouse.
I think that the average balance is pretty good as well.
Kind of curious what was the percentage that was probably the revised Inc.
Kind of how how are you guys thinking levels down from 20 point I think I did quite a coming down probably after the first half of.
2021.
Yeah.
Yes, Steve it will be but like we mentioned, it's about 65% by activity right now and 45% to four.
Much of the activity. We are we have been in this business because there seems to be in this business service business with generating over 20%.
Compensating non interest bearing deposit balances for us and as we shared with you it's over $3 million in non interest income.
This past quarter for Us this is the core franchise business and Andy, but but it's a seasonal business and so we think it will be but we gave you the guidance typically two to two and a half billion dollar range for next year.
Okay.
That's helpful and then in terms of the consumer loans.
Bounces down a touch users in your flat to up a little bit here, just kind of curious as to and.
Can you just continue to expect those balances to remain more or less steady.
Over the next several quarters.
Yes, so I think that we have managed to approximately flat we have been originating direct.
North of $40 million, a month on average about $120 million a quarter.
In addition to some small.
Lower arrangements, we still have some of our marketplace lenders.
So we have experienced.
Faster than expected pay offs and 2020, so I would anticipate that we will continue to originate with pace that weve been originating and that we would slightly.
Increase and resume growth of the portfolio.
Okay.
Yes.
Yes go ahead, sorry, Steve and Steve like Weve shared with you we do not envision this portfolio to be greater than 50% to 20% for there to be over a period of time and that will be we will be very very.
Detailed review will be conducted to make sure that the credit quality remains as strong as possible. We think this is a business, which is things are totally given up to the to the marketplace lenders other than credit cards through the pretty much in the banking space.
And so we are very selectively looking at how do we do direct origination technology sell digitally deposit services to all of these consumers lose customers.
Okay, and just as we think about reserves net charge offs trending better than than you guys had modeled.
What's the potential for reserve releases.
In upcoming quarters here.
I'll check point type.
Hi, Jay.
Okay.
As I said I think we we mentioned con and Andy and I mentioned, our Pos to be to be conservative and reserving and we cannot comment on future reserve levels, but you can imagine that to.
Conservative approach in these uncertain times is prudent.
And and we will still be monitoring its using the movies analytical model.
To determine their future reserving, but we are reserving at levels, which are greater than what moodys model.
Models would show and and it was all based upon being taking a conservative qualitative adjustment to it so we do not envision.
Is that they would be higher reserves for consumer loans with anything you are your guess is as good as ours, there could be some releases in the future.
Alright, Thank you very much I appreciate all the color.
Our next question comes from the line of Michael Perito with KBW.
Hey, Mike.
Hey, good morning, everybody Greg.
Great so removed from the family and know the little baby.
No.
Doing well.
We've grown pretty quick so once you start trying to stay alive over here.
Hi, Thanks for the time I wanted to start a couple of questions I wanted to start actually following up on some of your last comment there. They are gay regarding kind of shrinking the balance sheet and buying back and I was wondering if maybe we could spend a minute just to.
Hi, again, your head a little bit more I mean honestly, Sam you mentioned kind of the growth expectations in guidance, but but I guess as we try to understand.
How you guys are thinking about it would seem like maybe at the valuation doesn't doesn't improve you guys would be willing to kind of walk back those those loan growth guidance is to shrink the balance sheet.
They'll capital and buyback stock is that kind of the right way to capture what you guys are trying to emulate.
Yes that is obviously.
Mike scenario.
And and get our York can imagine one can take an approach will temporarily.
You know the shrinking your balance sheet and freeing up the capital and buying back the stock to be sitting above tangible book value or bad tier levels and that could be a very prudent strategy on our part and we have enough.
Opportunities and our balance sheet is very liquid to be able to pull that off but in the core businesses of CNR lending franchise lending, we do not envision touching those.
And so the growth opportunities that exist over there the crude inventories teams to continue to improve our franchise value we think.
That just creating.
Yield by buying back stock is temporary but if you can do it in a way that you continue to improve yield franchise value continue to improve the quality of the deposits continue to improve the kind of customers. You have continued in two years. The digitization that have put that we are on combine it all.
Can really build franchise value.
That is one of the reasons why we decided to keep the technology of Bankmobile technologies for use by us and let bank mobile D., a totally independent company with no influenced by us and oil so that they can grow.
But at the same time, we can use that technology.
In ways that can benefit our shareholders.
Thanks, Jay and I would just add Mike to wrap up all around it our base case.
As.
To proceed along the asset generation growth levels that I walked through.
Our second option as it.
And I hope to be able to return to market multiples.
Second option would be.
Sort of a moderate stock buyback and that sort of mid next year and then in the event that we we don't have a conversions to market multiples that I think that the third option.
B would be on the table.
Okay.
Thats helpful insight. Thank you and then as we think about it.
Samsung the things you talked about on slide.
Second 23 here summit, which was helpful. Some of the growth things that you guys are looking I was wondering if maybe you could spend another minute or.
On on two things for me here, just one on the niche businesses.
I know you guys have talked about some of these in the past I was wondering if you can maybe just rehash, but more specifically what two or three of the bigger growth opportunities. There are and what those credits kind of look like that that you guys are taking advantage of and then secondly on the SBA side, yes.
Like historically that business was very asset oriented for most banks, but it seems like now with digital movement. There theres more of an opportunity to maybe capture some of the liabilities of these smaller businesses.
And to be able to service them more effectively without actually being close by and I guess, how do you kind of see that the liability opportunity from the FDA build out in terms of the impact on your deposit base.
Sure absolutely so starting with that with the niche businesses.
Our specialty lending lender finance business as the largest component of that it's approximately a billion dollar business for us today.
And that will be driving the majority of the growth Thats a business that is predominantly ad.
Approximately 65% advance rates on a pool of collateral what collateral swaps in it and then there's ever an issue and as we've modeled that out you'd have to be at a recession multiple times as big as the great recession to ever experienced dollar loss. So that's the biggest component of our of our of our specialty niche business.
The healthcare business ethic, Andy already walked through earlier.
Earlier today, and then lastly from our commercial finance business.
Which is our equipment finance business that business is expected to grow about 10% to 15% again, a business that has experienced some industry generally experience is very low loss rates in our business has experienced essentially zero.
Losses to date.
I get it and to address your question on the SBS side, absolutely our existing business today.
Really frankly, I would be without the existence of our strong in house SPX M&A lending team, we would not have been able to pivot so quickly.
To to take advantage of.
The Ppps first step that we had a huge success.
That that business currently.
As a direct business with videos nationally around the country and they do bring on deposits that typical video brings in about.
The 10 million or so.
A year and we have approximately 10 videos. So it's approximately about $120 million a year.
Those businesses are great they come with deposits and now we're expanding that to more of a higher volume lower ticket size less bespoke.
More down the middle.
Using technology.
And for us to originate as well as to process that will give us a higher volume not so dissimilar to our PPP efforts higher volume or ticket size, but.
Rich in sort of initial deposits, but in the medium to long term perspective perspective, those are good theres, a potentially very valuable customer franchise. In addition to being profitable customers upfront, especially big I hope.
Okay great.
Yes, no that that's that's very helpful.
Thank you and then.
Chris just.
Just just lastly here on the.
Expense side of the equation.
Actually all I want to backtrack, a little bit just.
And thats something different on the loan growth the 7% to 10%, obviously that the margin and the balance sheet have some some kind of other items that are going to impact the near term with the PPP and excess liquidity in L. day mortgage warehouse et cetera, but just as we try to get to a more normalized view an end run rate for for maybe the middle next.
Year and beyond and we think about kind of the incremental loan yields that you guys are getting on some of those those portfolios that we just discussed can you maybe provide a little bit more color on on where some of the origination yields are on these portfolios today and and how you expect them to kind of trend.
Do they seem like they're pretty stable or is there room, maybe for competition increase and some deep or risk asset classes that are growing and it could compress or how are you guys thinking about that dynamic today.
Hey, Mike This is Karl I can add some commentary on that so just broadly sort of 2000 2021, we are expecting a stable margin.
From where we are going to be on 2020.
From a volume perspective, what we're seeing right now on average coming on is between three and a half typically 75 range.
And we are expecting to continue to have similar pricing downward on the positive side.
Okay.
Any margin contraction steel.
Okay.
Helpful. Thank you guys for taking my questions appreciate it.
Our next question comes from the line of Russell Gunther with D.A. Davidson.
Hi, good morning, guys.
Good morning, Brad how are you.
Im fine Thanks, Jay I Hope you guys are all well.
I did have a question on the expense side of things it Carla I heard the guide for.
Flat to up.
In the near term could you just clarify the commentary on.
What that considers for bank level that X all bankmobile expenses or is there a different interpretation.
Yes. So that does not include any bank mobile related expenses as part of the divestiture transaction.
And just to give some comments on that some forward looking we are expensing 2021 to get into that efficiency ratio around the low 50, we're going to stay focused on controlling our expenses that said, if we see opportunities for revenue growth.
Well.
We are spending some time investing in our digital transformation efforts.
Helpful. Not its very helpful. I appreciate the clarification there and.
And then you mentioned, obviously the branch light model at.
Customers will you mentioned still able to tighten.
Tighten that up a little bit about 20%, but.
Given that the tough revenue environment and some of the franchise investment you. Just mentioned are there potential other offsets within the legacy customer business model from an expense perspective, just give us a sense for how you would what those might be that to get that low fiftys efficiency ratio target achieve.
Yeah, we're really not going into that level of detail at this point in time, just managing to be flat.
Flat to moderately increasing expenses and stay within that low fortys efficiency ratio.
Okay I appreciate it.
I think Russell I'd like to add to that.
I agree with that.
And on that line by line, but the zero based budgeting initiative that we shared with you about as well as the Digitization of the bank booking get every single process and you are using technology.
In every single area. The company I'll just give you an example.
We are incorporating technology into our credit approval credit administration portfolio management interaction with our borrowers that we will free up extensive amount of time for our private bankers, our relationship bankers and portfolio management.
And that is something which will be operational by the end of this year and also will give us a huge.
Improvement.
In our overall franchise, where card blog, our measurement of success is the customer should say Wow and that is the way we are measuring that not just for instance, redemptions, but you can have improvement in productivity and improvement in customer service.
It is an absolute winner and we think that the banks have not changed the credit administration credit approval and portfolio management processes over the last 25 to 30 years.
Technology.
Can today really help your big time, we are using similar approaches to lump the company that is why we are the.
A moderate growth because the traction of the team is bound to be expenses for us in the beginning.
But it is something which we will spend money on and no question about it and we are very focused on positive operating leverage.
I got it okay. Thank you Jay Thanks, Carla and then just switching gears.
The final question to the extent you're able.
Could you share where those.
What type of teams you've got after what lending verticals, what geographic concentration any any insight into.
Where where your boss during the the bank going forward with some team lift outs.
I think there to support what Sam shared with you.
On our strategic initiatives.
And so it's really not to entering into any significantly new verticals. We're just looking at one very low risk vertical, which we do it's premature for me to talk about that but otherwise it's really building on our so called community banking and our niche business model and its.
Recruiting very very successful experienced teams, who can help us continue to propel the growth that we've experienced in those niches and and I think we think that there was the next exceeded you'll start to see.
Press releases out on those teams and you will be very impressed with what we are attracting we think there is a lot of disruption taking place in the marketplace right. Now every single bank is trying to to really.
The phone their trust on cost reductions and and they're taking and I'd also works for taking care of reclaiming some of their high producers and we believe that opportunity to recruit talent in this kind of a remote working environment and you.
Using our equity based compensation plan as well as our team. There is compensation plan is very attractive to really build a very strong credit cards. So we are very upbeat yesterday in fact, our entire board and cost management team. We're involved in a planning sessions.
And it was.
Wonderful for the board to hear from.
The entrepreneurial as well as risk related colleagues of ours present to the board your plans.
Thanks for your thoughts there guys I certainly appreciate it.
Your next question comes from the line of Frank Schiraldi with Piper Sandler.
Good morning.
Hey, how are you.
Yes. Thank.
Thank you.
Just want to ask you about.
Your your expectations on capital you've got some some really nice levers here to accrete.
Capital levels, and then obviously there can be opportunities on the growth side, but then you also talked about baby.
Potential to shrinking and buying back stock just wondering as we think about those potentials what is the right sort of level.
Your mind now to operate the company you've talked about getting to that 3%. PCB is are are you focused on staying at those levels or could we see a dip back down there.
Okay.
No I think capital is king and capital has always been very very important.
For us, but at the same time capital has to be adjusted to that kind of risk for Oklahoma. The company as well as your short term and long term strategy of the company are minimum acceptable standards for us, which we are somewhat below that for this quarter is a 7%.
PC.
And and we.
We are hopeful appeared to get up to seven and a half before we look at look at tediously on stock buyback option and and then we've done that Sam and I shared with you a different scenarios and all of those make an assumption about maintaining.
Good to see levels, where they are.
For whatever reason.
In the regional banking community banking sectors small cap banks preferred equity has not been given the kind of credit that the larger banks have been given but we believe we've got a lot of the smaller regional banks. Following the route that we followed in Irving building up their preferred equity.
They are getting credit for that.
And so when you add the seven.
The glass you look at.
One or two percentage of capital over that two preferred equity or which we decided in this low rate environment to definitely keep goods because it's very low cost of capital for us it's lower than what banks are raising debt report equity right. Now we think it gives us a lot of opportunities in terms of which.
Preference, we would have we would we are a growth company and a growth company with a strong emphasis on on risk management.
Our preference would be to continue to be a moderate lead brewing company in this current cautiously.
Joining the company.
But.
We will not accept 43% tangible common equity to I'm, sorry, 43% to tangible book value and that is the leading 55% minimum appreciation.
From a from a valuation point of view on.
On the table, we think our peer group or is trading at somewhere in the 90% to 110% of tangible book and we are not going to be satisfied till we get there and we will get there one way or another.
Okay Fair enough and then on the just on expenses just following up on the the idea sort of flattish expense growth.
As you build out the banking as a service as you continue to build out the banking as a service business.
Is there a meaningful expense linked to compliance and back office function.
And then there has to be offset elsewhere or is that expense already baked in.
For for significant growth here.
The San I'll take that Frank yes from our from our existing expenses, we remain materially have all of those resources in house already.
Fantastic, Okay, and I won't data just frankly, a question on capital.
Our regulatory capital is going to strengthen significantly regardless of whether we buyback or not.
No understood. Thank you.
Thank you.
I will now turn the call over to David Petty far what question.
Thanks, Kyle and let me remind everyone of those on the webcast. There's still time will submit a question if you'd like to do so through the function there on your screen.
Our first question I'm going to combine Q from Daniel Grossman of Dandelions Corporation on PPP.
Yes going in two parts first of the $100 million TP origination fees.
How much was recognized as income in the third quarter and how will the remainder of that origination fee income.
Hey, recognizable next four or five quarters.
Are you thinking about that let me also add that Daniel would love to ask for information.
On our 10-Q.
Deposit from looking at the bars and transition them to permanent customers or customers Bank people, who would now be be a part of our customers by family and I was wondering how thats go and how much of those deposits, we think will retain.
I'll turn it over to the panel for or spot.
Then weren't et cetera.
Sure Karla and I'll start with the deposits than if you could sort of share the specific numbers on on PDP in the last quarter. So.
So from a deposit perspective.
We have had good success over the past couple of quarters. As you can appreciate we have multiple touch points with the PPP borrowers as it relate as it's related to.
The length of time as well as the changes and delays and forgiveness.
Any deposits that we brought in to date, we expect to remain Wendy.
And I would further add that many of these borrowers as you could appreciate given the small loan size.
We're holding a bated breath waiting for an additional.
PPP round.
As such.
We think that the nearest.
Opportunity with these borrowers frankly is going to be on the ASP side.
Regardless of whether there is another.
Stimulus targeting small medium sized businesses.
Okay.
The commentary on the CTP interest income was lining the deferred origination fees.
According to about $12 million in the third quarter.
Remaining will be recognized over the estimated life of the PPP mom, however will be accelerated contract.
We are anticipating that.
Now some of these loans will be forgiven in the first half of 2021 and that is creating a significant accretion to our capital level.
In the third quarter, we also recognize interest income or about 1% on those loan balances. So all in the interest income was probably around 25.
Thanks, Carl and I would just add just from a NIM perspective to one of the earlier questions.
Given the 1% interest rate on the PPP loans Dick.
Alright police or in our opinion does not recognize that as bickering yearnings. So most of the time in the banking industry, Florida in in something which you can count on and it's pretty much generally speaking recording going and and that is the reason why you chose those kind of words, so that you can.
Look at our sustainability are there any that you can count on valuation so far stock bright as a multiple of color on it.
Okay.
Response from our panel so that's special.
If not <unk> I have no one further in the West coast. So no one on your telephone.
Therefore.
Okay to do that for insurance for any closing remarks.
Thanks for your call and thank you so much everybody for joining US today, we really appreciate your input student customers Bancorp and we look forward to staying in touch with you. Thank you and have a good day Stacey please.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect presenters. Please remain online.
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