Q4 2020 Customers Bancorp Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for HAE patients.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
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Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the customers Bancorp, Inc. 'twenty 'twenty fourth quarter and year end earnings call.
At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer a question to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require further assistance. Please press star.
Zero.
It is now my pleasure to turn the call over to your speaker today, Mr. David Patty Communications Director True. Please go ahead.
Thank you Ray and good morning, everyone. Thank you for joining us from the customer Bancorp earnings call for the fourth quarter and full year of plenty.
The presentation deck, you will see during today's webcast has been posted on the Investor Relations page of the bank's website at Www Dot customers Bank Dot Com you can access the debt by clicking a red button marked latest earnings presentation.
Alright Thats. The presentation includes important details that we will walk through on this morning's webcast.
I encourage you to download and use our print the document.
Before we begin I would like to remind you that some other 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.
It 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 security laws.
Please refer to our SEC filings, including our form 10-K and form 10-Q for a more detailed description of the risk factors that may affect our results.
Copies may be obtained from the SEC or by visiting the Investor Relations section of our <unk>.
Website.
At this time, it's my pleasure juice customers Bancorp share Jay said if.
Jay webcast as yours.
Thank you very much Dave and good morning, ladies and gentlemen, thanks, so much for taking the time to join US. This morning for our call Hope you all are safe and healthy during this unprecedented times.
Joining me from different locations this morning.
Brett.
<unk> Executive officer of customers Bank Carla Leibold.
As you know, our Chief Financial Officer, Sam Sidhu, Chief operating officer of customers Bank, Andy Bowman, Chief Credit Officer.
As well as Jim Collins, our chief administrative officer.
These are my colleagues, who make up what we call the orca itself.
At our.
Company and and we've all worked together for many many years for many of your card and Sam has been a recent one year ago.
So congratulation Sam on your book Standard Board with our company.
Before the call.
And then share with you my comments I'd like to have you join me in saluting our team members.
Just performed beyond anybody's expectations.
It's so easy for me to take this opportunity to ensure that these are very very good results that we've achieved but it's been very extraordinary contributions Copa team.
Had situations, where about 95% plus of our team members have been working remotely because you don't have branches and really performing beyond anybody's expectation.
Your company your bank customers Bancorp rose to the challenge.
But at the same time.
Took extraordinary steps to support our team members and their families. We took an extraordinary steps to support our communities.
Force our clients and.
I think that's going to become pretty pretty evident when are we all share our results with you. This morning.
Another major accomplishment for us was.
Debt, we provided to approximately 100000 small businesses and not profit.
Across the country and see a day not estimate at least a million jobs across America. While we also added approximately or would add approximately $115 billion in revenues for our company at the same time.
So that was in addition to our core bank expanding the name as well as maintaining superior credit quality.
And while we watched our expenses and created positive operating leverage.
Another major accomplishment.
<unk>, which we announced in January but we've been working on exports from time now.
The closure or divestiture of Bank Mobile technologies, Inc. And we are so pleased to see that our shareholders want.
$75 million in <unk>.
Stock that we were able to provide to them.
We're a company where they saw no value and debt in the past there based upon graduation.
And today that company is valued at approximately.
Under New York Stock Exchange.
Close to $200 million.
So.
It's been.
A year of tremendous amount of challenges, but also a year of tremendous amount of accomplishments.
I share with you or just a little bit.
Some other highlights the accomplishment you'd know that total loans and leases increased five 8 billion.
57, 5% year over year, and we recognize that about $4 6 billion, our debt was driven by PPP loans.
It was also.
Growth in our C&I business as well as our our commercial loans to mortgage companies.
And when you combine all of that up excluding PPP loans skilled we showed a 12, 1% increase year over year and loans on.
On the deposit side.
Major accomplishment of ours, we reported 38% year over year increase in deposits, which included $2 2 billion or about 84% increase in demand deposits in one year.
And that is something which would have been a relentless focus to improve our quality of our franchise.
And we are very pleased with those results from an asset quality point of view and we'll get into some of these later on our total deployments did decline to about 215 $218 million, but the important thing is.
Deployments, which are two departments, which is principal and interest departments.
Our only about 20% of our loans excluding people.
PPP loans, so now I'd like to draw your attention to page five and.
And just to give you a overview of our franchise. So excluding PPP loans, we were about $14 billion in size, including PPP. We were about <unk> 5 billion in size from a loan portfolio like I shared with you we continue to expand debt. So excluding PPP we were at.
11, 3 billion, we funded 100% of our loans, including loans to mortgage companies other warehouse all by deposits and so our deposits were also 11 3 billion and we're very pleased to report good average.
On common equity was 24, 2% this quarter and other adjusted pretax pre provision all the way.
163%.
At the same time, we see tremendous opportunities for our shareholders investors because the market cap of the company, although we've outperformed the market in the last couple of weeks.
<unk>, Inc. At 700, plus or minus million market cap. We think there is huge potential because in our opinion, we are only trading at about six and a half times last 12 months earnings and about five times or that our guidance for earnings for 2021.
We had last year.
He knew.
Analysts to pick us up on research coverage. Since this is the first time that I know all of them joined US I just wanted to welcome Bill quoted from upbeat.
As you hear from Jefferies and Peter Winter from Wedbush, who picked up coverage on a set of very opportunistic time.
And we will not disappoint, you and we will do everything possible to be totally transparent and be very focused on building shareholder value.
So now we have I think seven or eight.
Analysts, who cover us and we are committed to to having some time in the next couple of months.
Analyst day also.
Where we are.
<unk> per share with you a lot more detail about all the opportunities that customers Bancorp presents to our investors if you move to page six.
It's really our key features you saw in our title page recall, Libya, calling ourselves as a high Tech Wildwood thinking bank with high touch what do we mean by that we mean.
The debt, we think there is huge.
Absolutely huge transformational opportunities available.
Two banks.
Who are tech savvy and digital savvy.
But at the same time that customers expect those banks.
Just to be tech savvy, but also to be relationship oriented we are calling debt high touch so our average.
We think about our strategy I wanted to summarize it in one sentence. It is that we are a high tech forward thinking bank, where the high touch culture.
As far as customers are concerned.
If you look at page six or slide six you can see debt.
We have book.
Started about 10 11 years ago, when we did our IPO in 2011.
I think and since from debt kind of $200 million $225 million to $50 million ceiling bank.
35% to 40% nonperforming assets, a bad bank today without doing any M&A. We are on an asset basis about $18 5 billion on a core bank about 14 billion in size and at the same time, we built a tech startup.
One of the most fintech.
<unk> banks could be started in the United States and that was the bank Mobil and and we are.
Glad to see that our shareholders are.
Now owning about Apple.
And it's creating under New York stock exchange.
The management team is where I'm really so privileged to be part of this is a lot of my colleagues I've known them for years being in this industry.
And this management team average is about 30 years of banking experience and we are very focused on the fundamentals of the business, which is outstanding credit quality outstanding risk culture, and a focus on building a strong core deposit franchise could differentiate ourselves from other types of.
Financial institutions that are also in the lending business.
So our core deposits, which is our non interest bearing DDA is up 21%.
Of our total deposits now and we built go back to organic growth.
From a.
We are very focused on our long term stated goals and like I think so we are very focused on serving the privately held companies through private banking for them.
And we are very focused on becoming an industry, leading digital bank and having digital lending platforms, and primarily supporting small businesses and consumers and continue to focus on the quality of our balance sheet and continue to focus on risk management capital ended.
The same time be very focused on delivering superior returns, which will come and measured by return on assets return on equity, but you've got to do that by also reported return.
Non.
Reported earnings. So we are giving you the guidance that we will be above $4 in core earnings in 2021 above or at $4 50 in core earnings in 2023, and we are not shying away and conforming our goal of $6 in core earnings by <unk> <unk>.
1026, and we have several ways to get there.
Now on page slide seven.
A little bit more on what do we mean by this digital bank transformation as you know people always ask me how many branches do you guys have been you know my answer 11, too many because we got technically towards that.
That's how we believe is the when you have ways to reach your customers.
Finally, banks and everybody in the industry recognizing.
Diminishing value of branches, we built our company based upon having no branches and so today, even though we have 11 too many.
We will keep them.
And gradually we believe we will end up with very very few branches less than what we have today. Our average branch size is about 950 million per day, and we think.
You will see within the next two to four years in America billion dollar average branches removed all across America amongst successful banks among the digital capabilities.
We set up about 15 months ago.
Fintech.
Group.
Debt.
We first discussed it advocate VW conference in Florida, and people were scratching their heads what is it.
It becomes clear to you that we have developed capabilities and we've analyzed every single technology platform. That's available in this unit blowers and how can be b per.
The wider off value to all of them and at the same time day become provider of value to us that is how we see this because we think the technology.
The distribution system that generation of business.
Changing very rapidly and yesterday's business models.
Not going to be relevant and we use you you can see that debt out of the 5000 banks why is that there are only three or four banks, who were on the list from two banks, who were on the list of the top 10 ppt lenders in the United States and we are again going to be who we believe are among the top 10, PPP lenders and youre not.
<unk> by the time this PPP zone tour to be whatever one has done that it's all because of our tech focused approach in working with Fintech partners and we see that all as as an opportunity at the same time, we can now fully onboard combo.
Also customers totally digitally.
And we at the same time.
Been testing and utilizing market segmentation for our consumer banking going after high net worth customers and whatnot and then we've developed capabilities, where every one of our bankers.
Today is undergoing and just continuously going to be undergoing a law.
Look at other better ways to digitize all of our platforms and we are not shy to be working with every single digital platform debt, which is very valuable like sales force and Doctor sign in service, now and snowflake and et cetera.
Incorporate them and we have no pride in building everything ourselves, but we take tremendous pride in using what's been built and putting it to work.
We've created basically in the last 12 months.
Operating efficiencies, where we've eliminated a need to add 29 jobs by coming up with 762000 team member all were reduction through the processes and those so far have been mainly in the back offices, but once the COVID-19 environment.
Behind us.
Will there be accelerating debt digital transformation between.
If you move to page.
Nine.
Nine slide nine now.
So if you look at our financial results very very quickly you all know that our earnings were up 121% quarter to quarter, they were up 83% year to year.
And so we.
We believe that only 45% of our PPP loans have been forgiven yet so far.
At December 31, and the other 85% to 90%, 90% debt months are going to.
Before given this year most of them in the first half of this year and that's going to really accelerate the generation of capital by us.
This year if.
If you look at the asset quality years and my colleague.
And partner.
Andy Bowman will be discussing it we are right now at 30 basis points nonperforming assets to total assets now because just last week, we sold without taking any additional losses.
Largest nonperforming assets on our on our balance sheet.
And that is.
Whereby we believe debt.
Our asset quality will remain very strong and above average and we are confident about that from a day portals point of view like I mentioned to you.
<unk> deferrals are about eight total day portals, including.
Those who are just on on principal only deferrals and are paying us interest debt is about 193% per port total loans excluding PPP.
<unk>.
Alright.
From our.
Book value point of view, we are pleased to report that we are ending the year at about $28.
Tangible book value per share and by the end of 'twenty, one we will be in about 32 or $33.
Tangible book value per share.
If you move to <unk>.
Slide.
Ken I wanted to talk about capital.
And we've been laser focused on generating tangible common equity at our company and doing it without issuing equity.
And so so you can see.
That we discussed last time, if our valuation is not totally reflective by the middle of this year, we will start buying back stock.
And so what you've seen over here is because we are determined and we feel so confident about the future of this company and that there is no way that we will accept trading at discounts to to the market.
So even assuming a $50 million stock buyback in the second half of per share you can still see.
About 700 to have two 8% tangible common equity to assets ratio.
The achieved by us.
You take away any PPP loans script might still be on our balance sheet because that is the liquid assets that we can always get them off of our balance sheet attribute recognized all of the upgrades.
Of the fee income so with that I'd like to now hand, it over to Andy Bowman to talk about credit with you Andy.
Thanks, Jack and good morning, everyone.
Starting on slide 11.
Overall credit quality remained strong and we're very pleased with how our loan portfolio was holding up against the economic social and political pressures brought about by COVID-19.
NPA to total assets stood at 39 basis points at year end and as Jay noted would have stood at only 30 basis points. If we had taken into account the successful resolution of a large NPA earlier this month.
The NPA, which did account for approximately 24% of our total NPA book at year end was a large flagged hotel, which we successfully sold the note at 100% of it's written down value as of year end incurring no. Additional loss. This was done through a competitive bid process and we had multiple active bidders.
Despite the successful large NPA resolution and although we are extremely pleased with our NBA performance overall and do not foresee significant increases going into 2021, we've opted to retain a very strong reserve position of one 9% given the continued uncertainty associated with COVID-19, and the associated economic.
And social recovery.
Moving to slides 12, and 13 regarding the seasonal reserve build throughout 2020.
Which remains predicated upon a detailed portfolio by portfolio of SaaS.
Based upon various economic factors is impacted by COVID-19, as well as we undertake a deep dive into the individual portfolio attributes as impacted by these economic factors as noted on slide 13.
The reserve build accounts for actual charge off rates in NPA levels and the results for Q4 being a reserve of approximately $144 2 million or one 9% of loans held for sale. This equated to approximately 204% coverage of Npa's yearend and nearly 267% coverage.
<unk> successful large NPA resolution earlier this month.
We're confident that this level of reserves were well positioned to deal with the residual effects of COVID-19 moving into 2021.
Moving on to slide 14 and 15.
Regarding deferments.
Slide 14 outlines our loan deferments at yearend and overall very positive trend, we have witnessed a steady decline in deferment rate within both our commercial and consumer portfolios from a peak of nearly $1 2 billion dropping to $755 million in July declining further to $302 million at the end of.
Q3, and ultimately ending up at $218 5 million or one 9% at year end.
Slide 15 provides a little bit more granular view.
Touching upon what Jay had previously talked about regarding commercial deferments at year end, showing at 95% of deferments, and our investment free and multifamily portfolio and 53% of the firm it's in our hospitality portfolio, where principal only deferments.
Overall portfolio wide on the commercial side, 53% of deferments in our commercial portfolio, where principal only with borrowers continue to make the contractual interest payments.
Overall for the next two quarters, we're looking for <unk> remain near or at current levels, a significant improvement in highly impacted industries, such as hospitality are likely not to take hold until later in 2021 after successful vaccination rollout.
Moving on and touching on slide 16. This slide basically indicates that the bank maintains a.
Highly diversified loan portfolio comprised of multiple commercial and multiple consumer business lines.
And while certain basis points have remained unchanged that your share of overall book what is evident is that while 2020, the bank gradually transition to a more well balanced mix between investment free and multifamily exposure and that of commercial C&I and warehouse exposure. This granule transition throughout 2020.
Evidence of our continued commitment to maintaining a well diversified loan portfolio as a means to mitigate concentration risk from both the credit and revenue generation perspective, and continue to enhance the bank's overall value as a full services financial institution.
Slide 17 takes a little bit of a deeper dive into the commercial portfolio and focuses on our exposure levels to those industry is significantly impacted by COVID-19.
Overall, we feel the diversification of our portfolio positions us well moving into the pandemic are significant portions of the portfolio represent lending activities to industries not significantly impacted such as mortgage warehouse lender finance and portions of our C&I and owner occupied free portfolios represented by manufacturers wholesale.
Service companies and professionals.
Ear and only six 1% of our commercial portfolio was comprised of whats determined this at risk industries with the largest being a little over $400 million of hospitality exposure and only three 6% of total book.
Overall, the banks exposure to at risk industries is very limited.
Touching on slide 18, and sticking with the hospitality industry segment.
I wanted to share with you some key characteristics around our hospitality portfolio and why we as an organization are quite bullish as to its ability to further whether the current pandemic.
First of all on nearly 20% of that portfolio are operating under government contracts for transitional housing.
19% are comprised of high end destination hotels located predominantly in Cape May New Jersey, Avalon, New Jersey, and Long Island, New York that operated near capacity during the summer of 2020 and possess more than ample liquidity and reserves to continue to support operations moving into 2021.
Nearly 77% is supported by some form of personal recourse under guarantee agreements.
And 79% represent flag facilities with the majority of the non flags being the destination hotels I noted previously.
Again hospitality deferments at year end were only 31% of total book or $125 9 million, marking a significant reduction from the $301 5 million or 73% of book in July and it was.
Current hospitality deferments as I stated earlier, 53% of principal only and also overall, we continue to see gradually improving occupancy trends within our hotels and no hospitality loans transitioned in NPA status at the last few quarters, nor do we anticipate any transitioning into NPA status over the next few quarters looking forward.
Slide 19.
It's really a touch upon our healthcare sector and although it was not defined as a high risk industry. There has been considerable focus around this industry segment throughout the pandemic. We wanted to share with you that overall, our health care portfolio, which was approximately $359 million has performed extremely well and we've had no payment deferment requests.
<unk> delinquencies within that portfolio.
The portfolio and conferences about 5500 beds and is quite geographically dispersed with the majority being in New York, New Jersey, Pennsylvania, given the bank's traditional trade area and.
In addition, a key components that the insurance payer mixes both private and government with the majority being comprised of Medicaid and Medicare, which both significantly increased reimbursement rates during the pandemic to help defray costs for PPE staffing as well as to deal with decreased occupancy levels as mandated by many states income.
Commonwealths portfolio.
So predominantly is real estate secured and it's virtually fully back by personal guarantees.
Sticking with.
Specific industry segments on slide 20.
We're talking about some characteristics around our multifamily and investment portfolios.
Overall as you've seen over the past couple of years, we have moved to reduce our overall multifamily investment free exposure and this trend did continue throughout 2020.
The decision to reduce exposure again was driven by a desire to create a more balanced portfolio and really had nothing to do with the performance of the portfolio as I'll share with you.
All of our portfolio has performed well and predominantly it was that because of the conservative underwriting standards that we implement as evidenced by low ltvs.
In place Conservative debt service coverage ratios and the financing and assets Allison's historically strong urban markets, such as New York Boston and.
Philadelphia.
The portfolio is our wealth fees with an average weighted life since origination of three eight years.
And from a multi family perspective are sent around historically less volatile work force housing the affirmative steadily decrease reaching a low of only $39 9 million or one 6% of the portfolio at year end and as I shared previously 95%.
Of those deferments are principal only.
Overall the portfolio is predominantly comprised of performing stabilized properties owned and managed by experienced professionals with very little speculative for construction exposure on the <unk>.
Wrapping up the credit component or my side of the presentation on slide 21.
The notes from key statistics around our banking to mortgage companies portfolio, which was extremely robust as evidenced by a 59% year over year volume increase at year end.
We had 61 point.
Zero billion in turnover throughout 2020 and that came predominantly from the refinance activity. However, home purchase volume was strong as well given the favorable rate environment.
I also wanted to note.
This line of business traditionally carries a very low credit risk profile, given the fact that the banks hold period on these individual assets has less than 30 days, 90% to 95% of these our Fannie Freddie or Ginnie eligible.
We have a sub 100% funding rate and the traditional market sales rate of 102 and 105% overall, we are extremely pleased with how this line of business performed in 2020, garnering nearly two percentage of the entire share from the U S mortgage market.
So with that I'd like to pass it on to Sam's to do our price.
<unk>, Chairman and Chief operating Officer Sam.
Thanks, Andy Good morning, everyone flipping to slide 22, we wanted to update you on our round, one and two PPP loan forgiveness.
As you know we administered over $5 $1 billion in PPP loans across a 102000, plus loans, which represents 2% of all PPP loans to small businesses across the country.
Youll see that while the industry had a slow start to forgiveness last fall by the end of the year. We had submitted approximately 15% of our loan balances for forgiveness and have experienced a 99% plus forgive us right.
In December Congress.
In the Corona virus fell approves an easy application a perfect gift from loans below a $150000, which as you can see has really accelerated applications in the new year.
As of January 25, we have $1 3 billion and forgiveness applications in process, which represents over 25% of our loan book.
It's worth noting that about 94% of our loans are below a $150000 and we anticipate this easy application will encourage borrowers to apply for forgiveness more quickly and allow for the majority of our PPP loan balances to be forgiven in the first half of the year and to chase earlier point accelerate our capital realization.
Flipping to slide 23.
I wanted to spend a minute to talk about PPP three while it's still early days want to let you know that we believe we were one of the first banks in the nation to begin collecting borrower applications on Monday January 11, eight days before the program officially opened our application portal is intuitive and it's customized for each applicant specific borrower journey, which.
It's not the way most banks are taking applications.
We amplified our origination process by offering an end to end White label program for banks lenders and agents, who are unable or unwilling to participate in this route.
I'm pleased to inform you that to date, we've signed up direct or Tri party agreements with hundreds of banks across the country, including banks over 10 billion, one slightly over $50 billion and Additionally, a top five bank in the country for a portion of their customer base.
The biggest change in PDP three for cubby investors to be aware of is that there is now a minimum fee of $2500 on PPP loans from between 5000 $50000.
Last year over 80% of our loans were below $50000. However, we only earned approximately $25 billion of our 100 billion plus an origination fee on these loans.
Had this structure in place we would have earned over $70 million more as our share of origination fees.
This new structure will tremendously benefit tech forward institutions like ourselves to serve the smallest borrowers across the country.
As a result of the incredible reputation we've built in round, one and two which with smbs around the country as of last Friday, we already had over 50000 applications and process.
That number has now increased by tens of thousands as of today.
Again, it's interesting to note that over 70% of our pipeline, our new first draw customers with an average loan size under $40000.
We began funding loans last week and to give you a perspective on Monday of this week.
Approximately 3000 loans by the approved by the SBA in just one day.
Now moving onto our consumer portfolio.
On slide 24, again, we wanted to share with you updated metrics on our portfolio. The key takeaway is we continue to maintain a highly diversified quality portfolio of high earners with great credits that are not as impacted by Covid.
The portfolio is performing above expectations at underwriting pre and post COVID-19 with minimal deferrals, we were 80 basis points at year end and even lower since then.
Looking ahead to slide 25.
Then we wanted to show you that we continue to outperform the industry and are doing so today at an even better margin than during the pandemic.
At peak, we were 70% better than the industry. Despite the challenges and despite the challenges the country is facing we're back to near normal performance.
Flipping ahead to slide 26.
Moving to deposits.
<unk> to be an unsung highlight for the company as Jay mentioned, we grew deposits by $2 $7 billion year over year and dramatically improved our mix with $2 2 billion of that growth coming in the form of demand deposits.
Our borrowing to assets ratio is going to settle in the mid to high single digits ex PPP, which is a fraction of historic levels.
Additionally, our cost of deposits continues to decline and now stands at 58 basis points in their growth expected to decline even further this year.
Now moving ahead to outlook.
Beginning on slide 28.
As we have previously stated we will continue to focus on building franchise value by leaning into our single point of contact model High Tech high touch approach.
C&I loans are expected to grow by 7% to 10% over the next year, excluding mortgage warehouse, our niche businesses will grow by 10% or more.
And in terms of digital lending as Jay touched on we have built an industry, leading consumer lending origination platform supported by an AI driven approach to underwriting.
We're adding new product lines to that portfolio and program, including direct home improvement auto and credit cards on the roadmap in 2021.
In terms of commercial digital lending building off of our success and PTP. We will continue to serve smbs around the country, who are underserved by their banking and lending partners. We're leading first with an SBA seven day digital lending business, where we are building a reputation for expedited processing with a smart credit box.
In the fourth quarter, we had a $1 $7 million gain on sale and we are targeting to achieve this amount or more for each quarter in 2021.
Finally, we will manage our multifamily book to $1 5 billion, we expect mortgage warehouse balances to stabilize approximately around 3 billion and then down to $2 billion at year end based on mortgage banking Association projections.
And we will continue to evaluate non teams selectively in and around our target community banking markets now I'd like to pass it onto Karloff, our financial guidance.
Thanks, Sam and good morning, everyone.
Reviewing our updated financial guidance for 2021, I thought it might be helpful to review the.
Accounting and financial reporting impact of the bank's mobile divestiture on our first quarter financial.
As previously reported.
Accounting for this transaction dependent upon minimum cash and equity consideration.
He received in exchange for our ownership interest in bank mobile technology, and whether we would only 15%.
The newly formed.
Technology, Inc.
Which I will refer to.
Yeah.
The other thing of the transaction, we received $23 million in cash.
Six 2 million shares.
<unk> stock, which had a fair value of approximately 92 million.
452%.
Equity interest.
Six 2 million shares that we received for <unk>.
Well distributed to our shareholders as a special distribution and one 3 million were given to 17.
Mobile at Stephens, Inc.
It is important to note that the actual accounting for the transaction will be recorded.
The first step will be to accounts.
All of our non.
Non controlling interest income.
Can you have consolidations from Merial.
Okay recognize.
Our first quarter earnings.
The difference between the non controlling interest recorded and.
And the cash with fees will be recorded at the net increase in additional paid in capital.
The second step will be to accounts.
Distribution.
Sure.
Tech stock.
Special distributions of $4 9 million shares to our shareholders will be recorded as a direct reduction to retained earnings and will be accounted for based on our carrying value.
One 3 million shares.
Certain day level team members.
From a severance payments will be accounted for at fair value or approximately 29 and will be recorded.
As merger related expenses in Q1.
Increased equity.
As a result, the net effect of these <unk> will be neutral from a capital perspective.
Lastly, I'll just add that the transaction will be taxable.
Generally James from value.
Other consideration that we received about 115 million less.
Our net investment in sales.
Which is about $25 million.
So we are estimated income tax expense related to this transaction will be between 20 and $25 million.
For reference this information that was included in an 8-K that was filed on January.
I'll also add that beginning in the first quarter 'twenty 'twenty, one and historical financial results of bank mobile technology for periods prior to the divestiture.
Free cash.
In our financial statements.
Yes.
Yeah.
And with that high level overview of the transaction I'll turn to our updated financial guidance on slide 29.
As Dan mentioned, our loan growth, excluding PPP and mortgage warehouse balances is expected to average in the mid to high single digits over the next several quarters.
The balance of commercial loans to mortgage company is expected to decline.
Between $2 8 billion and $3 2 billion at March 31, 2021, and then down to one six to $2 4 billion at December 31st 2021, we are expecting to continue to see stronger volume in the first half of the year and then declined in the second half.
The total risk based capital ratio is expected to exceed 13% by year end 2021, and our TCE ratio, excluding PPP loans is expected to be between selling other half of 8% by year end 2021.
We are projecting the NIM again, excluding PPP loans to expand.
And between that three and 330 range by the fourth quarter of 2021.
Also our non interest income and non interest expense will be impacted by the divestiture of bank mobile so we aren't giving some guidance for the first quarter. We project that non interest income in Q1 will be between nine and $11 million and operating expenses.
The seven day.
The first that I talked about earlier will be between 59 or 61 zone we.
We also project.
This tax rate for 2021, 2021, and 22% and local book from our continuing operations.
Earnings trend is likely to be volatile over the next several quarters.
Due to our participation in P. P P, but we do expect to Irwin.
$4 of core EPS in 2021 force 50 in 2023 and remain on track to earn $6 from core EPS in 2026, I will note that our core EPS guidance GAAP include.
The net interest income that we do expect to earn on the P. P T.
Also our 2021 NIM Inc.
Pension is expected to be achieved by Remixing, our loan portfolio. When we think about our loan portfolio mix for 2021.
The remaining years in our planning horizon, we see the core C&I portfolio, making up about 35% to 45%. Other total loan book multifamily will be between 10 and 15%.
And thus make Cui will stay flat right around that 10% Mark.
Our commercial loans to mortgage banking companies will be between 15, and 20% and our consumer book will be approximately 15 to 20 per se.
Again, we are focused on continuing our efforts on bringing down our deposit costs and we expect to bring them down to less than 40 basis points in the near future.
Moving to the next slide this is just the path to getting to a core EPS of $6 from 2026.
Similar to what we included in last quarter's deck, it's really trying Michelle.
Yes, I can't value proposition that we see and we will.
That I will turn it back to you Jay.
Okay. Thank you very much Carlos.
Very good report teams.
Just wanted to before we open up for Q&A just to emphasize there are four things that you are very focused on one is number one number one is maintaining superior credit quality, you would never get away from portfolio management, Although we continue to feel very comfortable about it but it is our number one priority.
Our focus is portfolio management and next is in terms of meeting or exceeding card.
Tangible common equity targets that we shared with you.
We are laser focused on debt because we think that will really increase.
Franchise value as well as shareholder value.
Number three is improving the quality of our funding, while maintaining or expanding our margin along with above average revenue growth and maintaining that positive operating leverage that you expect from quantity companies and last but not the least is it absolute relentless focus on continuing to build our technology capabilities.
<unk> and <unk>.
We intend to remain very forward thinking and continue to Opportunistically take advantage of banking as a service.
And that's what we call and working with Fedex and other clients and prospects a pause and we think that in this environment.
Our very significant opportunities way beyond <unk> that exist right now so we're debt Emily I would just ask you to please open it up for any questions.
As a reminder to ask a question over the phone. Please press star one on your telephone keypad.
Your first question comes from Michael <unk> from Keefe, Bruyette <unk> Woods. Your line is open.
Hi, good morning, everyone.
Morning, Mike.
Can you guys just spend a bit more time explaining your.
Your loan growth strategy. The main prior calls that you expect to drive it.
Will it be direct or indirect and also just hitting on.
How the technology investments that the company is making will help scale that growth.
Sure Sam do you want to take that.
Sure Carlos why don't you start with the components of the loan growth by vertical and then I can touch on technology.
Sure So as we've mentioned before.
We do expect that warehousing business to fluctuate.
In the first half of the year being stronger and then leveling off two in the second half a day here and we really see that growth coming through our core C&I business. So we have a strong pipeline at this point in time, we do expect to continue with our SBA portfolio and some other.
Our other specialty lending businesses as I mentioned there are commitments currently on our books and we expect those to fund.
Over the course of 2021, and we also expect to see some growth and our consumer book direct.
Direct origination process.
Sam if you want to.
Take it from there.
Sure absolutely so.
I'd like to touch on the impact of the technology.
At our approach to originating from digital first customers. We are currently.
Originated about $50 million to $60 million a month direct.
And our consumer lending portfolio, we are now up to 40%.
Correct.
And our direct originations represented almost all of our overall monthly originations the portfolio balance has been more or less flat in 2020.
As the stimulus money is also flowed through the system, we have seen accelerated paydowns.
So we do anticipate that there will be as we've previously stated on the consumer loan book and Carla just mentioned.
Eventual growth, but most of that growth is going to be driven by our direct lending. Similarly.
Columbia SBA side.
We have originated to date about a quarter $1 billion.
The remaining principal of which about $60 million remains on our books today. The rest is has been sold and we continue to service debt portfolio.
We anticipate debt by the second half of the year to give you a perspective that we will be originating at about $20 million a month.
And our SBA portfolio based upon the technology.
In our platform that we have set up which will allow us to do smaller ticket SBA loans again, we've added.
One to two ftes.
And really using our in house technology expertise to be able to launch that platform.
Similarly on the small business side.
We will.
Apparently we redefined small businesses as $1 million or below.
Within our organization.
We plan to.
Stablish are more of a.
Direct <unk>.
Origination platform, there as opposed to more of an inbound request.
Platform that we have today.
That will kick in in the second half of the year.
And we may similar to the consumer lending portfolio.
In our work with some originators on an indirect basis core originating on our behalf within our credit box, having said that similar to consumer lending business. Once we have a mature business and we built the in house expertise and learned from our partners in the market that will again be a direct a majority direct business for us.
Hopefully that answers the question.
Yes, and then top of that Mike.
Our really core strength as index C&I lending.
Which is.
100% all through related private banking.
It's to private banking.
Offices that we have and private banking teams have you have about 2000 teams that are working in our company.
And these teams have their own P&L.
And we.
Very very focused on generating loans as well as deposits total relationship.
So when you combine all of that we built we believe.
A very valuable franchise.
Which cannot be copied easily.
Okay, Thanks for that and.
My second question just following the divestiture of bank mobile.
Can you guys just provide an update on your fees for capital generation and deployment going forward.
I think color given to you pretty much are the guidance on <unk>.
Other income statements will look like.
Also we gave you the total guidance on where you see the income coming in so from a capital point of view.
We see.
Achieving those goals, which you can translate those into into the into the capital allocation process. So I don't.
Was there any other specific question, Mike that you had.
Related to that.
No I mean, I was just trying to get an idea of what your cat like just capital deployment deployment priorities, where but the targets you provided helpful. Thank you.
And then just.
One more question.
You provided from core NIM guidance, but can you just spend some time on how you.
You expect PPP and excess liquidity to impact the NIM over 2021.
I think we've given you the guidance on the NIM, where we see the NIM could be.
By the end of 2021, excluding PPP.
The PPP.
As you know the accounting requires us to put the.
Origination fees also through the NIM, so as Carlos stated there'll be some volatility in our earnings but Sam mentioned to you we expect.
80% to 90% of PPP loans have been originated last year to be forgiven in the first half of this year.
And they are all going to flow through the income statement generating a significant amount of revenues and profitability and capital for us.
It's very difficult for us to give you quarter by quarter NIM guidance, but you've given it to you for the year and by year end.
Okay. Thank you for taking my questions.
Sure Mike.
Again to ask a question over the phone. Please press star one on your telephone keypad.
Your next question comes from Steve Moss from B Riley Securities. Your line is open.
Good morning, good morning.
Starting with the PPP and just kind of curious a couple of things here, maybe one do we think how do we think about the revenue sharing this time around is it going to be similar to the.
The prior model and then I know this ramp should be smaller, but you guys seem to have more partners and so I'm just kind of curious as to how youre thinking about maybe sizing this one up versus.
The rounds last spring.
So I'm going to take that sure.
Absolutely Hi, Steve Good morning, so from a revenue share perspective, we're at or above where we were last round in terms of shares with partners.
And partners can can can also include.
Servicing et cetera.
And as we think about the originations.
Going forward to give you a perspective I think I mentioned 80000 loans, we earned about just under 2% on those on those loans that were below $50000. The gross origination fee would have been 17% on those loans.
In the $2500 minimum structure.
Our share would have been 8% after a 1% agency and agency and a 50% split.
Okay.
So in terms of just the yeah.
The volume this time, just thinking about the partners here.
I guess a couple of things one is I think you have more touch points is probably a fair assumption and then with the banks that you have you highlighted.
A top five bank in numbers.
<unk> 10 billion or $50 billion banks, how do we are you guys going to retain those PPP loans on balance sheet or will those be retained by those respective banks.
That's right we will originate process fund service forget all of those loans.
Okay.
Okay. That's that's helpful.
And then in terms of.
Maybe moving on to just the reserve releases here.
And your strong reserve ratio just kind of curious as to.
How youre thinking.
About.
Reserve trends going forward in 2021.
Carlos you want to take that.
Sure. So I'll just comment that we're not giving specific guidance related to our provision expense in 2020, a line that says the reserve release that we recorded in the fourth quarter was largely driven by the improvement in the macro economic variables, we use the Moody's baseline model.
We do not expect any significant deterioration in our credit quality going forward.
That being said.
The estimate from.
From projections, if you were somewhere between 10 and $15 million a quarter, a provision expense that wouldnt seem unreasonable to us.
Okay.
And then in terms of just.
As youre thinking about.
$10 million to $15 million and provision expense is that driven on loan growth here, just covering charge offs as I think about that.
A combination of both I would say.
From growth as well as from charge offs, we have factored that in.
Well.
Okay.
And then one more question if I may just on the multifamily front and thinking about the balance sheet makes you guys, indicating slide deck the.
The loans are about $3 2.8 years old at this point and usually thats about the point, where you're starting to see refis.
Youre hitting at this point revising really start to pick up.
The only guidance about $1 billion five I think by year end kind of curious as to what are the dynamics and drivers that you see keeping.
Resulting in only a modest decrease in 2021.
Yeah. So we are expecting to keep about that one $5 billion in multifamily book, So you're right.
To replace that run off so as we think about the different markets, where we can add some additional multifamily lending we are considering that I feel confident that we won't be able to replace that run off to keep our multifamily about 10% to 15% of our total book.
Okay.
Great. Thank you very much that's helpful.
There is no further question at this time you may continue.
Okay. Thank you.
We do have questions online.
Question is from from three individuals' Jay I'll read them to you. Some of these things we've probably touched off I'll read the questions. So that the question of Lord knows that they've been asked.
The first comes from the first five questions come from Casey Haire from Jefferies.
Cases first question that he described it as a big picture question why not buy back shares at 75% total book value with a 10, 6% capital.
Tier one capital ratio rather than grow loans that are in the mid to high single digits.
Yeah Okay.
Absolutely right and we will buyback, but right now we see a huge opportunity.
Build capital.
Extending our balance sheet temporarily to the PPP loans.
But I wanted to be very very clear that if we are not clearly at least at book value, which I shared with you I was just going to be somewhere between 30% and $32 by the end of this year, we will be buying back stock.
But do not expect us to make it a priority to buy back stock in the first half of this year.
That should be more of the second half of this year, we think that will be after the.
We've gotten an excess of 7% TCE ratio and we've already taken into onto our balance sheet.
Majority of the revenues.
We are getting from PPP, one and two are we on.
<unk> will continue to get more revenues from this so called PPP.
Initiatives that debt is going on right now, but we will deploy our capital appropriately and we are not going to be chartered to buyback stock. If we are trading below book.
Okay.
The second question, Jay it's about NIM and Casey asked what is new money yield on loan production and which deposit bucket makes the biggest contribution to getting down to 40 bps is the cost of deposits.
Okay.
First of all next quarter around Casey fleets coming in into our into our section where you can ask these questions directly.
And so obviously its interest bearing deposit money.
Money market as well as interest bearing DDA that goes the other ones, which offer the greatest potential for us to decrease our cost of funds.
And from the average yield that youre getting other loans right now it's running between two and a half from tier two quarters per cent.
Okay.
The next question is about the mortgage warehouse.
It says MBA forecast is down about 20% versus your guidance of down about 40% in 2021, what percent concentration are you targeting from mortgage warehouse long term.
I think.
Again, Carla gave you that guidance. So we would expect that to be Carlo you wanted to get to that debt.
Just wanted to show the numbers.
Yeah, we are expecting our total mortgage warehouse to be between 15, and 20% of our total loan book and as I mentioned earlier, we expect the volume to be strong in the first half of the year.
To lag a little bit in the second half of the year. So at the end of the first quarter, we're expecting somewhere between two eight and three two and that the ended the year somewhere between one six in Q4 from any.
Average balance perspective for the full year somewhere between two and two five.
Okay.
Next question.
Jay is.
What do we see as the allowance for credit loss landing spot versus a one 9% rate and how quickly does it get there assuming no change in the forecast.
I think as Carla shared with you earlier.
We use the Moody's model this time around.
We did quite a bit of history as well as qualitative adjustments to try to keep the.
Good to be conservative in looking at our reserving because a dog so to compete cost in.
In the environment.
That's pretty consistent with some other more forward thinking banks and so we will be conservative on our provisioning there not be very aggressive.
And.
Obviously, the actual amounts will be dependent upon.
Our forecast for the future economic activity as well as the debt.
Trends that we are seeing in our portfolio.
We are seeing very strong credit quality as Andy shared with you with some details.
So we do not envision a significant change.
In our company.
As of right now.
And I think the guidance that card lucky.
Which is principally for growth.
And charge offs in the consumer portfolio, which has that by nature will have.
25% to $30 million in charge offs in a year and that's why having.
$10 million to $15 million per quarter.
In growth.
Other provisions as a good number as we see it.
Yeah.
Okay. In case. Your final question is probably a good one for Sam Sam.
Sam Casey asked what's our estimate for the magnitude of this new round of PPP.
Thanks, Dave.
Casey it's difficult to say at this point in time I think you can back into based on the average loan size of approximately what the pipeline looks like.
One thing that is unique about.
Banks and Fintech lenders that have application portals available online, which don't require you to be a preexisting customer of that institution as the debt.
Can be a tendency to have multiple applications with a couple of organizations. So as we sift through the pipeline in the next in the coming weeks, we will have a much better sense, but.
We feel pretty comfortable based upon the pipeline debt.
Approximately half of the origination volume that we did last time around fees.
<unk> to be the base case.
Okay.
Three questions from Peter Winter of Wedbush Securities and this first one I think we answered, but let me read it again and see if anyone wants to elaborate.
The economic outlook improves where do you think the allowance for credit loss ratio could fall to.
So I think we've already addressed.
Again, I will say that we are not expecting any significant credit deterioration.
On the horizon on the short term horizon, but that being said it's difficult to print book tour will end up.
At the end of next year I will just repeat that where if we're using an estimate somewhere between 10 and $15 million of provisions.
This quarter it seems okay.
Thank you Carl and theaters next question involves NIM guidance sales with our with our guidance that we will expand to the three point, Ken 330% range without PPP loans.
For 'twenty one.
What are some other drivers that would take to get to the high end of that range.
So I'll just give a little extra color to what we said and expand upon some of the case early remarks again focused on continuing our efforts we've made significant progress in reducing our cost of deposits, we do have well north of $600 million.
The deals that are available from repricing in 2021 about $500 million.
We price.
In 2021 and about two thirds of those will reprice in the first half of the year and they're right now at a cost of about $1 15 to 120 range. So theres some significant ability there to bring down the overall cost.
Yes.
Thank you Peter as final question.
He is returning to the credit losses.
Peter asked.
What's the range for net charge in 'twenty 'twenty, one and it was only 29 bps in 2020.
And secondly is there a potentially higher stress as the remaining levels come off of deferrals.
Yes.
As Andy.
Yeah, I'll handle that one.
As Karla mentioned.
We're looking at that 10% to $15 million.
Loss rate per quarter.
We think thats really realistic given where we stand today from the quality.
The overall portfolio and the aggressive stance, we've taken in moving off.
Nonperforming assets I think as we evidenced with the.
The first core sorry.
First months move too.
The hotel asset up in Massachusetts.
Concerning stress from the portfolio as far as loans coming off of a deferment.
Really haven't seen that in the loans coming off of a firm it to date.
They've been successful in coming all from the permit.
We don't feel there's a lot of significant stress on those assets, we did longer term deferments on those assets.
And then very sound forward looking cash flow analysis on those assets to ensure that between the deferments in the payments as well as to build a cash reserves on their ends through operations.
They will be able to get through all of 2021, as we really think that it's going to take till the end of 2021 for this economic cycle to really fully recover especially for those industries that have been highly impacted such as hospitality. So what I can really share as those that have been coming off of a deferment to date have been coming off.
Absolutely.
That trend will continue.
And for those.
Especially hard hit industries are at risk industries, we have made sure and working very closely with those borrowers that theyre in a position to whether all of 2021 to when we get back to somewhat semblance of normalcy moving forward.
And then Jay we have a final question from the web from Daniel Grossman of Tech Com, Inc.
And then Steve Moss as a follow up.
That he will give to you.
Danielle asked realizing the P. P. P. Initial processing fees are taken into income over life of the loans.
How much was taking into income in the fourth quarter and approximately what do you estimate it will be taken into income in the first half of 2021.
Carl.
I think Jay.
Just a little bit of color around what we've recognized to date on our P. P. P loans. So in response to the fourth quarter from a net interest income perspective, we recognized about 30 million net interest income there was about $17 million of that that was really the <unk>.
Recognition of the FERC, we did have some level up forgiveness in the fourth quarter.
Year to day 'twenty 'twenty, there was about a total amount of $65 million of interest income recognized on the P. P. P loans.
And a little over half of that was from deferred fee recognition.
That gives some color on the first half of 'twenty 'twenty, one we havent given specific guidance on that but we are still projecting a significant amount of around one and two to be forgiven in the first half of the year.
Overall from a NIM perspective, again, I'll, just repeat that free cash of 330 range for the fourth quarter.
Thank you Carl.
We can return to Steve Moss for his question was the last question for today and then you can give it to Jay for closing remarks.
Sure Steve Steve last line is open.
Alright debt.
Thank you and a couple of just follow ups in terms of.
Starting with maybe the.
On the PPP aspect the fee recognition, how do we think about the timeline for the new how youre going to amortize the fees into income with the latest round of PPP.
Yeah, I'll take that quickly.
Just on the PPP Steve.
<unk> will start there.
Our next.
This first quarter, we think the majority of that will be done in the first quarter and then you will see since these are below our average loan size is expected to be below 50000 per Sam shared with you.
The forgiveness process. So we will determine the exact recognition.
Perhaps some conservative estimates in our guidance that you've given to discrete debt.
You should expect us to make over $4 a share this year and you should probably expect us to make more than $4 a share again next year and the following year at $4 50.
We've given you.
Guidance so.
I think.
Very difficult as Carla mentioned there'll be volatility in our earnings on a quarter to quarter.
But the core bank is also expected to continue expanding its margin, it's continuing looking at loan growth unless.
As a as you know was.
It was pointed out to us once again by Casey that unless we see that the street.
It's just not putting enough capital into the banking.
Sector in that case.
<unk> be creating below.
We think we ought to be ready and we will be aggressive in buying back our stock with all these revenues that we're generating are.
You already heard from card loan book.
Net.
From PPP wanted to our estimated revenue was $150 billion, we can put debt.
After.
After.
Adjustments for taxes, we could be using all of that to buy back stock.
And if we think we generated another similar amount you can see huge opportunities for our company to buy back stock and make sure that shareholder value is truly reflecting the value of our company.
Steve I would just add to that that it's a 1% interest rate 35 basis point cost of the PPP Lf and 60 month term.
Yes, okay.
So then the fees, you'll probably amortized on like a six month basis and to the extent Forgivenesses accelerated you would.
It's going to flow through or is that kind of.
So that's how to think about okay.
Great and then in terms of the.
The other thing just going back to the provision for a SEC just as I think about that guide I mean.
Is it fair to assume that basically $8 million of that or so if you will is just the normal quarterly churn in our consumer portfolio.
That's correct charge offs are expected to be in the $7 million to $8 million, maybe a little bit more or less than debt on a quarterly basis and that's already been factored in by us youre not coming up with our margin.
And they're not earning assets to expectations and then when Carla gave you the guidance of $10 million to $15 million. The rest is for growth.
Right. Okay, great. Thank you very much I appreciate that.
Yes, Thanks, everybody really appreciate your taking your interest in customers Bancorp, we look forward to working with you.
Please don't hesitate to call us anytime with any follow up questions and once again, therefore, Peter Casey and will please join us on the call. So that you can directly ask those questions.
Thank you so much and have a stay safe and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participating you may now disconnect.
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