Customers Bancorp, Inc

Good morning, and welcome to the first quarter 2020 Customers Bancorp, Inc. earnings conference call. At this time, I would like to turn the call over to Bob Ramsey. Please go ahead, sir.

Thank you, Travis, and good morning, everyone. Customer Bancorp's first quarter 2020 earnings release was issued this morning along with our investor presentation. Both are posted on the investor relations page of the company's website at www.customersbank.com. Our investor presentation includes important details that we will be discussing this morning, and I would encourage everyone to pull up a copy. Before we begin, I would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 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 website. At this time, it's my pleasure to introduce Customer Bancorp's CEO, Jay Sidhu. Jay, the floor is yours.

Jay Sidhu Thank you very much, Bob, and good morning, ladies and gentlemen. Thank you for joining us for this call. I hope you all are safe and healthy, and as you can imagine, we are all speaking from several different locations today. I thought it would be a good idea to have several members of our management team present to be able to answer any kind of questions you have because this is an important time for everybody to understand that customers bank Corp well. So we encourage you to please look at our investor deck that we have posted on our website and please follow the deck. Joining me today, Besides Dick East, who is our President of Customers Bank, and Carla Leibold, who is the Chief Financial Officer of Customers Bank Corp., and Sam Chidoo, the Chief Operating Officer of Customers Bank, are also several members of what we call the very important executives, the Management Board of Customers Bank. Those are Andy Bowman, he is our Chief Credit Officer, Steve Vissa, our Chief Lending Officer, as well as President of our New England Market, as well as he has the commercial finance group, or the equipment leasing reporting to him. Also joining us is Lyle Cunningham. Lyle is our market president of Metro New York, our private banking teams there, as well as he's head of our specialty lending, as well as the Chicago market. And then Tim Romick is also with us today. Tim is the president of our Pennsylvania, New Jersey markets, as well as he heads our small business administration group, which has been very, very active the last couple of weeks and has contributed immensely, very significantly different numbers than what you've seen from our peer groups. And then joining us also is Glenn Hetty. Glenn is the head of our banking, the mortgage companies, and also Jim Collins. Jim is our chief administrative officer. So if we go to page two of the investor deck for first quarter that we've shared with you, I'd like to start off by talking about how privileged we all feel and so how proud we are of our team members who have really, really risen to the occasion and are working remotely. Eighty-five percent of them are working remotely, and they've done an exceptional job, in our opinion, in serving our customers, our communities very well. We've had some special pay consideration. We've had some bonuses. We've had some additional incentives for them. We've had no furloughs, and we've also added 2,500 zero-interest loans for our team members who are other than the executive officers of the company. And I'm pleased to share with you that we are so fortunate that none of our team members have been directly impacted so far by COVID-19, but their family members have been, and we pray for all those who are suffering right now. In terms of helping the consumers, as you can well imagine, our customer care center has been open 24 hours a day, seven days a week in majority of the cases. We've had a few branches that we have open their drive-in windows and appointment banking like others, but very important for the consumers, I want to share with you that it's under 5% of our consumer loan customers who are in deferment right now. which speaks somewhat about the quality of our consumer loan portfolio, and we'll discuss more of that in detail. Regarding the business customers as well as the not-for-profit segment, we are very pleased to share with you that we took advantage of helping those communities and that we have advanced For the Small Business Administration, about $5 billion in PPP loans. That's about five times to six times the average of our peer group based upon some of the information that we've glanced over that was prepared by many of you as well as investment bankers. And not only has that generated approximately $85 to $100 million in revenues for Customers Bank Corp., but has helped us attract thousands of new prospects. And we've already opened about 1,000 new business checking accounts from all of their sources, multiples of normally what you would expect from a bank in this kind of an environment where the branches are not open, but we are doing it all digitally. And We are in touch with 100% of our commercial clients, and we are pleased to share with you that it's 8% of our commercial loan customers have asked for deferments. This, again, speaks for the kind of CNI business that we've been doing, the kind of commercial real estate business we've been doing, because commercial real estate, other than multifamily, has not been a major focus for us, as you all know. Regarding the communities, we are pleased to share with you that Customers Bank has made directly or indirectly in excess of $1 million of donations for urgent COVID-19 care. We've also conducted a webinar for the entire business community in our franchise talking about how do you not only survive but also thrive in the environment after COVID-19. And we were pleased that CNBC invited me. to share with them the perspectives of community banks on this crisis. So moving on to page three, let me talk a little bit more about the Paycheck Protection Program because we have really done, I'm so proud of our teams, and we've really outperformed any of the banks in our peer group, and the results for us resemble those of the $50 to $100 billion banks in many instances. So we set out to helping banks smaller-sized businesses in all our communities. And customers expanded its platform. We developed because we have a group in our company called the FinTech Banking Group. So we developed partnerships with several SBA-approved and other FinTech platforms to expand our reach, expand our ability to help the customers. And so I'm pleased to share with you that as of Friday, 75,000 small businesses have established a relationship with Customers Bank, and we were able to offer them $5 billion, a little over $5 billion in PPP loans. Our average loan size was in the low 70s, which is well below what you've normally seen from some of the banks that we were competing with. And we expect to add approximately $85 million to $90 million in revenues from origination alone. And on top of that, in the first two months itself, those revenues from the $5 billion in loans will be approximately $1 million in net interest income in the two months that they'll stay with us. The industry is expecting up to 25% to 35% of these loans may not be forgiven and that they will stay on the balance sheet. We are we are putting all of our loans to the Federal Reserve window for the Paycheck Protection Program loan funding. And so we will get the funding in a spread of 65 basis points, and it has no impact whatsoever on our capital. So over the next two years, if 25% are not forgiven and they stay on our balance sheet, you would expect to see approximately $8 million more in annual net interest income. So you can add it all up. You're talking about approximately $95 to $100 million revenues for our company, besides helping 75,000 businesses. And that equals about, after taxes, $2.50 or so in book value, tangible revenues. common equity accretion or $2.50 book value accretion just from the PPP loans. And you will see later on, we've been pretty conservative in the reserving and still that added approximately $100 million to our reserves in the first quarter. And it just so happens that we would have added approximately $90 to $100 million over here, including their interest income. so that we have a much stronger balance sheet without any impact on our tangible common equity. From a loan modification point of view, we had to, of course, set up the deferment initiative for our borrowers who were directly impacted by COVID-19. You would hear from my colleagues talking about that. We took a very proactive action on that. And we decided to go with 30 days to 90 days type of deferment. And we did a tremendous amount of dialogue, completely understand the needs, because we believe just granting 90 days to six months of deferment is simply postponing the inevitable. And we are very, very comfortable with our asset quality and the kind of customers we have. But to make sure that there are no surprises, you have to be actively engaged in portfolio management, in our opinion. So the bottom line is our total deferment or relief represents 5.1% of our portfolio. About 4.3% of them are consumer loan customers and 7.9% of them were commercial loan customers. But the C&I deferred loans are only 1.7%, talking about that we had stayed away from some of the industries which are higher risk. and majority of our commercial deferments were in the multifamily area. Regarding customer assistance, we are actively engaged with clients to understand their situation and to minimize any credit deterioration. So 100% of the customers, Bancorp borrowers, are being contacted right now who are in deferment on a weekly basis and everybody on a monthly basis. Moving to slide four, First quarter 2020 highlights. As you know, we made, after providing $23 million in provisions in Q1, we still reported $7 million in gap earnings. Important thing is our PPNR, or pre-tax, pre-provision, or pre-provision net revenues, whatever you want to call it, was $38.6 million. And that is 53% over the first quarter of last year. That was driven by a 37% year-over-year increase in net interest income and an 11% year-over-year increase in non-interest income. Looking at the asset quality at March 31st, we built our reserves by a little over $100 million in the first quarter between 12-31 and March 31st numbers. The reserves today amount to 2.1% of our total loans for investment. That's up from 0.8% at 12-31-2019. And this compares with only 1.7% reserves for all the regional banks in the United States and 1.3% comparable reserve levels for mid-cap banks all across America. So our reserves amount to about 6.5%, 6.4% of our consumer loans. And the reserves equal 240% of our non-performing loans. And our total non-performing loans were 0.6% at March 31st. And we'll talk more about all of that. Our loan portfolio, as you've seen, grew by 18% over last year. Our CNI loans, as I mentioned earlier, grew 29% over last year. We've been gradually bringing our multifamily loans down over the last two to three years, so they were down 36% over last year. Our C&I loans make up over 50% of total loans, and commercial real estate, including multifamily, is 33%, but without multifamily is a little under 10%, or about 10% of the total loans. And our other consumer loans, which are which are home improvement loans, personal loans, as well as student loan refinancing, all combined, as well as some home equity loans, make up only about 13% of our total loans, and we like that. And the mortgages and manufactured housing are about 4% of our loans, and we have absolutely no subprime loans in our portfolio. And our definition of subprime is 660 FICO scores, not 640, as many other industries consider to be subprime. On the deposit side of it, our deposits went up 30% year over year. Our demand deposits are up 38% year over year. And from a capital point of view, our capital ratios, even excluding the accretion in capital that we will see from our efforts of retained earnings as well as our PPP efforts. Still, at March 31st, the CET1 was 10.7%. So was our Tier 1 risk-based. And the total risk base was 12.3%, and our Tier 1 leverage at 10.1% at Customers Bank. From a tangible book value point of view, excluding CECL, it was $801 million or $25.50 a share approximately. And if you include CECL, it's $23.51. And if you include the revenues we made from PPP, it's back up. to 2547, although there will be a timing issue in terms of when we will be able to recognize all the revenues coming from PPP. At March 31st, we were trading at only 0.46 times tangible book value of March 31st, as of March 31st. Moving to slide five, this is financial highlights year over year. So I wanted to emphasize year over year for you. Banks' tier one equity capital was up by 9%, and like I mentioned to you, it's 10.7% CGT1. If you look at our PB&R, that went up 53%, and the PB&R ROAA, or the return on average assets, improved by 29 basis points year over year. Our adjusted PB&R return on Common equity, that improved by 570 basis points year over year to 17.4% at March 31st. Our loans and leases, like I shared with you earlier, were up 18%. Our deposits were up 13%. DDAs up 38% year over year. Our non-interest income up 11% year over year. And like I said earlier, net interest income was up 37% year over year. If you look at slide six, you can see the tangible book value per share, as I shared with you earlier. If you look at that, that would be in our assessment, because we simply transferred the capital from the capital account to our reserve account, and so that's value per share 2560, and that means we are trading at 43% of tangible book. And you can see over here our stock price compared to tangible book. But I'm pleased to share with you that our book value per share over the last few years has been up between 8.5% to 9% per year. We move into slide 8. We at our company are very focused on risk management. And what we wanted to do was, to share with you our top five risk management priorities and discuss those with you on this call so you would have a better understanding of Customers Bank Corp. The top five risk management priorities for us are, number one, portfolio management or maintaining superior asset quality. Number two, preserving and expanding our margins. And I'll talk about each one of these separately about the highlights in a second. Number three is strong liquidity. Number four is our capital management and capital allocation process. And number five, obviously, is maintaining and improving profitability. So if you go back to the portfolio management, we are very, very focused on conservative underwriting. And my colleague, our colleague, Andy Bowman, who's our chief credit officer here, In about a minute, we'll share with you what do we mean by conservative underwriting and what our credit culture looks like. But we believe we've also been in now in this environment, especially are taking a conservative view towards reserving. The reason for that is that we, since middle of last year, have been operating in a pre-recessionary environment. We've been stress testing each and every loan, stress testing our loan portfolio and moving out of the bank the credits that were more stressed, and then trying to only focus on attracting credits where we believe in a stressed recession environment would perform better than the rest of the industry. And that's why, in addition to that, it's very important for you to note that we are having weekly contact with every one of our borrowers and deferments, and we are requiring information from them working with them, and we are in regular contact with every single borrower, maximum once a week, otherwise more frequent than that, once a month, sorry, but more frequent than that in most of the cases. And you will have my, you'll hear Andy talk more about this. Number two is preserving and expanding the margin. As you know, our margin expanded 40 basis points compared to where it was last year, March 31st, 2019. It expanded 10 basis points in Q1 2020. We expect the margin to be about 3.1% by year end, or we are saying over 3% for the entire year, every single quarter. And we believe that in this kind of an environment, it is much more important to have a stronger balance sheet and preserve your margin than to build loans. So whatever we do is we are very focused on on disciplined credit quality, disciplined pricing, as well as reducing our reliance on higher cost funding, as well as reducing our borrowings. That's why we are very confident with preserving and expanding our margin. On the liquidity side of it, the most important factors, as you know, for liquidity is strong growth in demand deposits and strong growth in core deposits. I've already shared those numbers with you. And that should result in reduced reliance on borrowings, And we have a loan-to-deposit ratio when you exclude the mortgage warehouse business that we fund with borrowing because it's only a 30-day type of loan. And so it's not a loan held for investment for us. And so we are at 87.5% of our loan-to-deposit ratio. And we have over $3 billion, which is in excess of 30% of our average assets, are extremely liquid right now. And from a capital management point of view, we are pleased to share with you that it makes no sense for us to redeem our preferred stock this year when it's becoming callable. And last year, based upon our pre-recessionary environment, style. We decided to add about $100 million in capital to the bank in the third and the fourth quarters last year. Plus, PPP will add, as I shared with you, $85 to $100 million pre-tax to our equity capital over the next couple of quarters. Both the bank and the holding company is well above the well-capitalized status. And maintaining and improving profitability, our PPNR, I've already shared with you, is showing above-average growth, and our core ROA and ROE targets within the next two to three years remain. There's a little bit of uncertainty why we can't be precise because of this environment, but we are confident that we would be in the top quartile of our peer group and our focus, which today happens to be about 125% ROA and 12% ROE. And we remain focused in the long term for having maintaining those kind of ROA and ROE ratios. And that ends up being in about $6 in core EPS within five, perhaps six years because of COVID. So now I'd like to move to slide 10. And you can just talking about our portfolio management or and our asset quality, and talking about our portfolio of assets. So CNI loans make up $2.6 billion of our loan portfolio, and the middle market in business banking itself is about $1.5 billion of it. The specialty lending is about $675 million of it, and equipment finance has about $364 million in outstanding, and this is a very, very high-performing portfolio, and well-diversified at such end. My colleagues are happy, will be happy to answer any kind of questions. The yield on that at March 31st was 4.7%. The loans to mortgage companies, it's a niche national business. We had $1.8 billion in average outstandings, which is up 46%. You can imagine where the curve is right now, that this business is booming. Right now, and it's expected to remain booming for the next at least two to three months. And we have 55, Glenn Eddy has 55 very high quality mortgage clients across the country. These are just the top quality mortgage companies, independent companies, mostly privately held in the nation. And we are a top 10 lender in this business. And we also have, as a result of being in this business, about $575 million in non-interest-bearing deposits right now. And this business also generates fee income for us, which usually averages about 30 basis points of outstanding loan balances. So it's a great business. We haven't had any losses other than an unfortunate fraud loss. at one time over the last 10 years that we've been in this business. From a commercial real estate loan point of view, like I mentioned to you, we have de-emphasized lending to retail shops. We've de-emphasized to retail shopping centers. We've de-emphasized lending to office buildings and such, but we've been focused on multifamily. And even over there, we've been de-emphasizing that over the last two years or so. So that's why The portfolio of commercial real estate is down 20% year over year. And the commercial real estate non-owner occupied was only about $1.4 billion, which is about 13%, 14% of our loan portfolio. And our multifamily is now at $2.1 billion. That's down 36% year over year. And we think you should expect this portfolio to be somewhere between $1.5 to $2 billion. We will maintain that. We are opportunistic. We think we can see some very high-quality opportunities right now, but we will remain disciplined in having higher-quality borrowers as well as the pricing has to be risk-adjusted basis. The spreads have widened a little bit, and so we will take advantage of that. As far as consumer loans are concerned, we wanted to diversify our portfolio. We wanted to build our deposits in the consumer business. We wanted to be... take the best of fintechs with the best of a bank in this business. But we wanted to be cautious. We wanted to have a limitation and put some constraints on this business as such from a growth point of view. So that's why this business, which includes personal loans, home improvement loans, student refinancing, outstandings are about $1.3 billion, which is about 13% of our loans. As such, no subprime loans at all. And again, subprime is defined as 660 for us, and you will see a lot more details that we are disclosing to you today about this business. And residential mortgages, because of interest rate risk, we have really de-emphasized that. It's only about $340 million in our portfolio. And investment securities are very clean, $700 million in our portfolio, because we have about 30-some percent of our assets are all liquid assets. You know, before we talk more about our commercial loan portfolio, and I'd like to ask Andy Bowman, who many of you may have never met, but he's a very integral part of our business. I've known Andy for, Dick and I have known Andy for many, many years. He's been with our company for many years. Andy, if you can share with the Our investors and analysts, please, a little bit about how you see and how would you define our credit culture.

Absolutely, Jay, and thank you. And good morning, everyone. I'd like to take a few moments and share with you why we feel the bank is well-positioned to continue to post strong credit quality metrics throughout as we move forward through this very challenging economic period. First and foremost, I just want to make everyone aware we possess a highly experienced and well-seasoned 49-member credit team. Our team of credit officers, who are regionally dispersed throughout our footprint, on average have an excess of 20-plus years of credit management experience, the majority having 20 to 20, sorry, 25 to 30 years, and that experience pertains to front-end credit structuring, portfolio management, and workout experience. Personally, I've been In the credit industry for 32 years, I've been working with Dick and Jay for the past 10 years here at Customers Bank. Additionally, as evidenced by our strong historical credit metrics, our credit culture is one that is conservative in nature with a high degree of emphasis placed in safe, sound underwriting practices and highly interactive portfolio management framework driven through our single point of contact customer facing model. I'd also like to point out that beginning in the middle of 2019, an initiative was undertaken within the organization to begin operating our various credit lines of business as if in a pre-recessionary environment, with each line of business challenged at that time to assess their respective portfolios as to how each would perform in a recessionary environment, and then work in unison with the credit administration team in implementing a strategy to address any areas of concern. Some of the key initiatives that came out of this undertaking were the scaling back or complete placement of a moratorium of lending into industries with highly susceptible to recessionary pressures, such as hotels and motels, entertainment industries, energy, restaurants, and leisure and travel. We also implemented a formal exit plan strategy where we established this for all credits of high risk, where there was a formal and timeline-sensitive exit strategy put in place for each of those credits. Third, we planned and we implemented increases in staffing levels within both the portfolio management and loan workout segments within the organization. I think it's also important to note that we developed a very robust portfolio management program that requires ongoing discussions, as Jay had previously mentioned, between our relationship management and portfolio management teams and our borrowers. It's important to note that these are all being tracked and documented through our fully integrated Salesforce platform. I'd also like to note that we undertook a very proactive stance in working with our customers to support their respective operations through payment deferral options, the Paycheck Protection Program, both of which Jay has previously mentioned, but also by levering our Small Business Administration preferred lender status, which enables us to provide other SBA lending options to our customers that not all of our peers have that flexibility to do. In closing, I'd like to also state, when we assess the composition of our overall commercial loan portfolio, It's important to note that many of our larger lines of business, such as mortgage warehouse lending, multifamily lending, and our specialty finance lender finance unit, have either proven to be historically strong performers in periods of economic stress and or are well positioned at this time. And I'd like to give a few highlights on that. Regarding our mortgage warehouse lending unit, as we shared with you previously, it's a self-liquidating by nature. And currently, it's evidencing little to no signs of stress. I think it's also important to note that within that portfolio, the majority of our exposure is with conforming mortgages that, again, are self-liquidating in nature as they go out to the secondary market. And we have scaled back significantly any level of credit exposure we have to the non-conforming market as also as to the loan service finance components. From a multifamily perspective, it's always historically proven to be a line of business with limited loss potential. And based upon our ongoing barber conversations, collection rates currently stand at approximately 75%, dropping slightly to 65% to 70% for mixed-use properties, denoting a little bit more stress in the retail component of the leasing industry. In addition, I think it's important to note that the multifamily credit's that we have provided deferrals for, those credits all maintain strong LTV positions with a current proximate LTV position on those credits of 50%. And those credits had a pre-deferral debt service coverage ratio of approximately 1.58 times. Lastly, when we talk about our specialty finance lender finance portfolio, it's also evidencing very little stress at this time. And that's really supported by there being no payment deferral requests at this time, and the presence of what we're seeing is very proactive stances being taken by many of our borrowers and funds in either scaling back growth or outright portfolio reductions. Another trend we've seen very important in that industry, especially amongst our customers and funds, is that a predominance and a gravitation towards senior debt financing as opposed to any type of tranche bridge, or sub-debt financing. So that diversification within the portfolio also provides us with that additional structural hedge. So really, at this time, I would like to hand it over to Dick East, our president and CEO, and he'll review with you in more detail our overall loan portfolio and how we're managing it going forward.

Dick? Thank you very much, Andy, and thank you to everyone who has taken the time to listen to our story today. When I'm listening to Jay, it just reminds me of the passion that has been driving our company, our young company, which we started a little over 10 years ago. And that passion has been the creation of jobs and the retention of jobs. That's what has been driving Customers Bank for all of these years. The opportunity to be the conduit to provide financing. for these 77,000 potential customers and applications that we have gone through, totaling $5 billion, as Jay mentioned, just speaks to the heart of who we are as a company. So we are privileged to be able to fill that role. And it's been a remarkable process, as Jay mentioned, over the last five weeks to be able to achieve that result. In keeping with the program today, let me refer to you to page 11 of the deck. And basically what the left side will share is the behavior of various portfolios within the company over the last several years. You can see a constant and consistent increase in our CNI loans. You can see a stabilization of our investment-free loans. You can witness a reduction in our multifamily loans, as well as an increase in our banking from mortgage companies, which are commercial loans as well. But what drives the business bank is a business model, and that business model is a single point of contact. And what this means is that every commercial or business customer has a team dedicated to delivering the services of the entire bank to that customer. So basically one call does it all. The experience of our teams is exceptional. When you look at the entire generation of assets in this company, the median term of engagement and credit experience is about 26 years across the company. The average is about 30, and I'm happy to tell you that I'm probably one of them that advances those averages. The business banking that's conducted principally from New England to Northern Virginia along the I-95 corridor is made up, as Jay mentioned, the Commercial Finance Group, which is headed up by Sam Smith up in Portsmouth, New Hampshire. Lyle Cunningham, who heads up the Specialty Finance Group, along with the other market leaders, Steve Issa, Lyle, of course, from Metro New York, and Tim Romick from Pennsylvania and New Jersey. But we are constantly focused on in-market lending. Now, we do have some national programs, as Jay mentioned. Our Banking for Mortgage Companies is a national program. and Tim Romick heads up a national program for SBA lending. The LPOs that exist in Boston, Providence, New York, Philadelphia, and Chicago, plus the SBA program, which I mentioned is a national program, significantly multiplies the LPOs that we have throughout the country. Let me share with you just a moment on page 12 how very comfortable we are with the credit quality, as well as the coupon rates. We've enjoyed these high-quality assets, building these high-quality assets over a period of time. But those assets are being built, we believe, to be at a fair price. So as you look at this, at slide 12, it simply demonstrates quarter over quarter, year over year, the improvements that we have made in the complexity of this commercial loan portfolio. Now, as Andy mentioned, the efforts to accommodate deferment requests. We initially, on page 13 you'll see, have maximum deferments at this time of 90 days. That's a bit different than other banks are doing, but we will, other banks we believe are in the 180-day range, but we will review in 90-day increments when additional time is required by our customers. We obviously go through an extremely detailed process to make sure that the deferments that we are offering to our customers are absolutely necessary. We also have, as Jay mentioned, daily, weekly, and at least monthly contacts with all of our commercial customers. And we will continue to use the SBA lending programs where possible to support the cash needs of our customers. And all of those issues are true to our commercial real estate borrowers as well. So now I'm going to ask our colleague, Sam Sadu, to take over the presentation on consumer loans. Sam?

Thanks, Dick. Good morning, everyone. Appreciate you taking the time on today's call. We recognize it's running a little longer than we would normally anticipate, but there's obviously a lot to cover given the environment that we're in. So if you flip to slide 15, before I jump into the numbers, let me take a step back and walk you through the business model of our consumer business. Our total consumer portfolio is approximately $1.7 billion, including mortgages, and it provides a tremendous amount of diversification to our balance sheet. We provide home equity and residential mortgage loans to customers in addition to originating and purchasing unsecured consumer loans through arrangements with third-party fintechs. Over the past several years, online consumer lenders have jumped from being a small fraction of the market to what we expect to be the dominant market share. To date, it's been more efficient for customers' banks to target and service these loans outside of the traditional bank infrastructure, given the high volume as well as large amounts of marketing dollars that fintechs have been spending to compete. What we've done at the bank is taken a hybrid approach with our other consumer book, which is currently at approximately $1.3 billion. Phase one of our approach was to originate direct as well as enter into purchase and flow arrangements with top online lenders in the country. Phase two is we supplemented our internal credit box and modeling with industry partner and internal data in an effort to drive superior asset quality and risk management. In the portfolio and over time, you will see our purchases be a smaller percentage of our overall portfolio. We're currently already slightly below 50% purchased. We're now entering phase three, which is where we are matching the assets and liabilities on our balance sheet of our digital bank, which includes digital deposits of about $1.2 billion, close to $2 billion if you include bank mobile, and cross-sell and create deeper connections on both sides of the balance sheet. We're spending a lot of time thinking about how to link our digital customers together and create a cohesive brand platform with unity across the product suite to create a national presence that is much more integrated with a combined customer proposition. As many of you know, at Customers Bank, we have a challenger bank mentality on a national digital first scale, and we see this consumer strategy as the best way to acquire customers at scale. So with that background, I'll point you to slide 15. As you can see, we have a very highly diversified portfolio by loan type, age of borrower, geographic market, employment industry, and income levels. From a FICO perspective, we have no subprime. As you heard Jay say, our average is a 744 FICO. If you move to debt-to-income, just about half of our portfolio's borrowers have debt-to-income ratios of less than 20% and an average of just under 22%. If you look at the bottom left chart, We are geographically well dispersed, in line with population dispersion, with the top 10 states representing about 55% of our portfolio. From an employment perspective, 50% of our borrowers are employed in professional, education, government, and healthcare sectors, with only 5% self-employed. Finally, from a use of funds perspective, on the bottom right chart, you see that debt consolidation represents about 58 percent, home improvement about 25 percent, specialty and niche financing of about 19 percent, and student loan refinancing of about 4 percent. All in all, as we've said previously, we expect our other consumer portfolio to be around 15 percent of the assets of the bank. So if you flip to slide 16, again, here are some summary stats on our portfolio. We want to reemphasize that we have no subprime loans, strong FICO, debt to income, borrower income, and geographic characteristics. This discipline has helped us over the past several weeks, as I'll touch in a minute, as it's related to deferments in our portfolio. In terms of residential and home equity mortgage businesses, we periodically reevaluate these businesses, but at this point in time, we don't foresee an increase of capital allocation. If you flip to slide 17, As the team alluded to in our commercial portfolio, we pursued a similar diligent process to our consumer portfolio. Firstly, in March, as we publicly announced, we decided to temper growth in our consumer business. In addition, we tightened our credit standards, increasing our FICO cutoff to 700-plus only credits. In conjunction with our proactive efforts, to tighten credit standards on new originations, we worked with each of our servicers to institute natural disaster deferment plans ranging from 30 to 90 days. As you can see, as of April 25th, we were at 4.27% on the portfolio, and we're pleased to see that deferment growth has slowed in month two of COVID-19 from 34.9 million in March to under 17 million as of April 24th, representing a greater than 50% reduction. As I alluded to earlier, our direct originations, inclusive of the Upstart platform, who is a public partner that we've previously disclosed, is about 27% of our other consumer portfolio, and we're proud to say that we are operating at under 4% in deferments, which is well below our industry peers, including partners that Customers Bank works with, which is a testament to our internal credit underwriting, modeling, and risk management standards. If you flip to slide 18, you heard from Andy and Dick about our outstanding credit quality. We have a very experienced team managing a well-structured portfolio. Our historical credit metrics reflect our outstanding credit culture at levels well below peers and industry averages. What you see in the chart in the first quarter of 2020 is a jump to around 53 basis points of total NPAs largely driven by one credit which is a Class A office building with about a 25% personal guarantee from high-net-worth borrowers. As a conservative measure, we have decided to dispose of the asset, and I'm pleased to say that we are currently under a letter of intent with a strong institutional buyer to sell the credit and expect to close in the next several weeks. With that, I'll pass it to Carla to flip to slide 19 and talk about our CECL process.

Thanks, Sam, and good morning, everyone. The next couple of slides focus on our CECL adoption on January 1 and the reserve build that occurred during the first quarter 2020. Starting at the end of last year, we had a total allowance for loan and lease losses of $56 million, or about 80 basis points of total loans and leases held for investment. Our day one adoption impact was $80 million. As Jay and Andy mentioned earlier, our economic outlook on January 1st considered that we were operating and actively managing our portfolio since the middle of 2019 under the assumption that we were in a pre-recessionary period. As a result, we probability weighted a moderate recession scenario using Moody's S3 scenario available at 12-31-19 and the consensus forecast to best reflect management's economic outlook as of January 1st. We then applied qualitative adjustments as deemed appropriate. That resulted in a total allowance for credit losses of $136 million, or an increase of 141% over our December 31, 2019 allowance for loan losses. We then adjusted for first quarter 2020 net charge-offs of about $6 million and portfolio balance changes that occurred during the quarter, which increased the allowance balance by about $10 million. At March 31, 2020, We used Moody's March 27th baseline scenario as a basis for our economic outlook. We then went through a very similar discipline process as we did on day one, in which we calibrated model outputs to be more reflective of our portfolio and layered in other qualitative factors. That resulted in an allowance for credit losses on loans of leases of $152.6 million at March 31st, 2020, a coverage ratio of 2.10%, and provision expense of $22.3 million for Q1 2020. Slide 20 provides an overview of our health for investment portfolio as of March 31st, the amortized cost, estimated lifetime loss rate, and the associated provision expense by commercial and consumer lending activities. I'll comment here that our coverage ratio of 2.1% which we believe to be prudent and conservative, compares to the industry average of 1.7% for regional banks and 1.3% for mid-cap banks. Moving on to our efforts to preserve and expand margin, slide 22 really highlights the significant progress we've made over the past six quarters in restructuring our balance sheet. You can see the trough of 247 in third quarter 2018 increasing up to 2.99% in first quarter 2020, which is 52 basis points of expansion. In first quarter 2020, yields on interest earning assets declined two basis points from fourth quarter 2019 to 4.59%, while the cost of interest-bearing liabilities decreased 16 basis points to 2.01%. Going forward, we see considerable opportunities to further reduce our deposit costs, particularly in the second half of the year as we run off higher-cost CDs and reprice our digital assent deposits. We are expecting margin to be above 3% for the full year 2020, not factoring in the impact of the SBA PPP loans held on our balance sheet. Turning to slide 24, which really speaks to our strong liquidity, which we actively manage and monitor daily. Our strong deposit growth over the past two years has created a strong liquidity position. You can see also the decline in our core loans to deposit ratio, which has decreased to about 88% at March 31, 2020. We also had average liquid assets of $3.2 billion for first quarter 2020, which included $1.8 billion of our mortgage warehouse portfolio. It's important to note that a mortgage warehouse portfolio is a self-liquidating asset and can be liquidated in less than 60 days under stress conditions. And lastly, from a borrowing capacity perspective, we have access to a total of $7.1 billion borrowing capacity with a remaining capacity of $2.8 billion. I'll also point out that the PPP loans that we've originated to date will be pledged to the Fed's PPP lending facility so we can take advantage of the favorable capital treatment, which means that the PPP loans will be risk-weighted at 0% and have no impact on our leverage ratio. And also, we'll get a favorable borrowing rate of 35 basis points. Slide 26 presents our capital ratios for the bank and the Bancorp both significantly above well-capitalized. And at the bottom of that slide on the left-hand side, you can see the bank's excess capital levels over well-capitalized. We did elect to defer the impact of CECL over the five-year transitionary period, which means 100% of our day one adjustment and 25% of our day two adjustment will be deferred for two years so through the end of 2021, and then be phased in at 75%, 50%, and 25% over the following three years, ending on December 31, 2024. Turning to our profitability on slide 28, our gap earnings were $0.22 for first quarter. Core earnings were $0.26. On an adjusted pre-tax, pre-provision basis, earnings were $38.6 million, a 53% increase over the year-ago quarter, and the adjusted PP&R, return on average assets, increased 20 basis points to 1.30% for the first quarter 2020. Our net interest margin also increased 40 basis points over first quarter 2019, and both the consolidated and the business banking efficiency ratios showed improvement from the year-ago quarter. Lastly, slide 29 shows trends in the level of non-interest expenses over the past five quarters. In the latter half of 2019, you can see the significant cost savings from renegotiating vendor contracts last year. Going forward, we expect the level of non-interest expenses to moderate over the next few quarters. And with that, I'll turn it back to you, Jay.

Thank you. Thank you so much, Carla. And I do apologize that we have taken a long time, but I think it's very important that we go through a lot of details with you. So I'm on the last slide, key takeaways, and I'd like to emphasize four things. Number one, the company is very well positioned to execute on our 2020 as well as our long-term strategies. NIM should remain above 3%. I shared with you, should expect about 310 by the end of the year. Operating expenses, as Carla mentioned, should moderate over the next few quarters. Our tax rate will be 22% to 23% for 2020. And excluding the PPP loans, our balance sheet at year-end 2020 is expected to be about the same as where it was at 12-31-2019. And when you add all the capital that we would have added from PPP loans, as well as our retained earnings because we are not buying back any stock and we are not giving any cash dividends on our equity so that you should see significant growth in our equity to asset ratios at the end of 2020. Once again, I want to emphasize the SPA PPP program, which was a major, major, major initiative. I want to acknowledge the hundreds of our team members who worked around the clock, and we are so proud of them to make this all happen. And we didn't just go after the large customers. We did everything possible. And like I shared with you, just from origination fees alone, it's about $85 million is our number. But then you've got to add the net interest income on top of it. So it's about a $195 to $100 million number, and we're not done because PPP is still open as such. And like we mentioned earlier, we are also focused on long-term, and the long-term is that we expect to report somewhere around $6 in earnings per share and with improved ROA and ROE over the next couple of years. From a NIM point of view, as we've already mentioned, how do we do it? Assets are going to be measured growth. We are not focused on blowing up our balance sheet at all. It's very disciplined pricing, especially in this environment. We're going to be very, very focused on maintaining our higher credit quality rather than building a loan portfolio. We've built floors into our loan agreements, and we are protecting the spreads above the floating rate indices. From a deposit point of view, as I think Carla mentioned, we'll have 1.1 billion of our digital deposits. They are expected to reprice down at least 100 basis points or up to 100 basis points, excuse me, on July the 1st. We are guaranteed a 2.2 rate till July the 1st. and then another similar amount of $1.1 billion in CDs will mature in the second half of 2020, and they are also expected to be repriced down by about the same amount. From a capital allocation point of view, I've already shared with you, we are targeting at least a 7% TCE ratio, and this is excluding taking advantage of the huge increase in our equity capital coming from the SPA PPP gains. as well as the positive spread that we will get on those loans while we keep them on our balance sheet, about 25% of them for up to two years. And like I shared with you, we are not going to be redeeming our preferred equity in 2020 to have a stronger balance sheet. From a BankMobile point of view, BankMobile is expected to remain profitable in 2020, and we are on target. and we expect to have the divestiture being executed sometime this year. So with that, Travis, if you can please open it up for at least 15 minutes of Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. again for star one to ask a question. Pause just for a moment to allow everyone an opportunity to signal for questions. We do have our first question.

Good morning, it's Steve Moss with B Reilly FBR.

Oh hi Steve, how are you?

Good, yourself Jay?

Great. Thank you, Steve.

I want to start with the PPP originations here, you know, a really big number of partnership with others. I take it the $5 billion you guys are retaining, pledging. Just kind of wondering, you know, how you structured this partnership with the FinTech partners and perhaps any lender liability or any other call you could share there.

Steve, I'll ask any of my colleagues to please jump in if I didn't answer the question completely, but there is no lender liability because we are an approved SBA lender. We know how to do this business. This is a business that we've done in accordance and working with SBA. We've looked at outsourcing many of the servicing programs with SBA-approved agreements for that, and so that we can service these clients. Approximately a little over a billion dollars was done directly by our relationship managers, and the rest of it was done in partnerships with the various business-oriented higher-quality fintechs. and this has turned out to be a beautiful business opportunity for us to be really, and we are so gratified when you get, and you should look at our social media contacts. It's very rare that you see the kind of reaction from small businesses and from not-for-profits that we've seen. Sam or Tim, you want to add anything else?

No, I think that was a good summary, Steve. I think that Liquidity is very important, and as you heard Jay and Carla mention, we intend to pledge all to the PPP lending facility. And if there is a chance that some portion of this are not forgiven, they will remain in our balance sheet, but we will still enjoy the benefits of the PPP lending facility. The Fed is essentially sharing that risk with us, and that would just accrete more income over up to a two-year period for the portion that is not forgiven.

So the bottom line is there is no credit risk. There is no operating risk. There is some servicing issues. We are working over there. And this gives us an opportunity to work with these clients to become primary banking customers of ours. Great.

Thank you very much. That's helpful. And then, you know, in terms of CECL here, you know, a big day one build and obviously a big provision here. It sounds like you guys used the late March Moody's numbers correctly. Kind of wondering, given that the economic scenario has deteriorated after March 31st, how you all are thinking about the provision for the second quarter?

That's a very good question because, as Carla shared with you, we used a lot of qualitative analysis and the fact that since middle of 2019 we were working that in 2020 there would be an economic recession. That was our strategy. We started functioning in that fashion. We did not rely just on Moody's in 2019, but just for the discipline, for the proper process. We relied on an approach so that it's not just management's judgment, but it's a very, very strong process which can be audited by our independent accountants. And so that's why we use the Moody's process on top of it as a layered in. And we are assuming somewhere between a V-shaped to a U-shaped recessionary environment in our qualitative analysis. And so we stress all our different portfolios in the process. in the severely adverse type of environment. We stressed out, tested our entire loan portfolio. We're going through a process, and we have done it. Actually, we are implementing a portfolio management, extremely automated system, and we cannot guide you as to what will happen to our provisions in the next couple of quarters, as you understand, but it's a process, a very disciplined, auditable process that we follow, and we think it would be prudent to be conservative In this environment, it makes no sense to find a way to reverse some of our reserving until we are sure that we are out of this economic recession. But arguments can be made that maybe some of this could be up for potential reversal. Our consumer loans are performing better than all the assumptions that we've used in setting up the reserves. All our loan categories are performing better. better than what are the assumptions that we've used in a very stressed environment. Um, so, so we will, uh, just be very disciplined in following this process.

Okay. That's fair. And then in terms of the, uh, just wondering what the total restaurant and hotel exposure you guys have at the current time and what the loan to values are there.

Uh, uh, yeah, sorry that we, uh, kind of jumped over there a little bit. Uh, but, uh, Our exposure is minimal, and Andy, maybe you have those numbers.

Yes, absolutely. Our total exposure in the restaurant industry is very minimal. In aggregate right now, it stands at only about $64 million in aggregate total exposure, and that's spread across approximately 120 customers. So there's not a lot of aggregation and density in that portfolio, but As far as the LTVs on those portfolios, it varies. A lot of them are, some of them are in leased facilities, some of them are in owned facilities. If they're in owned facilities and they're owner-occupied, based upon our standard underwriting criteria, they'll come in somewhere between 70% to 75% on an LTV basis.

And Andy, what percentage of them are national chains, franchisees like McDonald's or Arby's or Taco Bells, et cetera, compared to independent restaurants?

Yeah, I would say about of that $64 million, I'm going to say somewhere in the ballpark of $20 million is in some form of a franchise restaurant or chain, whether that be a potential Dunkin' Donuts, Taco Bell, et cetera.

Okay, great. Andy, do you want to share hotels?

I'm sorry. What was that?

Steve, go ahead. The hotel exposures. I was just going to ask the same thing.

I can share with you. Our total exposure in the hotels right now is about 395 million total, so it's not a significant portion of the portfolio. The preponderance of those hotels are flagged hotels, meaning along the lines of your Marriott, your Hyatt, et cetera. That's probably about 60% of the portfolio, and then there's probably about another Twenty-five percent of the portfolio is what we classify more as your seasonal resort hotels that have been long established for a period of time. And then, obviously, there's the gap is the difference in between. Some of that is obviously SBA exposure as well.

And I think, Andy, if you can comment on what percentage of our hotels are with strong borrowers and what percentage of them are still leased out right now.

Yeah, right now I'd say we've got about $211 million of the $395 million as per the one slide is out there on deferral right now. The other hotels are all paying as agreed. The other thing I would like to note that about 15% of our hotel portfolio is actually supported by contracts with government authorities for use of facilities for either displaced persons or individuals that are just trying to get back on their feet. And a lot of those are those that are up in the North Jersey and are in our New York market. And that's about 15% of that total, $395 million.

Okay, great. And do you have the loan-to-values on those by any chance on the hotels?

Sure. Our loan-to-values typically are very Entrenched from an underwriting perspective, we lend basically out of the gate at a 65% loan-to-value. That's based upon the real estate-only value. We do not give any value to FF&E. So our standard underwriting would be 65% loan-to-value on just the real estate component of the collateral.

Okay, great. And then my last question here, just in terms of the margin statement, Does the margin guidance include or exclude the PPP loans?

Well, we mentioned to you that the margin excludes the 3.1 margin by end of the year excludes any impact of PPP loans.

Oh, I apologize for missing that. All right. Thank you very much. Sure, Steve.

Okay, any other questions? Next question.

Hi, good afternoon, everyone. This is Michael Schiavone from KBW. Thanks for taking my question.

Sure, Michael.

On the day one CTO adjustment, it was a bit more than we expected. Can you talk about what drove that? Because I think it's correct to assume that the COVID-19 should not impact that figure, right?

That is correct. What impacted that is that since middle of last year, we were working with an assumption that in 2020 there would be a recession. And that's why, like you heard from my colleagues, we were in a strategy. I think Andy outlined for you in detail what that strategy was. We started to We started to tighten our underwriting. We started to de-emphasize certain sectors. We moved out certain credits. We focused on certain risk-based pricing initiatives. We looked at our portfolio management strategies as such. And we were sitting with that we are going to be in a recession. And that is what we had assumed in our qualitative analysis. Now, obviously, we did the Moody's quantitative analysis. And our qualitative analysis showed to us that we need to be conservative in reserving and appropriate based upon the analysis where management was operating at that time. And management was clearly in a well-documented way. We had a risk summit on this middle of last year talking about how do we manage our credit risk in this kind of a pre-recessionary environment. And that was our conclusion. And we took that approach to come up with a qualitative adjustment to the quantitative Moody's analysis to build up our reserves appropriately.

That's helpful. Thank you. And on expenses, how much of the build was due to some of the COVID-19 actions you guys laid out in the earnings release? And for the rest, what were the big drivers and so you can maybe discuss what you think the run rate from here will be. Carlos, you want to take that on, please?

Yeah, sure. So, year over year, there were a couple of drivers. First of all, we had a million-dollar legal settlement for our partial settlement for the DOE. We also had an increase in the reserve for our unfunded commitments. If you, the 22 million that we were talking about was focused on our loan and lease portfolio, There was also an additional $800,000 for unfunded commitments that went through that other non-interest expense line. We had increased other non-cash-related items, in particular some depreciation expense related to capitalized development costs for technology that was placed in the service in 2019, as well as some other technology-related costs that were capitalizable and some increases in our digital transformation efforts. And as we said that we do expect our operating expenses to moderate over the next couple of quarter.

Great, thanks. And for the PPP program, is it reasonable to assume that it should help boost capital levels later this year when the revenues start to be realized? And then we're wondering At that point, will you reconsider or start thinking about redeeming the preferred?

Let me take that on. It's in the next two months that 75% to 75% of all the $85 million plus minus in revenues that I've shared with you will be realized by us in the next 60 to 75 days. Maybe you can add another factor to that in a few more days here and there. That's how much impact you will see on our capital, equity, tangible, common equity capital in the next couple of weeks. So that's basically the impact on capital. What was the second part of the question?

At what point do you guys expect to start rethinking about redeeming the preferred?

Yeah, I think it's more important in this environment to have a stronger balance sheet than to be maximizing earnings. And we are going to have very strong earnings this year because of PPP and, you know, accretiveness from that. And we think it will take it at a time from a capital allocation point of view, and we wouldn't want to commit to anything, but we would. First, our priority is to have strong capital ratios, and we are not going to be ever looking at any kind of a common equity issue until we are trading above book. So that's out of question for us. And we will look at appropriately building a strong balance sheet and continuing to function in this kind of an environment in a cautionary state.

Okay, and lastly, if the COVID-19 environment impacts your ability to divest BankMobile, do you have any sort of contingency plan moving forward for BankMobile?

Our contingency plan and our definitive plan is called divestiture, and we will stay with that.

Okay, thank you very much.

So we do have a contingency plan. In other words, I'm telling you with some pretty good certainty that it's going to happen.

Thank you very much. Thanks for taking my questions. Have a good day.

Thank you. Any other questions?

Yes. Next question.

Yes. Hey, good afternoon, guys. It's Russell Gunther from DA Davidson.

Hello, Russell.

Hey, Jay. I just have two follow-ups at this point. The first, just jumping back to the preferred conversation, just a reminder, please, of what does, in fact, come due in 2020 and then what the slug that would be available in 2021. And then if you guys could put a finer point around what capital hurdles you'd need to achieve before you start thinking about that.

I'll just mention in the capital hurdles, and Carla will give you some of the details. I think, like I just mentioned over here, that we are looking at building a fortress talent sheet with strong capital ratios and not redeeming our preferred as a priority until we are out of a recessionary environment. That is our philosophy on capital, is more capital is better than less capital. And, in fact, with the rates where they are right now, as Carla will probably give you the details of that, In fact, keeping the preferred on our books this year is going to reduce the rate on those preferreds based upon the current rate. So, Carla, if you can give some details, please.

Yeah. So, Russell, we have about $57.5 million that first becomes callable in June 2020. It's at about a 7% rate. It will reprice to a three-month libel rate that will reset quarterly. And it's at a spread, I would say, close to 600 basis points. So given where rates are currently, it would actually be a benefit when it does reset at a lower cost than what it was on the books previously. But as Jay mentioned, we are not considering redeeming that in 2020. And we have a total of about 225 that will become redeemable in 2021.

Okay, great. Thank you, Carla. Thank you, Jay. And then just the last one is a bit of a ticky-tacky question, but... appreciated the granularity in the deck as well as in response to Steve's questions on hotels and restaurants. Just wondering if you could provide the same for your retail exposure, kind of what that is in aggregate and then any of the portfolio characteristics from an LTV perspective.

Yeah. Dick or Andy, you want to take that on, please? We have a very little exposure in retail overall.

Go ahead, Dick. I'm sorry.

Go ahead, Dick. As of the 24th of April, as you'll see on the page 14 of the deck, we have a total of 12 loans right now totaling about $4.7 million. So the retail exposure is almost nil. Andy?

Yeah. We have very little indirect retail exposure at this time. And I think I really don't have much to add to Dick's statement there. It's negligible.

Dick, were you referencing the total number of deferrals? And I'm just trying to get a sense for what the outstandings are.

Well, if the outstandings are 0.12% of the total portfolio. So you can do the math in reverse, I guess. Andy, do you have a number on that?

Yeah, our total overall exposure on the retail side is probably in that ballpark of, you know, no more than 10 million. Okay, great.

I appreciate you guys clarifying that slide. Thank you very much.

And also, just to add real quick, what that exposure is is predominantly also a component of that is probably SBA as well.

Thank you, guys. That's it for me.

Thank you, Russell. Any other questions?

Next question.

Yes. Yes, hi. This is Tony Spazio with Anthony L. Spazio Consulting. And you've sort of answered this question, but I just want to ask something quick about the preferreds. The one coming due in June is 90-day LIBOR plus 530. And, of course, LIBOR is a discontinued program. A year ago, of course, it was 258, which would have put that over 8%. Right at 8, it's way lower now. But have you actually formally determined what rate you intend to use for the variable rated preferreds, or is it a proxy for the 90-day LIBOR?

I'll let you want to take that on. did we lose Carla sorry guys we're a little bit you know we're in all different locations so we are LIBOR is going to stick around with us you know at least till 2021 and so we are using the LIBOR okay all right you're going to use some LIBOR even though it's kind of become a it's being discontinued that is correct hopefully discontinued who knows yeah Who knows? As you know, the Federal Reserve on the Main Street lending program had suggested SOFR first as a rate, and then they moved to LIBOR. And those are four-year loans.

Yes. Okay. Thank you.

Sure. Thank you. Any other questions at all?

Yes. We do have a few. Okay. Okay.

Hi, everyone. It's Frank Shrawley from Piper Sandler. Hope you're all well. Thank you, Jay. Just quickly, Jay, I wonder if you, as you get back to the 7% TCE ratio by year end, I know the PPP program should help significantly. Just wondered if you could talk a little bit more about the puts and takes in the rest of the balance sheet. It sounds like multifamily will continue to shrink, but wondering about the rest of the loan portfolio. And then, as you've seen, good growth, it seems like, in the digital deposit space, wondering if that's accelerating and where you think loan-to-deposit ratio will shake out later this year.

We think, Frank, thank you, we think the loan-to-deposit ratio is going to be between 85% to 90%. We are not focused on building our loan book portfolio. uh, to any costs. And we don't have any targets for that. We, our targets are for, uh, return on assets and return on capital. And, uh, as well as improving our capital ratios and preserving our, uh, credit quality and preserving our margins and having the appropriate liquidity. I think that's what we shared with you as our priorities, uh, as such. Uh, and, uh, so, so, you know, to us, uh, is that equity is going to be very critical in these uncertain times. And so we are looking at always continuing to build that as such. And we are very comfortable with our equity position, especially we put a tremendous amount of effort in building our equity by somewhere between $85 to $100 million in the last three weeks. by doing the stuff that we are expected to do, and we are proud of our teams to have done that. So, you know, the balance sheet is stronger. We just transferred $100 million from equity capital to reserves, and then we found a way to replace that $100 million back into equity. It is very, very significant, and our reserves, as you know so well, Frank, are that are now assuming a lifetime charge-offs and lifetime write-downs. And nobody knows for sure in our assessment as to what will happen from a COVID-19 environment. Everybody's talking about their own research and their own economics. We do it loan-by-loan stress testing. That is the only way, in our opinion, that you can figure out whether it's COVID-19-related or it's non-COVID-19-related economic stress. And what if 2008 environment comes in? How much do we need in reserves? So another way of looking at it is you assume no growth in loans. And in that case, if all our qualitative and quantitative assumptions are there, you should see immaterial changes or additions or subtractions from our loans over the next couple of years. and that's because it's one, two, three years is the average life of our loan portfolio, and that is the way we are looking at it. We will evaluate the adequacy of our reserves on a quarterly basis using a very disciplined process, and on top of it, layering our qualitative conservative standards, and that will determine our eventual capital allocation process. But right now, we are very, very comfortable, and we don't envision our capital ratios to be below 7% this year at all. I'm talking about TCE. But you've got to add another $215 million of preferred equity on top of that, which is another 2% on top of that. So we are really looking at 9% equity capital. Shareholder equity capital is common shareholders, is seven and preferred shareholders will be two. So it's a 9% equity capital.

Gotcha. Okay. And then just finally on, I wondered if you could share trends in loan delinquencies through the end of the quarter. And then even if you could hear, you know, through the end of April, are those elevated or did those just get captured by deferrals at the, at this point?

Thanks. Yeah. That's a very good question again, Frank. Thanks for asking good questions. When you see only under 5% of the consumer loans to be deferred, the very smart question is, what's happening with other 95-plus questions and how is the delinquency? So it's a very good question that you asked. I am pleased to share with you we are seeing no material change in our delinquencies from fourth quarter to now. among the ones which are in a non-deferral basis. And we've disclosed to you deferrals by income, deferrals by FICO scores, deferrals, you know, in all those ways that you can see that. And, you know, in fact, we've seen in our portfolios whereby there has been an increase in payments coming in from those who had elected to defer and then decided for whatever reason, maybe after they got their check from the government to make the payment. So as of right now, we are seeing no material change in delinquencies at all. And we have zero delinquencies in our multifamily.

Thank you.

Next question.

My question was just to answer I was going to ask about borrower behavior specifically in April. If you have anything you want to add, that's fine. Otherwise, we can go to the next question.

Thank you. That's why we decided to give you, have a slightly later call so we can give you the April buyer behavior and the borrower behavior rather than being in a rush to give you the first quarter earnings.

Thank you, Jay.

There are no further questions in the queue.

Thank you very much for dialing in. We really appreciate your interest in customers, and we are hopeful if you have any other questions to please give us a call. Thank you, and have a good day.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.