Customers Bancorp, Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Customer Bancorp, Inc. 2020 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 question. To ask a question during the session, you will need to press star 1 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 to call over to your speaker today, Mr. David Paddy, Communications Director. Sure, please join.

Thank you, Rain, and good morning, everyone. Thank you for joining us for the Customer Bank Corp's earnings call for the fourth quarter and full year of 2020. 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.customersbank.com. You can access the deck by clicking the red button marked latest earnings presentation. Our interactive presentation includes important details that we will walk through on this morning's webcast. I encourage you to download, use, or print the document. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated. Please note that these forward-looking statements speak only as of the date of this presentation, and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable 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 your results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bank Corp Chair Jay Siddiqui. Jay, the webcast is 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 is our President and Chief Executive Officer of Customers Bank, Dick Eaves, Carla Labo, Chief Financial Officer, Sam Shadu, Chief Operating Officer of Customers Bank, Andy Bowman, Chief Credit Officer, as well as Jim Collins, our chief administrative officers. These are my colleagues who make up what we call the office of the chair at our company. And we've all worked together for many, many years, for many of us. And Sam has been a recent one year ago. So congratulations, Sam, on your first anniversary with our company. Before I comment, share with you my comments, I'd like to have you join me in saluting our team members. They have just performed beyond anybody's expectations. It's so easy for me to take this opportunity to share with you these very, very important, good results that we've achieved, but it's been the extraordinary contributions of our team. We've had situations where about 95% plus of our team members have been working remotely because we don't have branches, and they've really performed beyond anybody's expectations. So, you know, your company, your bank, customers, Bancorp rose to the challenge. At the same time, we took extraordinary steps to support our team members and their families. We took extraordinary steps to support our communities and, of course, our clients. And I think that's going to become pretty evident when we all share our results with you this morning. Another major accomplishment for us was that we provided to approximately 100,000 small businesses and nonprofits across the country and saved, in our estimate, at least a million jobs across America, while we also added approximately or would add approximately $150 million in revenues for our company at the same time. So that was in addition to our core bank expanding the NIMB as well as maintaining superior credit quality and while we watched our expenses and created positive operating leverage. Another major accomplishment which we announced in January, but we've been working on it for some time now. There was the closure of the divestiture of Bank Mobile Technologies, Inc., and we are so pleased to see that our shareholders own $75 million in stock that we were able to provide to them for a company where they saw no value in that in the past based upon the valuation of Cubby. And today that company is valued at approximately, on the 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. To share with you just a little bit on some of the highlights of the accomplishment, as you know, the total loans and leases increased $5.8 billion, or 57.5% year over year. And we recognize that about $4.6 billion of that was driven by PPP loans. But it was also the growth in our T&I business, as well as our commercial loans to mortgage companies, And when you combine all that up, excluding PPP loans, still we showed a 12.1% increase year-over-year in loans. On the deposit side, which is a major accomplishment of ours, we reported a 30.8% 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 has been our 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 deferments, they declined to about $215, $218 million. But the important thing is the deferments, which are true deferments, which is principal and interest deferments, They are only about 0.8% of our loans, excluding PPP loans. So now I'd like to draw your attention to page five. And just to give you an overview of our franchise, so excluding PPP loans, we were about $14 billion in size. Including PPP, we were about $18.5 billion in size. From a loan portfolio like I shared with you, we continue to expand that. So excluding PPP, we were $11.3 billion. We funded 100% of our loans, including loans to mortgage companies or the warehouse, all by deposits. And so our deposits were also $11.3 billion. And we are very pleased to report that our return on common equity was 24.2%. this quarter, and our adjusted pre-tax, pre-provision ROA was 1.63%. 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, We still think it's at 700 plus minus million market cap. We think there is huge potential because, in our opinion, we're only trading at about six and a half times last 12 months earnings and about five times our guidance for earnings for 2021. We had last year three new markets. analysts who picked us up on research coverage since this is the first time that I know all of them have joined us. I just wanted to welcome Will Curtis from Hubby, Casey here from Jefferies, and Peter Winton from Redbush, who picked up coverage on us at a 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 having some time in the next couple of months, Analyst Day also, where we intend to share with you a lot more details about all the opportunities that Customers Bank Corp presents to our investors. If you move to page six, It's really our key features you saw on our title page. We're calling ourselves a high-tech forward-thinking bank with high touch. What do we mean by that? We mean that we think there is a huge, absolutely huge transformational opportunities available to banks who are tech savvy and digital savvy. But at the same time, the customers expect those banks, not just to be tech savvy, but also to be relationship oriented. We are calling that high touch. So everything about our strategy, if you want to summarize it in one sentence, it is that we are a high tech forward thinking bank with a high touch culture as far as customers are concerned. So if you look at page six or slide six, you can see that we have a We started about 10, 11 years ago. We did our IPO in 2011, I think. And since from that time of $200 million, $225 million, $50 million, failing bank with 35% to 40% non-performance on a core bank, about $14 billion in size. And at the same time, we built a tech startup, one of the first fintech neobanks to be started in the United States, and that was the bank Mobile. And we are glad to see that our shareholders are now owning about half of that company, and it's trading on the 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 averages 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 to differentiate ourselves from other types of financial institutions that are also in the lending business. So our core deposits, which is our non-infrastructuring DDAs, are 21% of our total deposits now, and we built all that through organic growth. 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. And at the same time, be very focused on delivering superior returns, which will come in measured by return on assets, return on equity. But you've got to do that by also reporting 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 confirming our goal of $6 in core earnings by 2026. And we have several ways to get there. Now on slide seven, a little bit more on what we mean by this digital bank transformation. As you know, people always ask me, how many branches do you guys have? And you know my answer, 11 too many, because we got technically 12. That's how we believe is when you have ways to reach your customers that finally banks and everybody in the industry is recognizing the 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 and less than what we have today. Our average branch size is about 950 million today. And we think you will see within the next three to four years in America, billion-dollar average branches emerge all across America among successful banks. Among the digital capabilities, we set up about 15 months ago, FinTech group that we first discussed it at the KBW conference in Florida, and people were scratching their heads. What is it? We hope it becomes clear to you that we have developed capabilities, and we've analyzed every single technology platform that's available in this universe, and how can we be a provider of value to all of them, and at the same time, they become provider of value to us. That is how we see this, because we think the technology, the distribution system, the generation of business is changing very rapidly. And yesterday's business models are not going to be relevant. And you can see that, that out of the 5,000 banks, why is it there are only three or four banks who were on the list, or two banks who were on the list of the top 10 PPP lenders in the United States? And we are again going to be, we believe, among the top 10 PPP lenders in the United States by the time this PPP round two or three, whatever one calls it, is done. That is all because of our tech-focused approach and working with FinTech partners, and we see that all as an opportunity. At the same time, we can now fully onboard commercial customers totally digitally. And we, at the same time, have 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 is continuously going to be undergoing I look at are there better ways to digitize all our platforms, and we are not shy to be working with every single digital platform, which is very valuable, like Salesforce and DocuSign and ServiceNow and Snowflake and et cetera, to incorporate them. And we have no pride in building everything ourselves, but we take a 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 62,000 team member hour reduction through the processes. And those so far have been mainly in the back offices. But once the COVID environment is behind us, we will be accelerating that digital transformation. If you move to page Slide nine now. So if you look at our financial results very, very quickly, you all know that our earnings are up 121% quarter to quarter. They were up 83% year to year. And so we We believe that only 4% to 5% of our PPP loans have been forgiven yet so far by December 31st. And the other 85% to 90%, 90% that much are going to be forgiven 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 you look at the asset quality, as my colleague said, and partner Andy Bowman will be discussing it. We are right now at 30 basis points, non-performing assets to total assets. Now, because just last week we sold without taking any additional losses, our largest non-performing asset on our balance sheet. And that is why we believe that our asset quality will remain very strong and above average, and we are confident about that. From a deferrals point of view, like I mentioned to you, our P&I deferrals are about 0.8. Our total deferrals, including those who are just on principal-only deferrals and are paying us interest, that is about 1.93% of our total loans, excluding PPP and such. And from our Book value point of view, we are pleased to report that we are ending the year at about $28 in intangible book value per share. And by the end of 2021, we will be in about $32 or $33 intangible book value per share. If you move to slide 10, I want 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 you can see that, you know, 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, that there's no way that we will accept trading at discounts to the market. So even assuming a $15 million stock buyback in the second half of this year, you can still see it's about 7.5% to 8% tangible common equity to asset ratio achieved by us. when you take away any PPP loans that might still be on our balance sheet, because that is a liquid asset that we can always get them off our balance sheet after we recognize.

Talk about credit with you, Andy.

Thanks, Jack. And good morning, everyone. Starting on slide 11, Overall, credit quality remains strong, and we're very pleased with how our loan portfolio is holding up against the economic, social, and political pressures brought about by COVID-19. NPA's total assets stood at 39 basis points at year end, and as Jane 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 its written down value as of year end, incurring no additional loss. This was done through a competitive bid process, but we had multiple active bidders. Despite the successful large NPA resolution, and although we are extremely pleased with our NVA performance overall and do not perceive significant increases going into 2021, We've opted to retain a very strong reserve position of 1.9% given the continued uncertainties associated with COVID-19 and the associated economic and social recovery. Moving to slides 12 and 13 regarding the CECL reserve bill throughout 2020, which remains predicated upon a detailed portfolio by portfolio assessment based upon various economic factors as 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 bill accounts for actual charge-off rates and NPA levels, and the results for Q4 being a reserve of approximately $144.2 million, or 1.9% of loans held for sale. This equated to approximately 204% coverage of NPAs at year-end, and nearly 267% coverage after the 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 slides 14 and 15 regarding deferments. Slide 14 outlines our loan deferments at year-end, an overall very positive trend. We witnessed a steady decline in deferment rates within both our commercial and consumer portfolios, from a peak of nearly $1.2 billion, dropping to $750.5 million in July, declining further to $302 million at the end of Q3, and ultimately ending up at $218.5 million, or 1.9% at year end. Slide 15 provides a little bit more granular view, touching upon what Jake had previously talked about, regarding commercial deferments at year-end, showing that 95% of deferments in our investment-free and multifamily portfolio and 53% of deferments in our hospitality portfolio were principal-only deferments. Overall, portfolio-wide on the commercial side, 53% of deferments in our commercial portfolio were principal-only, with borrowers continuing to make their contractual interest payments. Overall, for the next two quarters, we're looking for deferments to remain near or at current levels, as significant improvement in highly impacted industries, such as the 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 business lines have remained unchanged that you share of overall book, what is evident is that throughout 2020, the bank gradually transitioned to a more well-balanced mix between investment-free and multifamily exposure and that of commercial C&I and warehouse exposure. This gradual transition throughout 2020 evidences 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 industries significantly impacted by COVID-19. Overall, we feel the diversification of our portfolio positions as well moving into the pandemic as significant portions of the portfolio represent lending activity 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, wholesalers, service companies, and professionals. At year end, only 6.1% of our commercial portfolio was comprised of what's termed as at-risk industries, with the largest being a little over $400 million in hospitality exposure at only 3.6% of total book. Overall, the bank's 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 weather the current pandemic. First of all, nearly 20% of that portfolio are operating under government contracts for transitional housing. Nineteen percent 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 flagged facilities, with the majority of the non-flagged being the destination hotels I noted previously. Again, hospitality deferments at year end were only 31% of total booked, or $125.9 million, marking a significant reduction from the $301.5 million, or 73% of booked, in July. And of the current hospitality deferments, as I stated earlier, 53% are principal only. And also, overall, we continue to see gradually improving occupancy trends within our hotels, and no hospitality loans transitioned into NPA status in the last two quarters, nor do we anticipate any transitioning into NPA status over the next few quarters looking forward. Slide 19. is really a touch upon our healthcare sector. And although it's 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 healthcare portfolio, which is approximately $359 million, has performed extremely well. And we've had no payment deferment requests and or delinquencies within that portfolio. The portfolio encompasses about 5,500 beds and is quite geographically dispersed, with the majority being in New York, New Jersey, and Pennsylvania, given the bank's traditional trade area. In addition, a key component is that the insurance payer mix is 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 and commonwealths. The portfolio predominantly is real estate secured. It's virtually fully backed by personal guarantees. Sticking with specific industry segments on slide 20, we're talking about some characteristics around our multifamily investment CRE portfolios. Overall, as you've seen over the past couple of years, we have moved to reduce our overall multifamily investment CRE 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. Overall, our portfolio has performed well, and predominantly that's because of the conservative underwriting standards that we implement, as evidenced by low LTVs, in-place conservative debt service coverage ratios, and the financing of assets housing historically strong urban markets such as New York, Boston, and Philadelphia. The portfolios are well-seasoned with an average weighted life since origination of 3.8 years, and from a multi-family perspective are centered around historically less volatile workforce housing. Deferments have steadily decreased, reaching a low of only 39.9 million or 1.6%. of the portfolio at year end. As I shared previously, 95% of this deferment are principal only. Overall, the portfolio is predominantly comprised of performing stabilized properties owned and managed by experienced professionals with very little speculative or construction exposure. Wrapping up the credit component or my side of the presentation on slide 21, it denotes some 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 $61.0 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 that this line of business traditionally carries a very low credit risk profile, given the fact that the bank's hold period on these individual assets is less than 30 days. Ninety to 95% of these are Fannie, Freddie, or Ginnie eligible assets. We have a sub-100% funding rate, and the traditional market sales rate of being 102% and 105%. Overall, we are extremely pleased with how this line of business performed in 2020, garnering nearly 2% of the entire share of the U.S. mortgage market. So with that, I'd like to pass it on to Sam Sadu, our Vice 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 102,000 plus loans, which represents 2% of all PPP loans to small businesses across the country. You'll 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 forgiveness rate. In December, Congress, in the coronavirus bill, approved an easy application for forgiveness for loans below $150,000, which, as you can see, has really accelerated applications in the new year. As of January 25th, we have $1.3 billion in forgiveness applications in process, which represents over 25% of our loan book. It's worth noting that about 94% of our loans are below $150,000, 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 Jay's earlier point, accelerate our capital realization. Flipping to slide 23, I wanted to spend a minute to talk about PPP3. While it's still early days, I wanted 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 11th, eight days before the program officially opened. Our application portal is intuitive and it's customized for each applicant's specific borrower journey, which is 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 PPP-3 for Covey investors to be aware of is that there is now a minimum fee of $2,500 on PPP loans between $5,000 and $50,000. Last year, over 80% of our loans were below $50,000. However, we only earned approximately $25 million of our $100 million-plus in origination fee on these loans. Had this structure been in place, we would have earned over $70 million more as our share of origination fee. This new structure will tremendously benefit tech-forward institutions like ourselves who serve the smallest borrowers across the country. As a result of the incredible reputation we've built in Round 1 and 2 with SMDs around the country, as of last Friday, we already had over 50,000 applications in 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 are new First Draw customers with an average loan size of under $40,000. We began funding loans last week, and to give you perspective, on Monday of this week, we had approximately 3,000 loans approved by the SBA in just one day. Now moving on to our consumer portfolio. On slide 24, again, we wanted to share with you updated metrics in our portfolio. The key takeaway is we continue to maintain a highly diversified quality portfolio of high earners with great credit that are not as impacted by COVID. The portfolio is performing above expectations at underwriting pre and post COVID with minimal deferrals. We were 80 basis points at near end and even lower since then. Looking ahead to slide 25, again, 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 are back to near normal performance. Flipping ahead to slide 26, moving to deposits. This continues 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 XPPP, which is a fraction of historic levels. Additionally, our cost of deposits continues to decline and now stands at 58 basis points, and they're 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. Our 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 in PPP, we will continue to serve SMBs around the country who are underserved by their banking and lending partners. We are leading first with an SBA 7A 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 and add teams selectively in and around our target community banking markets. Now, I'd like to pass it on to Carla for financial guidance.

Thanks, Sam, and good morning, everyone. Before reviewing our updated financial guidance for 2021, I thought it might be helpful to review the accounting and financial reporting impact of the bank mobile divestiture on our first quarter financial. As previously reported, the accounting for this transaction dependent upon the mix of cash and equity considerations that we received in exchange for our ownership interest in BankMobile Technologies and whether we would own 50% or more of the newly formed BM Technologies Inc., which I will refer to as BMCX. Upon closing of the transaction, we received $23 million in cash and 6.2 million shares of BMPX stock, which had a fair value of approximately $92 million and accounted for 52% of the equity interest of BMPX. Of the 6.2 million shares that we received, 4.9 million were distributed to our shareholders as a special distribution, and 1.3 million were given to certainty members of Bank Mobile as severance payments. It is important to note that the actual accounting for the transaction will be recorded in two different steps. The first step will be to account for the sale of a non-controlling interest under a continued consolidation scenario with no gain recognized in our first quarter earnings. The difference between the non-controlling interest recorded and the cash received will be recorded as an increase in additional paving capital. The second step will be to account for the distribution of the 6.2 million shares of the PMPX stock. The special distribution 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 carry value. The 1.3 million shares given to certain bank mobile team members in the form of severance payments will be accounted for at fair value or approximately $20 million and will be recorded as merger-related expense in Q1 with an offsetting increase to equity or APEX. As a result, the net effect of these entries will be neutral from a capital perspective. Lastly, I'll just add that the transaction will be taxable to us generally based on the fair value of the consideration that we received for about $115 million, less our net investment in Bank Mobile, which is about $25 million. So we are estimating that the tax expense related to this transaction will be between $20 and $25 million. For reference, this information was included in an 8K that we filed on January 8th. I'll also add that beginning in first quarter 2021, the historical financial results of bank mobile technologies for periods prior to the divestiture will be presented in our financial statements as discontinued up. And with that high-level overview of the transaction, I'll turn to our updated financial guidance on slide 29. As Sam 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 mortgage companies is expected to decline between $2.8 billion and $3.2 billion at March 31st, 2021, and then down to $1.6 to $2.4 billion at December 31st, 2021. We are expecting to continue to see stronger volumes in the first half of the year and then decline in the second half of the year. 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 7.5% and 8% by year-end 2021. We are projecting the NIM, again, excluding PPP loans, to expand between that 310 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 are giving some guidance for the first quarter. We project that non-interest income in Q1 will be between $9 and $11 million, and operating expenses, excluding the severance benefits that I talked about earlier, will be between $59 and $61 million. We also project an effective tax rate for 2021 between 21 and 22%, and this will be from our continuing operations. Our earnings trend is likely to be volatile over the next several quarters, due to our participation in PPP, but we do expect to earn at least $4 of core EPS in 2021, $4.50 in 2023, and remain on track to earn $6 in core EPS in 2026. I will note that our core EPS guidance does include the net interest income that we do expect to earn on the PPP. Also, our 2021 NIMS expansion is expected to be achieved by remixing our loan portfolio. When we think about our loan portfolio mix for 2021 and the remaining years in our planning horizon, we see the core CNI portfolio making up about 35% to 45% of the total loan book. Multifamily will be between 10% and 15%. Our investment creep will stay flat right around that 10% mark. Our commercial loans to mortgage banking companies will be between 15% and 20%, and our consumer growth will be approximately 15% to 20%. Again, we are focused on continuing our efforts and 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 in 2026. It is very similar to what we included in last quarter's deck. It's really trying to show the significant value proposition that we see. And with that, I'll turn it back to you, Jay.

Okay. Thank you very much, Carla. Very good report, team. I just wanted to, before we open up a Q&A, just emphasize there are four things that we are very focused on. One is number one. Number one is maintaining our superior credit quality. You 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. Next is in terms of meeting or exceeding our tangible common equity targets that we shared with you. We are later focused on that because we think that will really increase our franchise value as well as our shareholder value. Number three is improving the quality of our funding while maintaining or expanding our margins along with above average revenue growth and maintaining that positive operating leverage that you expect from quality companies. And last but not the least is an absolute relentless focus on continuing to build our technology capabilities. And we intend to remain very forward thinking and continue to opportunistically take advantage of banking as a service And that's what we call in working with FinTechs and other clients and prospects of ours. And we think that in this environment, there are very significant opportunities way beyond PPPP that exist right now. So with that, Emily, I would ask you to please open it up for any questions.

As a reminder, to ask a question over the phone, please press star 1 on your telephone keypad. Your first question comes from Michael Chavone from Keith Britt in Woods. Your line is open.

Hi. Good morning, everyone.

Morning.

Morning, Mike. Can you guys just spend a bit more time explaining your loan growth strategy, the main verticals that you expect to drive it, you know, 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, you want to take that?

Sure. Carla, 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 mentioned before, we do expect that warehousing business to fluctuate in the first half of the year being stronger and then leveling off to in the second half of the year. And we really see that growth coming through our core business. CNI business, so we have a strong pipeline at this point in time. We do expect to continue with our SBA portfolio and some of 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 in our consumer book through a direct origination process. Sam, and if you want to take it from there.

Sure, absolutely. So, Mike, to touch on the impact of the technology and our approach to originating from digital-first customers, you know, we are currently – originating about $50 to $60 million a month direct in our consumer lending portfolio. We are now up to 40% direct. and our direct originations represent almost all of our overall monthly originations. The portfolio balance has been more or less flat in 2020, but as the stimulus money has also flowed through the system, we have seen accelerated paydowns. So we do anticipate that there will be, as we previously stated on the consumer loan book and Carla just mentioned, you know, eventual growth, but most of that growth is going to be driven by our direct funding. Similarly, on the SBA side, we have originated to date about a quarter billion dollars of remaining principal, of which about 60 million remains on our books today. The rest has been sold, and we continue to service that portfolio. We anticipate that by the second half of the year, to give you perspective, that we will be originating at about $20 million a month in our SBA portfolio based upon the technology 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, currently we define small business as $1 million or below within our organization. We plan to establish a more of a direct 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, work with some originators on an indirect basis who are originating on our behalf within our credit box Having said that, similar to consumer lending business, once we have a mature business and we've built the in-house expertise and learned from our partners in the market, that will, again, be a direct, majority direct business for us. Hopefully that answers the question.

Yeah, and on top of that, Mike, you know, our really core strength is in the CNI lending, which is 100% all through related private banking services. through private banking offices that we have and private banking teams. So we have about 20 teams that are working in the company, and these teams have their own P&L. And we are very, very focused on generating loans as well as deposits, total relationship and such. So when you combine all 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, Carla, I've given to you pretty much the guidance on how our income statements will look like, and also we gave you the total guidance on where we see the income coming in. So from a capital point of view, we see achieving those goals, which you can translate those into the capital allocation process. So 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 capital deployment priorities were. But the targets you provide are helpful. Thank you. And then just one more question. You've provided some core NIM guidance, but can you just spend some time on how 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 to be by the end of the 2021, excluding PPP. With PPP, as you know, the accounting requires us to put the origination fees also through the NIM. So as Carla stated, there will be some volatility in our earnings. But as Sam mentioned to you, we expect 80% to 90% of our PPP loans that we 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 we've given it to you for the year and by year-end.

Okay. Thank you for taking my question. Sure, Mike.

Again, to ask a question over the phone, please press star 1 on your telephone keypad. Your next question comes from Steve Moss from B Riley Securities. Your line is open.

Good morning. Starting with the PPP, I'm just kind of curious, a couple things here. Maybe one, how do we think about the revenue sharing this time around? Is it going to be similar to the prior model? And then I know this round should be smaller, but you guys seem to have more partners. And so I'm just kind of curious as to how you're thinking about maybe sizing this one up versus the rounds last spring. Sam, do you want 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 also include servicing, et cetera. And as we think about the originations going forward, to give you perspective, I think I mentioned 80,000 loans we earned about just under 2% on those loans that were below $50,000. The gross origination fee would have been 17% on those loans using the $2,500 minimum structure. And our share would have been 8% after a 1% agency and agent fee and a 50% split.

Okay. And so in terms of just the volume this time, just think about the partners here. And 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 – you know, a top five bank, remember, $10 billion or $50 billion banks. 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, forgive all those loans. Okay. Okay.

Okay, 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, you know, how you're thinking about reserve trends going forward in 2021.

Carla, you want to take that?

Sure. Sure. So I'll just comment that we're not giving specific guidance related to our provision expense in 2021. That says the reserve relief that we recorded in the fourth quarter was largely driven by the improvement in the macroeconomic variables. We used the Moody's baseline model. We do not expect any significant deterioration in our credit quality going forward. That being said, as an estimate, you know, for projections, if you were somewhere between $10 and $15 million a quarter of provision expense, that wouldn't seem unreasonable to us.

Okay. And then in terms of just, you know, as you're thinking about $10 to $15 million in provision expense. Is that driven on loan growth here or just covering charge-offs as I think about that?

A combination of both, I would say. Some loan growth as well.

Okay. And then one more question, if I may, just on the multifamily front, I'm thinking about the balance sheet mix. You guys indicated on the slide deck the loans are about 3.8 years old at this point. And usually that's about the point where you start to see refis. You're getting to the point where refis are going to start to pick up. But you guys are only getting to about $1.5 billion, I think, by year end. Kind of curious as to what are the dynamics and drivers that you see keeping, you know, resulting in only a modest decrease in 2021.

Yeah, so we are expecting to keep about that $1.5 billion in multifamily books. So you're right, we will need to replace that runoff. So as we think about the different markets where we can add some additional multifamily lending, we are considering that and feel confident that we will be able to replace that runoff to keep our multifamily about 10% to 15% of our total book.

Okay, great. Thank you very much, Tessa.

There is no further question this time. You may continue.

Okay, thank you. We do have questions online. We have eight questions from three individuals. Jay, I'll read them to you. Some of these things we probably touched on. I'll read the questions so that the questioner knows that they've been asked. The first five questions come from Casey Hare from Jefferies. Casey's first question that he describes is 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, Casey, that's absolutely right. And we will buy back. But right now, we see a huge opportunity to build capital by expanding our balance sheet temporarily through the PPP loans. But I want to be very, very clear that if we are not trading at least at book value, which I shared with you, it's going to be somewhere between $32 and $33 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 we've gotten in excess of 7% TCG ratio, and we've already taken on to our balance sheet. majority of the revenues that we are getting from PPP 1 and 2. Obviously, we will continue to get more revenues from this so-called PPP initiatives that is going on right now. But we will deploy our capital appropriately, and we are not going to be shy to buy back the stock if we are trading below book.

Thank you. Casey's second question, Jay, is about NIN. And Casey asks, what is new money yield on loan production, and which deposit bucket makes the biggest contribution to getting down to 40 bits as the cost of deposits?

Yeah, Casey, first of all, next quarter around, Casey, please come on in into our section where you can ask these questions directly. And so, obviously, it's interest-bearing deposits, money market, as well as interest-bearing DDAs. Those are the ones which offer the greatest potential for us to decrease our cost of funds. And from the average yield that we're getting on the loans right now, it's running between 3.5% to 3.75%. Okay.

Casey, the next question is about mortgage warehouse. and says, NBA forecast is down about 20% versus your guidance of down about 40% in 2021. What percent concentration are you targeting for Mortgage Warehouse long-term?

I think, again, Carla gave you that guidance. We'd expect that to be – Carla, you want to reiterate that? I just wanted to show the numbers.

Yeah, we're 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 2.8 and 3.2%. And at the end of the year, somewhere between 1.6 and 2.4. From an average balance perspective for the full year, somewhere between 2 and 2.5.

Casey's next question, Jay, is what do we see as the allowance for credit loss landing spot versus a 1.9% rate? And how quickly does Cubby get there, assuming no change in the forecast?

I think as Carla shared with you, clearly we use the Moody's model, and this time around we did quite a bit of S3 as well as qualitative adjustments to try to be conservative in looking at our reserving because of the uncertainty in the environment. That's pretty consistent with some of the more forward-thinking banks. And so we will be conservative on our provisioning and not be very aggressive. And obviously the actual amounts will be dependent upon our forecast for the future economic activity as well as the trends that we are seeing in our portfolio. We are seeing very strong credit quality, as Andy shared with you in some details. So we do not envision a significant change in our coverages as of right now. And I think the guidance that Carla gave, which is principally for growth and charge-offs in the consumer portfolio, which has by nature will have, you know, 25 to 30 million in charge-offs in a year. And that's why having 10 to 15 million a quarter in growth or rather in provisions is a good number as we see it.

Okay, and KT's final question is probably a good one for Sam. Sam, KT asks, 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 basically the average loan size 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 pre-existing customer of that institution, is that there could 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'll have a much better sense but um uh you know we feel pretty comfortable based upon the pipeline that uh you know that uh approximately half of the origination volume that we did last time around um you know feels to be uh the base case now we have three questions from peter winner wed bush security and this first one i think we we answered but uh let me read it again in case anyone wants to elaborate

As the economic outlook improves, where do you think the allowance for credit loss ratio could fall to?

So I think we've already addressed that previously. Again, I'll say that we are not expecting any significant credit deterioration on the horizon or on the short-term horizon. That being said, it's difficult to predict where we'll end up At the end of next year, I will just repeat that if we're using an estimate somewhere between $10 and $15 million of provision expense a quarter, that seems reasonable.

Thank you, Carla. And Peter's next question involves NIM guidance. It says with our guidance that we will expand to the 3.10, the 3.30% range without PPP by Q4 2021. What are some of the drivers that it 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 Jay's earlier remarks. Again, we remain focused on continuing our efforts. We've made significant progress. and reducing our cost of deposits. We do have a little north of $600 million of CDs that are available for repricing in 2021. About $500 million of those will reprice 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 $115 to $120 range, so there's some significant ability there to bring down the overall cost of deposits.

Thank you. And Peter's final question is returning to the credit losses. Peter asks, what's the range for net charge in 2021? It was only 29 dips in 2020. And secondly, is there a potentially higher stress as the remaining loans come off of deferral?

Yeah, this is Andy. Yeah, I'll handle that one. It's I think as Carly kind of mentioned, you know, we're looking at that, you know, 10 to 15 million, you know, loss rate per quarter. And I think that's really realistic given where we stand today from the quality of the overall portfolio and the aggressive stance we've taken in moving off. non-performing assets, I think as we evidenced with the first month move to the hotel asset up in Massachusetts. Concerning stress on the portfolio as far as loans coming off of deferment, we're not really having seen that in the loans coming off of deferment to date. They've been successful in coming off of deferment. We don't feel there's a lot of significant stress on those assets. We did longer-term deferments on those assets and did very sound, forward-looking cash flow analysis on those assets to ensure that between the deferments and the payments, as well as the bill of cash reserves on their end through operations, that they will be able to get through all of 2021. as we really think that it's going to take to 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 is those that have been coming off of deferment to date have been coming off successfully, and we think that trend will continue. And for those especially hard-hit industries or at-risk industries, we have made sure in working very closely with those borrowers that they're in a position to weather all of 2021 to when we get back to somewhat semblance of normalcy moving forward.

Great. And, Jay, we have a final question from the web from Daniel Grossman of TechCom Investments. And then Steve Moss has a follow-up that he will give to you. Daniel asks, realizing that PPP initial processing fees are taken into income over life of the loans. How much was taken into income in the fourth quarter? And approximately what do you estimate will be taken into income in the first half of 2021? Carl?

So I can give just a little bit of color around what we've recognized to date on our PPP loans. So in response to the fourth quarter, from a net interest income perspective, we recognized about 30 million of interest income. There was about 17 million of that that was really the recognition of deferred fees. We did have some level of forgiveness in the fourth quarter. Year to date, 2020, there was about a total amount of $65 million of interest income recognized on the PPP loan. And a little over half of that was from deferred fee recognition. So that gives some color. On the first half of 2021, we haven't 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. And overall, from a NIM perspective, you know, again, I'll just repeat that 310 to 330 range for the fourth quarter.

Thank you, Carla. Ray, we can return to Steve Moss for his question, which will be the last question for us today, and then you can give it to Jay for closing remarks.

Sure. Steve Moss' line is open.

All right, guys. Thank you. And a couple just follow-ups in terms of, you know, starting with maybe the – on the PPP aspect, the fee recognition, how do we think about the timeline for the new – how you're going to amortize the fees into income with the latest round of PPP?

Yeah, I'll take that quickly. The latest round of PPP, Steve, the closings will start in the next – sometime in this first quarter. We think majority of that will be done in the first quarter. And then you will see, since these are below, you know, our average loan size is expected to be below 50,000, as Sam shared with you. So the forgiveness process will determine the exact recognition. We crafted some conservative estimates in our guidance that we've given to the street that 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, it's $4.50 that we've given you the guidance. So I think it's very difficult. As Carla mentioned, there will be volatility in our earnings. ON A QUARTER TO QUARTER, BUT CORE BANK IS ALSO EXPECTING looking at loan growth, unless, as was pointed out to us once again by Casey, that unless we see that the street is just not putting enough capital into the banking sector, in that case, we might still be trading below where we think we ought to be trading, and we will be aggressive in buying back our stock with all these revenues that we are generating. You already heard from Carla that, you know, from PPP 1 and 2, our estimated revenue is $150 million. We can put that after adjustment for taxes. We could be using all that to buy back stock. And if we think we generate another similar amount, you can see huge opportunities for our company to buy back stock and make sure our 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 PPPLF and 60-month term.

Yeah. Okay. So then the fees are probably amortized on like a 60-month basis and to the extent forgiveness is accelerated, it's going to flow through. Is that kind of how to think about it? That's right. Great. And then in terms of the other thing, just going back to the provision for a sec, you know, just as I think about that guide, is it fair to assume that basically $8 million of that or so, if you will, is just a normal quarterly churn in a consumer portfolio?

That's correct. Charge-offs are expected to be in the $7 to $8 million, maybe a little bit more or less than that on a quarterly basis. and that's already been factored in by us you know coming up with our margin uh and then our earning asset expectations and then when carla gave you the guidance of 10 to 15 million the rest is for growth right okay great thank you very much appreciate that Yep. Thanks, everybody. Really appreciate you taking your interest in Customers Bancorp. We look forward to working with you. And please don't hesitate to call us anytime with any follow-up questions. And once again, for Peter, Casey, and Will, please join us on the call so that you can directly ask us questions. Thank you so much, and stay safe, and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.