Customers Bancorp, Inc

ladies and gentlemen this is the operator today's call is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience so Thank you. Thank you. Thank you. Good day and thank you for standing by. Welcome to the Customers Bank Corp. Incorporated Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. 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 any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Paddy. Please go ahead.

Thank you, Alicia, and good morning, everyone. Thank you for joining us for the Customer Bank Corp's earnings call for the second quarter of 2021. 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 a red button marked latest earnings presentation. Our investor presentation includes important details that we will walk through on this morning's webcast. I encourage you to use, download 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 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 is my pleasure to introduce Customers Bank Corp Chair, Jay Thabit. Jay, the audience is yours.

Thank you very much, David, and good morning, everybody. I, too, want to welcome you to Customers Bank Corp's Q2 earnings call. We really appreciate your interest in Customers Bank Corp. Before we begin, please join me again in saluting my friend and the bank's former Chief Executive Officer, Dick East, who retired effective July 1st after an illustrious and a very meaningful 50-year career in banking and other related financial services. Please join me also in congratulating Sam Sidhu on being named Customers Bank's President and Chief Executive Officer upon retirement of Dick. And Sam is also the president and head of corporate development at Customers Bank Corp. Today also happens to be Sam's birthday. Sam's vision, leadership, passion is already making a huge positive difference at Customers Bank Corp. And we encourage you to really follow us very closely as we start to execute on all the things that we will be discussing today. So besides James and Sam, joining me today for this call is Carla Liebold, our Chief Financial Officer, Andy Bowman, our Chief Credit Officer, and all four of us will participate in this call and will be available to answer your questions at the conclusion of our initial remarks. Q2 2021 was another exceptional quarter for us, helping us build a very strong foundation. We have a clear and unique strategy that is being executed both for the short term and for the long term and building a high performing, high tech forward thinking bank that is also supported by high touch or a relationship banking strategy. I'd like to now draw your attention to slide four and just to give you an idea of where do we stand today at a glance. You can see besides community banking, we are really positioning ourselves to be a niche bank with aspirations to become a national player. And right now we are a regional player. So besides community banking, we have developed very successful specialty lending programs or niche businesses, as well as simultaneously, both for the consumer as well as for the businesses, a digital banking platform. And we believe that that is absolutely critical for success, both in the short term and long term for midsize banks. Now, moving on to slide five, talking about our exceptional profitability and growth. As you know, our core earnings, were 176, up 182%. Our double ZPS and core earnings were about $59 million, up another similar 177%. Our return on capital common equity was 23.7%, and that's up from 11.1% last year at the same time. And talking about profitability, our core return on average assets was 1.3%. percent this quarter, and that was up from 68 basis points last year, same quarter. From a pre-tax, pre-provision return on average assets, it was 1.8 percent at Q2, and that's up from 1.5 percent last year, same quarter. We've intentionally kept our balance sheet for the core businesses reasonably flat at about $13.5 billion. and been focusing on having the allocation of balance sheet to lower risk, higher quality, higher yielding assets. And in spite of that, we've been able to show somewhat of a slight increase in loans and leases. And you will hear from my colleagues today that you should expect an acceleration of that growth in the second half of this year. And then leading on to deposits, that has been a very, very big story for the industry, but for us it's been exceptional. And so we've seen a $2.9 billion growth in deposits over the last one year, of which $2.4 billion were demand deposits. From a credit perspective, our non-performing asset ratio was only 24 basis points, and we believe that compares well with about 70 basis points for our peers. And from our reserves as a percentage of our loans held for investment, we were at 1.61% at June 30th, and again, in our opinion, equal to, if not better, than our peers. So now, besides going over the second quarter highlights, we will also cover with you where we briefly sort of come from, where we are heading, and our strategic priorities and the general guidance for both short-term and long-term. So if you look at slide six, you can see that it was only about 11 years ago that some of us put our money where our mouth is and took over control of a failing $250 million bank with 35% to 40% non-performing assets at that time. From that kind of a foundation, we built what is Customers Bank Corp today. This growth has been pretty rapid, but it's not been a straight line. We paused recently. to build the capital, we paused to take advantage of certain opportunities. For example, we were one of the first ones in the country to build a consumer digital bank, and then we decided to divest it before effectively crossing the $10 billion mark, and we divested it at a gain to our shareholders. From a strategy point of view, we believe that A tech-focused and a relationship-driven strategy and being in niche businesses is a winning, sustainable strategy for the future. And we are building on our private banking for privately held businesses. We are also building a leading-edge in-house digital bank for businesses as well as a digital bank for consumers that is not dependent upon government. So that is something which is world-class, in our opinion, that we have already built, and we are continuing to improve it. From an asset quality and deposit growth, we are very, very focused, and you should not expect us to have above-tier non-performing assets ever. As well as we are developing strategies today, when the industry is flushed with liquidity, we are building strategies today to have a very strong core deposit franchise when the rates rise and this liquidity starts to disappear. Now is not the time to turn away deposit customers. This is the time to be building strategies which will sustain and give us a very above-average deposit franchise because we believe at the end of the day, the valuation of banks is highly dependent upon the quality of their deposit franchise. All of this only is good when you have a very experienced management team. And you will hear Sam talk about how we are significantly adding to this team. And so that this team that we have assembled and we are continuing to add on is both made up of of very strong, experienced bankers, and they are complemented also with very significant technology experience that we are bringing in onto our management team as well as in our boardroom. So with that, I'd like to now hand it over to Sam to go over some of the rest of the materials in the package.

Sam? Thanks, Jay. Good morning, all, and thank you so much for your time today and interest in Customers Bank. Let me briefly summarize our results. Our strong momentum has continued in 2021 with our third record quarter in the last year that has benefited from continued growth across the company, highlighting the broad-based strength of the franchise. From an earnings perspective, Jay covered the highlights. In terms of PPP revenue, we expect to recognize over $400 million from our efforts in PPP net of expenses. Of that, we have only booked approximately $118 million of that revenue with substantial fees yet to be accreted. Strong asset quality is at the core of our franchise, and we continue to have superior credit quality to peers. We had a provision expense of $3.3 million in the quarter compared to a benefit of $2.9 million in the first quarter. Additionally, our COVID-19 related payment modifications are mostly behind us with only $91 million remaining on deferral, which is less than 1% of loans excluding PPP at quarter end. In terms of loan growth, total loans outstanding, including funded PPP loans, were up $1.7 billion over second quarter 20, or 11%. Core CNI growth was up 13.1% year over year, and consumer installment growth was 25% over the same period. In terms of funding, we had another incredible quarter. Total deposits grew $2.9 billion, or 26.5%, and our demand deposits grew by over 50%. Total cost of deposits are down 44 basis points to 47 basis points, and we'll touch on some strategic actions we have and will continue to take to plan for a potentially rising rate environment. Now looking at capital, we are experiencing tremendous capital build thanks to both strong core earnings as well as PPP revenues. We ended the quarter with TCE, excluding PPP, increasing to 7.7%. Carla will walk through our estimates of book value and TCE ratios after realizing all of our PPP revenues. In summary, we were up an impressive 29% year over year. Moving to slide 9. As we have previously shared, we continue to experience strong loan growth as well as an improving loan remix away from lower-yielding assets like multifamily and mortgage warehouse. After a slow first quarter industry-wide, with the recovery now significantly advanced, we are pleased that our core loan pipeline is at an all-time high, and we expect robust loan volume growth in the second half of the year. Flipping to slide 10, as Jay mentioned, deposits have become a strength of our franchise. Total deposits have grown over 25% over the past year and an incredible 60% over the last six quarters, with majority of that coming from demand deposits, with CDs now down to only 4.5% of total deposits. We delayed a planned Q2 pricing decrease in our digital deposits to mid-July and locked in about $500 million of deposits over the last 30 plus or minus days for up to seven years. And with these actions, we are now down to 44 basis points spot rate as of mid-July and will continue to track to our goal of 40 basis points or below cost of deposits in the near term. Finally and importantly, Technology team is on track to launch our real-time payments initiative to allow us to seek to grow our zero to very low cost core deposit base in anticipation of an eventual rise in rate environment. Flipping to slide 11, first on margin, including PPP, from our trough of 2.47% in 2018, we have been steadily increasing, and we ended the quarter at 3.3%, which is two quarters ahead of the high end of our 2021 year-end guidance. Our margin is expected to continue to expand in 2021 through the further remix of our loan portfolio, as well as continued lowering of our cost of deposits with a target of around 35 basis points by the end of the year. Moving to slide 12. Before I pass it to Andy on credit, let me highlight some exciting things that Jay referenced that are happening across the company on slide 12. I appreciate your patience as we run through this. This is what makes our strategy so unique, and this is what has and we expect will continue to drive value creation for our shareholders. Firstly, on the commercial side of our business, as we have shared previously, we have opened three new offices, several new teams in market, and also in expansion markets. You should expect us to continue to evaluate new markets driven by a single point of contact team lift-out strategy. Moving on to SBA, on Digital 7A, as a reminder for the mission-driven strategic rationale, a recent bipartisan and Goldman report cited that 82% of small businesses anticipated that their PPP funds would run out by the end of July. A further 76% anticipated an inability to make payroll in the second half of 21. And finally, the most important factor for a small business in obtaining an SBA loan is speed of decisioning. Many of these businesses don't have pre-existing banking relationships, and a number of them came to customers' banks for their PPP loan. This is why we are creating the digital 7A product. We are in the midst of our pilot and are closing our first loans in the coming days. We are pleased with the pilot so far, and we're targeting to be at a run rate of $3 to $5 million in originations by the end of the year. Moving to our specialty niche business lines, we added a new fund finance vertical and are continuing to evaluate adjacent and tuck-in business and product lines to increase cross-sell to our customers. With this focus, we are experiencing 10% or more growth in most verticals. Now moving over to our consumer business, we are building fee-generating businesses, first leveraging off of the success of our personal loan platform, which I'll talk about later, as well as bank partner income opportunities for our marketplace lending partners that we've established over the past several years. We are also continuing to fine-tune our existing products like credit cards and will evaluate additional product lines in the coming quarters. Moving to our digital bank, as Jay highlighted, as we mature our agile delivery model and simplify how we operate this quarter, we have reorganized our tech teams similar to that of a technology or consumer-facing technology company by separating embedded fintech, data, information technology, and digital product and marketing. This was a planned medium to long-term future state for us that we materially accelerated, and we believe very few banks have made this type of aspirational organizational alignment. With this reorg, we've injected fresh talent into the tech team, firstly with promotions of our chief administrative officer, our chief information security officer, and the head of our digital bank, as well as new hires with the head of digital marketing head of real-time payments platform, head of business development for a real-time payments platform, chief data officer, CIO or CTO, as well as several engineers. The tech team joins us from large financials like MasterCard and Goldman, as well as prominent tech and data companies. Our digital SMB bundle is an advanced rollout starting with the digital 7A, followed by term loans and credit card, all on the roadmap. This is critical to build off of our PPP success with small businesses. Our real-time payments initiative is on track for a launch in approximately 60 days, which we want to emphasize as one of the most important strategic initiatives at the company today for a variety of reasons that Jay also touched on earlier. Finally, we have engaged a leading digital launch our omni-channel online presence, which reflects the digital maturation and institutional growth of the bank. This is expected to be completed by the end of the year. With that, please flip to slide 13. This is a bit more detail on the gain on sale revenue driven and enabled by our tech team, turning our cost center eventually into a profit center. Consistent with previous guidance, we expect our SBA gain on sale revenue to increase 4x from four times in 2021 and have been working on a consumer health for sale initiative that is on a similar growth trajectory. Both are in early stages and are already embedded in our annual and long-term guidance, which we have previously provided. With that, I'll pass it to Andy Bowman, our chief credit officer.

Thank you, Sam. Good morning, everyone. I'm starting on slide 14. Outland's quarter-end product quality remains extremely strong, and we're very pleased with how the portfolio has performed and continues to perform against the economic, social, and political pressures brought about by COVID-19, as evidenced by NPA's total assets of only 24 basis points, which is less than half of peer averages. Total 30 to 89-day delinquency stood at only seven basis points, or 0.07 percent, marking the five-year low, and annualized net charge-offs to average total loans and leases of only 16 basis points, or 0.16 percent. Given the bank's continued commitment to sound credit quality and limited exposure that we have to at-risk industries, we expect the near-term credit outlook to remain stable. Moving on to slide 15, And as both Jay and Sam had mentioned, we had a sizable reduction in loan deferments from Q1, with deferments accounting for only 0.9% of total core loans, which excludes PPP, at quarter end. And we anticipate this trend to continue moving forward as our commercial borrowers continue to show improving operating metrics as the reopening process gains momentum, particularly across our hospitality sector, which constitutes the majority of our remaining deferments. We're also extremely pleased with how well our consumer portfolio has performed, and we remain cautiously optimistic that given its conservative attributes and diversification, it will continue its strong performance moving forward despite recent inflationary concerns. Moving to slide 16. outlines our CECL reserve for the second quarter of 2021, which remains predicated upon detailed portfolio-by-portfolio assessment based on various macroeconomic factors as impacted by COVID-19, and a deep dive into each individual portfolio attribute as impacted by these macroeconomic factors, and account for actual charge-off rates and NPA levels. with the end result being reserved of approximately $125.7 million, or 1.61% at quarter end, which equates to a 270% coverage of NPLs. As evidenced in the aforementioned slide, our asset quality performance remains extremely strong, and we remain committed to the conservative underwriting standards, strong client relationships through our single-pointed contact model, and proactive portfolio management. all of which have been critical and continue to be critical as we continue to weather the COVID-19 storm and take on the challenges associated with the post-pandemic world. And just as we were and continue to be laser focused on our customer base, given the pressures of COVID-19, we're applying the same degree of focus on those segments of our customer base deemed at risk due to a new challenge in the form of inflationary pressures. I'd like to thank you for your time this morning. And now I'd like to turn it back over to Sam.

Thanks, Andy. Flipping to slide 18, I want to spend some time talking about our digital banking capabilities and business model. We execute on a high-tech, high-touch, single point of contact community banking model, as you know, complemented by our niche specialty businesses. And these are in all cases supported by our best-in-class technology capabilities. Digitization and technology expertise is improving our performance in existing businesses like our consumer installment portfolio and small business lending, while also opening up greenfield opportunities like our small balance SBA loans, which we previously discussed. Our strategy is a hybrid model of bringing the best of a community bank along with the best of a fintech. We are hard-pressed to find a comparable organization in mid-sized banks with our tech capabilities and agility. As an example, the investments that we made previously in building out our middleware, Technology have allowed us to stand up the technology partnerships which have been fueling both the efficiency and growth across the organization. Similarly, we are reaping the benefits of a best-in-class cybersecurity organization fueled by investment in next-generation technologies which has improved our security agility and development of a security-focused operational culture. Very large banks use technology to serve existing customers but aren't necessarily using it to broadly source new digital customers with a digital branch-focused strategy like we are. We are adding approximately 25,000 new consumer customers a quarter in addition to several hundred thousand SMBs in the last year. Now moving to slide 19, our participation in PPP has clearly been transformational for the bank. At the close of the program, we funded approximately 325,000 loans for about $9.5 billion and ended as a top five bank across PPP1 through PPP3. In this year's PPP3, we were the number two bank in the country. with loans more than every bank in the country larger than us. And cumulatively, since last year, we have exceeded loan volume of well-known money-centered banks like Wells Fargo, Citi, TD, and PNC, and rivaled that of JPMorgan and Bank of America, who had huge origination teams led by tens of thousands of employees and outsourced resources. In terms of forgiveness thus far, we've processed approximately 57,000 forgiveness applications for $3 billion, which is about 60% of the $5.1 billion Round 1 originations. Our borrowers have maintained a nearly 100% forgiveness rate on applications submitted. As you may have read in a press release from the SBA yesterday, as well as a feature in the Wall Street Journal, we have partnered with them on a direct forgiveness tech platform initiative, which has the potential to accelerate forgiveness, especially for 2021 originations, possibly as early as this calendar year. Thank you, and with that, I'll pass it to our CFO, Carla Leibold, to bring it all together with capital, book value growth, and our outlook.

Thanks, Sam, and good morning, everyone. I'll focus my comments today on three topics. The first is capital. Second is tangible book value. And the third is our 2021 year-end outlook. Beginning with capital on slide 21, this slide shows the significant capital accretion resulting from the recognition of deferred origination fees from PPP loans and strong core earnings. Starting at the end of Q2, our total risk-based capital was estimated about 13.2%, and our TCE ratio, excluding PPP loans, was 7.7%. Fast forward to the end of this year, and our total risk-based capital is expected to be approximately 14%, and our TCE ratio, excluding PPP loans, is expected to be around 9%. Now, if you pro forma full recognition of the $400 million of pre-tax PPP revenue by the end of 2021, you will see that the estimated total risk-based capital increases to about 16%, and the TCE ratio, excluding PPP loans, increases to about 10%. So whether the income is recognized in 2021 or 2022, it is still significantly accretive to our capital ratio. Turning to slide 22, I'll talk about tangible book value. Year over year, we've had 29% growth in tangible book value. At the end of the second quarter, our tangible book value was close to $32. That's up from around $24 one year ago. By the end of 2021, again, if you pro forma full recognition of the PPP revenues, our tangible book value is expected to increase at or above $40 per share. That's additional growth of about 26%. And this is where we really see the value proposition. Turning to slide 23, our updated financial guidance for year-end 2021 is as follows. Loan growth, excluding PPP loans and mortgage warehouse, is expected to be in the mid to high single-digit growth. We are still expecting mortgage warehouse balance to decline between $1.6 and $2.4 billion by year-end. We are expecting our net interest margin to be in the $3.25 to $3.50 range For the second half of 2021, we are increasing core EPS guidance, which includes the PPP-related revenue, to at least $6 in 2021 and 2022. Core EPS guidance excluding PPP-related revenue is expected to be $4 in 2021 and 2022, and we expect to achieve the $6 in core EPS in 2025 rather than 26. The total risk-based capital is expected to be around 14% at year end, and our TCE ratio is expected to be around 9%. I'll highlight that these capital projections do not incorporate any stock buyback or redemption. Lastly, our effective tax rate from continuing operations is expected to be between the 23 and the 25%. Quickly, touching on slide 24, this slide shows the path to a core EPS of $6 in 2025 rather than 2026. Applying reasonable growth assumptions and a return on average assets of about 110, you can see how we hit that $6 target with assets somewhere between $18 and $20 billion. Before turning the floor back to Jay, I'd like to emphasize two points. One, the significant capital accretion stemming from PPP revenue and strong core earnings, and two, a pro forma tangible book value of at least $40, including full recognition of the PPP revenue. And with that, I'll turn it back to you, Jay.

Thank you very much, Carla. Thank you, Andy. Thank you, Sam. I think if you look at slide 25, you will appreciate it sort of sums it all up. We have a very clear, unique strategy, and we have a very, very experienced and talented management team that I feel so privileged to be working with. We have our strategy is very high-tech forward thinking, and it's supported with high touch, and it's broken into these objectives are broken into key results, and we follow the OKR, for those of you who are familiar with that, management system and the processes to really drill down each one of these objectives into actionable results and then have alignment, and that's the way we look at things. From a record earnings performance point of view, you've heard enough about our earnings performance. And from a high-growth franchise perspective, you've heard Sam talk a lot about that. But the important thing is we are building upon our strengths of community banking and getting into the future by focusing also on digital banking, which is supported by our digital lending, digital franchises, and combining superior technology with this high-touch specialty lending or niche businesses that I've called them. From a capital point of view, this was a major strategic objective of ours to be at or above average capital ratios, and we are so pleased to share with you today that we expect to be between 9% to 10% tangible common equity ratios without doing any capital raises. And at the same time, the amount of accretion that we've shown in our earnings today far exceeds any of the accretion that you've seen from bank mergers and acquisitions and those are the kinds of things. And we've done it organically by taking advantage of the environment. From a credit quality, as Andy mentioned to you, it's been exceptional. So these are the things that our board of directors, our top management is focused on on a regular basis. And we are, that's why, very optimistic about our future. So with that, Alicia, if you can open it up for questions, please.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Peter Winter of Wedbush Securities.

Good morning. Good morning. I wanted to start with the margin. If you could talk about some of the drivers to the increase in the margin of the core margin of 31 basis points. And just I was curious if anything was unusual in the quarter, and then just the outlook is why the low end of updated NIM guidance of 325 is below the second quarter results.

I think, Carla, if you can take it, but just let me just share one thing with you, Peter. We always want to provide general overall guidance rather than very specific guidance. And we always have a style of exceeding expectations. So with that, Carla, you can talk about specifics.

Yeah. Thanks, Jay. So I'll start, Peter, just to describe the balance sheet restructuring that occurred in the first quarter of 2021. in which we terminated some of our cash flow hedges and really had the opportunity to reduce our overall funding costs. That action alone was expected to provide at least 15 to 20 basis points going forward. So as expected, we did see that margin expansion coming through in the second quarter, as well as we continue to make efforts reducing our deposit costs, And then the last thing I would say is just the mix in the portfolio helped to increase our overall loan yields, which obviously drove the margin expansion. For the rest of this year, again, we are focused on our funding costs and bringing those down and being very disciplined in our pricing strategy such that we are not forecasting any margin compression and really for the rest of the year expected to be within that 3.25 and 3.50 range.

Okay, thanks. Can I ask, end-of-period commercial loan growth, if excluding the multifamily mortgage warehouse, really nice growth. You mentioned on the call that I guess pipelines are at all-time highs. I was just wondering if you could give a little bit more color on the commercial side where the growth is and what you're hearing from the clients.

I think Sam and Andy, that's the perfect question for you guys. Sure. Absolutely. I'll start off and then Andy, let me know if I missed anything. The overall pipeline is pretty broad-based. Our local geographic teams are seeing record pipelines. Our lender finance business, our commercial finance business, a lot of this is pent-up demand and carry forward from a softer first and second quarter. We do expect that the growth will be accelerating. throughout the year um and you know just given the seasonality of our business plus some of the likely reduction in our commercial mortgage warehouse business we think it's just a very nice both loan remixing yield remixing spread but also an opportunity to uh to really show far above peer um you know loan growth and even anything

Yeah, I think also, too, and I would just add, even from a core C&I lending perspective, even with the geographic expansion, we're seeing, you know, a lot of good penetration there. We've been able to take advantage of some other bank mergers out in the market that have created some disruptions. It's given us an opportunity to pick up some relationships that we have been prospecting for a period of time. So I think, you know, we're seeing it really, it's not just in the threshold lines, but also very good in the core line, core C&I lines of business, And I think you see that, you know, it's a good margin business as well. So overall, all the pipelines are robust, but predominantly specialty and core C&I. That's great.

And just my last question, and I understand that you guys like to be conservative, but just that $6 guidance for the full year this year, it does imply earnings flat for the second half of the year and Is it just the timing issue of the PPP? Because I would assume most of that 300 million should be recognized over the next three or four quarters.

uh i'll take that i'll take that question yes absolutely peter it's it's a timing it's a when not if um i think the the um you know operative word is at least or a minimum of six dollars in both years you're absolutely right that if we're also saying that four dollars of core core eps excluding ppp would mean that there's limited forgiveness in 2021 which is not our anticipation but going back to jay's earlier point we want to be conservative because PPP forgiveness is not like one of our core businesses that we really have a lot of control in and we can't really give short-term guidance on. So we provided the pre-tax revenues from PPP, which we expect will almost entirely come in between the remainder of this year and next year. And we understand it's difficult to make some modeling assumptions, but we also have the same issue. Internally, we really only have a 30 to 60-day, at most, foresight. into what the sort of origination fee realization could be. So, for example, if the SBA sends us a wire for $1 billion on January 1st versus December 31st, we could have as much as a $20 million swing in quarterly revenue. And that's the challenge that we face, and that's why we understand we would recognize request that some of our investors and analysts kind of make their own forgiveness estimates, but we expect that nearly all of it will be realized between this year and next year. So we could make seven this year, we could make 650, we could make eight, but it would just take a little We don't want to have technical misses due to uncertainty on borrowers stepping up in the government review and timing. But this is also why we partner with the SBA on their tech direct forgiveness platform that I touched on. It's to try to put some of this uncertainty in the rearview mirror, focus on business as usual, and start getting to a core, core earnings stream. Carla, it might be helpful. Could you just share, if you have the numbers handy, some precision on the PPP origination fee split between last year and this year, you know, as well as the breakdown of the $118 million that has already been realized today? That'll help some of the modeling.

Sure, Sam. So, as Sam mentioned, you know, we are projecting 400 million, at least 400 million of pre-tax net revenue. So, to give some perspective of how that breaks down, it's a total of about 335 million of deferred, net deferred origination fee. That breaks down in around one and two by about 100 million and then 235 million relates to round three. So when we think about this, that's what Sam's saying about it's when, not if. And so for PPP rounds one and two, to date, we've recognized about 75 million of that 100 million. So about 75% of that has already been recognized. 25 million is still expected to come in at some point during 2021. On round three of the 235 of deferred origination fees, 10 million of that has been recognized so far. And so there's still a lot of upside of that to come into our NII based upon the timing of the forgiveness. Now, to date, we've recognized 118 million. I'll focus just on the year to date, 2021. We recognized about 70 million. through our first quarter and second quarter margin table. So that gives you just a little bit of perspective to help with your model, Peter.

That's great. Really helpful. I'm all set. Thanks for taking my questions. Thanks, Peter.

Your next question comes from the line of Steve Moss of B. Reilly Securities.

Good morning. Good morning, Steve. That call was really helpful. Maybe just in terms of, you know, on the capital front here, you guys announced a preferred redemption later this year. Just kind of curious, will that be all preferreds? And also you can just discuss your appetite for a stock buyback here and how aggressive you want to make.

Steve, we have shared with you that once we have crossed the seven and a half percent TCG ratio. We want to make that the absolute floor for us. And we've also shared with you today that once all this PPP revenues have been recognized, we could be at 10% TCE. So that gives us the tremendous ability to look at all options. And at the same time, we are a growth-oriented company. So we don't want to show earnings growth just by buying back the stock. That is the only option available to low-growth franchises. So we continuously look at options for us, and we are very optimistic that we will be trading at higher multiples over a short period of time. But at the same time, if there are any market disruptions in our market, common equity becomes attractive to buyback rather than to accept a lower stock price, we will not hesitate to institute a common stock buyback. At this time, we think it would be most prudent for us to consider a preferred buyback, and you can see it's about $82 million as an opportunity for us if we do take advantage of it, and that itself you know, will save us several million dollars of after-tax income, which is accretive to our EPS.

Okay. So I guess with PPP building tangible book here towards the mid-40s, just, you know, if your stock is in the high 30s to $40 range, you know, should we expect a repurchase program maybe next quarter? Is that kind of how to think about that?

I would say is... You should expect us to first follow through on what our board of directors has decided, which is probably the purchase of preferred. And you should expect us to get the PPP revenues in-house rather than projected TCEs. And once that's done, whether it's fourth quarter or it's next year, if there are any weaknesses in our stock price and it would be prudent for us to buy back our stock, we will look at that.

at that time not in the third quarter but beyond fourth quarter everything is on the table okay and then in terms of the um just going back to the margin for a moment when i exclude pbp it looks like you're around a four and a half type uh loan yield and funding costs are coming down Is just the 3.25 to 3.50 range reflective of some of your expectations for liquidity with the initiatives coming online here in the near future?

That's definitely a lever that could compress margin. We're also seeing, while we still are maintaining loan yields, we are seeing some increased competition over the last 60 days, 90 days. from a loan yield perspective, and spreads have been maintaining for us, having said that, you know, floors are starting to compress a little bit. So we're just maintaining a little bit of flexibility into Jay's earlier point, making sure that, you know, we have conviction on the range that we're providing.

Okay. Okay. Got it. And then just in terms of gain on sale with, you know, Sam, you mentioned the Consumer Health for Sale Initiative. Is that more we think about the gate on sale there as a 2022 event, or should we expect that in the second half of this year?

A portion of that will be in the second half of this year. And, you know, our plan is to proceed to do this with regularity on a quarterly basis. You know, what we have provided in terms of guidance on the $4 of EPS for this year, this is obviously not an initiative we just turned the switch on in the last couple of weeks. It's something that's been in the works, you know, for six-plus months. So it's part of our guidance. for 2021 and could and also part of our guidance for 2022 but if we if it ramps up sooner or or faster we'll be in communication and uh on on what the impact could be for next year okay great thank you very much absolutely your next question comes from the line of michael parito of kbw hey mike hey good morning guys how are you

I wanted to just start on just kind of a simplistic question. I just wanted to make sure that I was kind of thinking about it the right way. I was looking at the outlook slides, you guys, or the long-term guidance slides. You guys were talking about the asset growth. I just wanted to make sure that I was kind of thinking about the baseline on that asset growth near-term the right way. I know it's just a range per se, but is it still fair to, you know, when we look at the mortgage warehouse guidance for i think 1.6 to a little over two but if you take the midpoint call two billion there's about 900 million of elevation there and you still have a little over six billion of ppp so is it fair you know it might we don't know necessarily when you'll get there per se but to think about the core balance sheet today at about that 12 12 and a half billion um asset level you know as we think about long-term asset growth carla

Yeah, Mike, I think that's a fair estimate to do that.

Mike, just to put a little bit of a fine point on that, you know, we're $13.3 billion at the end of June 30th. You know, the loan growth of the second half of the year, you know, will mitigate the perspective, you know, midpoint of the range of mortgage warehouse drops. Got it.

So it's, you know, obviously it's not unreasonable. You know, we'll make our own assumptions around PPP kind of forgiveness and the mortgage warehouse activity within the range you provided. But kind of beneath that, it's not unreasonable to think that that 12 to 12.5 should grow 7 to 10 percent, you know, over a multi-year period. I mean, at least that's how you guys are kind of thinking about it today.

That's correct.

I think it'll be 13. 13, I would say, would be our floor because of what the when you're looking at our TCE ratios, we're looking at their 13 to 13 and a half billion. Got it. Okay, so a little smidge higher. Got it.

That's helpful. Um, thank you, guys. And then, you know, as we think strategically longer term, you know, this is really helpful. And thank you for putting that together. But as I think about the balance sheet mix, right, I mean, presumably for the next year, You know, mortgage warehouse could be high. PPP will still be around. But as I think as we move into late 2022 and 2023 and beyond, I mean, it seems like a lot of the commercial type stuff seems a little bit more, some of the fintech partnerships seem a little bit more lending focused. Is the thought process, as we think about it, is that the real-time payments initiative and some of the digital small business banking stuff. Will that be more of where the kind of hopefully lower cost liability growth comes to fund some of the consumer and other fintech partnerships and geographic expansion on the commercial side that I imagine will drive the 7 to 10 asset growth over a multi-year period of time? Or is there other elements that we should be thinking of in terms of kind of how the mix of growth and funding of that growth will evolve once some of these temporary programs like the PPP eventually run their course?

Sure, absolutely. I'll take a stab at that. So from a funding perspective, yes, we do anticipate that some of our digital initiatives should have an ability to help fuel some of our growth. Having said that, we also have strong growth across the franchise from a geographic perspective, including in some of our new geographic markets, which are starting to really move the needle. from a funding perspective. You know, and then, you know, just to highlight in the near term, you know, many of the items that we discussed on slide 12 are reasonably balance sheet-like. You know, the SBA business is, you know, it's a combination of retaining a portion and a gain-on-sale business. The digital SMB business will take some time to ramp up, but the majority sort of uses in the near term we've already guided towards.

And on the – sorry, was there – No, I was just going to – No, no, no, no, I'm sorry.

I was just going to add is, Mike, you know what real-time payments did for Signature and what they did for Silvergate, and you can make some assumptions of the opportunities that that sort of a thing can have for our core no-interest-cost deposit franchises.

Yeah, and Jay, that was going to be my next question, right? I mean, the technology stood up. You guys did it fairly quickly. Soft launch in the next 60 days, which is great. I think I asked a version of this question last quarter, but would love an update or some more specifics. Now you're getting closer to that launch date. What's the roadmap or the plan? You know, I mean, I think when I think about signature and Silvergate, as you mentioned, you know, I mean, they obviously created, you know, strong networks, which you know, kind of a necessity right now for these RTP networks to really take off and get the customers and the deposits on there. I mean, what's the sales plan? You know, I think last quarter you had quite a few different industries in the deck that you were targeting, but would love just some additional color on where you're going to focus your efforts and what's going to kind of be the process of trying to get people on board to really see that deposit growth take off.

Sure, I'll start on this question. So in terms of the verticals, we are focused on, we're prioritizing internally some of the verticals that we think would have the highest ROI from a deposit growth perspective and a customer acquisition perspective. So as you can appreciate, you know, there are, you know, the digital asset ecosystems, for example, that you've seen Silvergate and Signature focus on. You know, similarly, we're in advanced discussions with many of our existing customers. So, you know, when we sort of think about a soft launch, which is really just a combination of existing customers plus counterparties and a network creation as well as new customers, while new customers you have to bring on the network altogether, We would do a soft launch at the end of the third quarter, early fourth quarter, and then within 90 days do sort of a more broad launch so that we can be able to foster those ecosystems quickly and make sure that we're banking them to the best of their, making sure that the service is the best. And what I would say is that In parallel, they're dedicated teams for business development and sales and relationship management and treasury, as well as on the technology project management infrastructure. So this is a – you know, it's full steam ahead.

Very helpful. And then just one last one for me. Sorry to keep going here. But just on capital – You know, as I think back, you know, through the company history, right, I mean, Jay, I mean, you guys have always had pretty decent growth. And certainly now, you know, just looking at this slide 12, there's no shortage of opportunities for you guys to grow. And it's clearly been a really, you know, great 12 to 18 months for Cubby, and there's been a lot of progress. But just as we think longer term here, you know, what's the right – capital ratios for us to think about you guys wanting to run the bank with the growth environment you have. And I guess it seems like with some of the ROA targets and certainly with the PPP near term, you guys, I would imagine, will be able to remain well in excess of those targets without any external capital. But just as we think about a growth organization, I think the capital piece is really critical. And right now, there's a lot of noise and certainly a lot of benefit from the PPP. But just as we think longer term, out into 2023 and beyond. I mean, do you guys have any updated sense of what the right capital ratios or position is for the organization that we should be mindful of?

Yeah, Mike, that's a good question. And, you know, what I would say is that historically, I think we have operated at below peer capital levels, but we've been very open as to why that makes sense for our organization based upon our asset profile and our liquidity profile. you know having said that with the benefit of uh of all of the ppt capital accretion um you know i'd sort of say that our range which we previously were guiding towards was more seven to eight percent that's up to you know seven and a half to eight and a half with seven and a half being a minimum and a bias towards the high end of that range um you know in the in the medium term absolutely right i second that got it okay so um you know i think

if I can just kind of comment or summarize, I mean, it sounds like there's, you know, you guys aren't trying to run around with a nine or 10% handle on your capital, but you know, relative to historical, it's fair for us to think that you're going to run with a little bit more capital, you know, relative to the peer group that then maybe historically, which would make sense, right? Because I mean, historically you guys had, you know, the multifamily book was much bigger and now, you know, you're looking at some higher yielding assets, but I just want to make sure that I'm kind of thinking about that, you know, conceptually the same way you guys are.

That's right.

Okay. Excellent. Thank you guys for taking all my questions. I appreciate it.

Thanks, Mike.

Your next question comes from the line of Frank Chiraldi of Piper Sandler.

Hi, good morning. Hello, Frank. Just wanted to hit on one thing. On the geographic expansion, I wondered if you could share – specific portfolio size, specific pipelines for some of the new geographies you guys have announced over the last few months?

I'll start on that, and Sam, if you can help finish that up, because I was out visiting our team in Chicago just a couple of weeks ago. To give you an idea, our Chicago deposit franchise is in excess of $750 million today, and our loan book is in excess of $100 million. So you can see that it's opportunistic, and we are taking advantage of wherever the opportunity is. It's not just lending-driven. It's also relationship-driven and certain niches which were unserved. And then we think that's sort of what we have goals by each and every geography. And then they're not all lending driven, like I said. So we are very, very bullish based upon our experiment over the last two, three years that this is something which we can duplicate in various markets around the country. and that we will not do it the typical bank way, which is through M&A. We will do it through organic, opening up sort of loan production offices and then doing our deposit gathering in a more high-touch private banking for those niches that we identify as high growth opportunities, including our real-time payments.

Yeah, and I would just add, you know, Frank, you know, it's a deposit-driven strategy, you know, followed by loans. Each one of our geographies, Chicago, Dallas, and Florida, are typically at least 75, 25 deposits to loans. So majority deposits, three to one on a deposit perspective. You know, as Jay talked about, sort of the deposit levels at Chicago, In Chicago, in Florida, and Texas combined, we're tracking on a nine-figure deposit growth already in just a very short period of time. And each of them, from an asset generation perspective, as you can appreciate, a new geography should have a minimum threshold of at least $50 to $75 million of loan growth in the first year, with, frankly, an upside goal higher than that.

Okay. And just as a follow-up, is there, in terms of a road map, additional geographies you could add? You talk about conversations to add additional teams. Is there any roadmap or expectation of new geographies to enter into, say, over a 12-month period going forward?

You know, our strategy is very much a people-driven team strategy first, as opposed to choosing a pin on a map and then following that with a team. So we have, you know, geographies on the eastern seaboard, as you can imagine. That makes sense, including, you know, a reboot of our, you know, D.C. metro area map. type geography. But, you know, it's again, as we previously said, it's looking at some of the top MSAs bifurcating, thinking about what are the best from a competition perspective and a competitive set perspective and a quality of customer perspective, and then making sure that the number one filter is people first.

Got it. Thank you.

Absolutely.

Your final question. On the line comes from Bill DeZellum of Titan Capital Management.

Hello, Bill. Good morning. I had a couple of questions. The first one is relative to the SBA forgiveness platform that you announced yesterday. I'll be the slow pony in the room here. Can you discuss what that does for you that's different from your current approach?

Sure, absolutely, Bill. I'll take that. So what the SBA is seeking to do in partnership with banks and new SBA lenders is to essentially try to create a borrower-friendly SBA platform. that not only allows a sort of co-branded white label type relationship with a bank or a lender, as opposed to having a two-tiered process where a bank runs the forgiveness, passes it to the SBA, passes it back to the bank, passes it to the customer, the rendering of the decision. It allows it to be much more of a collaborative and streamlined process. Now, the second thing that the SBA has done, which the banks would not have the ability to do on their own, is they have created sort of a data analytics analysis to make some determinations, especially for second draw loans, which had a 25% revenue test, to automate that as opposed to requiring for every borrower a backup for a 25% revenue drop. All of this is only for loans below $150,000, which for Customers Bank, as you probably know, for this year was about 99% of our loans. So larger loans will still go bank first, submit to SBA through the traditional process, but this tech platform should tremendously streamline the process.

That is helpful. Thank you. And then if I remember correctly, your redemption of the preferred was not included in your EPS guidance. If that is correct, Is it also the case that you are still not including that in your guidance that you've given here today?

That is correct, Bill.

That is correct. Great. Thank you both.

Absolutely. Thank you.

There are no further questions from the phone.

Okay, well, thank you, Alicia. Thank you, everybody else. Yeah, we really appreciate your interest in Customers Bank Corp. If there are any follow-up questions, please don't hesitate to give us a call. Thank you and have a good day.

This concludes today's conference call. You may now disconnect.