Customers Bancorp, Inc. (CUBI) Q1 2021 Earnings Report, Transcript and Summary

Good day. Thank you for standing by. Welcome to the Customers Bancorp, Inc. first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to turn the call over to our first speaker today, Mr. David Patti. Please go ahead.

Thank you Lisa and good morning everyone. Thank you for joining us for Customer Bancorp's earnings call for the first 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's my pleasure to introduce Customers Bancorp Chair, Jay Sidhu. Jay, you may begin.

Thank you very much, David and good morning, ladies and gentlemen. We really appreciate your taking the time to join us this morning. It's a very important call for us. Joining me today is Dick Ehst, our President and Chief Executive Officer of Customers Bank, Sam Sidhu, who is incoming President and Chief Executive Officer of Customers Bank, when Dick retires end of this quarter and Carla Leibold, our Chief Financial Officer, as well as Andy Bowman, our Chief Credit Officer. Before I share with you and my colleagues and also join me in sharing with you the results of the first quarter, we would like to talk a little bit about ESG. And ESG considerations are very much integrated across Customers Bancorp's different business units and into our policies and principles that cover how our company operates. We put together our ESG report which is on our website and we encourage you to take a look at that. And every single year, we will be updating that. And we are taking this very seriously at our Board level and at our management level. Now on to slide six, which is the highlights of our performance as well as our franchise. As you can see, we had exceptional core earnings. And the only difference between core earnings and GAAP earnings are something that we had shared with you earlier that we had a gain on the disposition of BM Technologies and we had to pay tax on that because we passed on the entire amount of disposition to our shareholders as well as there were severance payments or awards made by us to the management of BMTX. This is all going to be historical. So we would like for you to very much focus on the so-called core earnings. Very strong earnings. Return on common equity of 31%. Return on assets of 1.6%. And adjusted pre-tax pre-provision ROA of 1.9%. Very important also is and you will hear a lot more about this from Andy Bowman, is talking about our credit quality and that improved about 25% this past quarter with our nonperforming assets only 26 basis points as well as our reserve coverage of 1.71%. From a very important milestone also is a significant increase in our capital ratios. And our bank capital ratio was 13.2% at March 31. And we will talk a lot more about this during our presentation today. Moving on to slide seven. I would like for you to join me in saluting my partner, friend and colleague, Dick Ehst, who joined us, joined me and a couple of other of our colleagues about 11 years ago to start New Century Bank. From New Century Bank, we became Customers Bancorp. At that time of the launch of this bank, we took over a $250 million asset-in-failing bank. And today, it's $13.6 billion in total core assets and about $18 billion including PPP. We put together, fortunately with big significant contributions, a very highly experienced management team and our team averages about 30 years of banking experience and Dick was the one who recruited. We told Dick, you cannot retire. It doesn't matter whether you are 75 or 74 or 76 until you find a successor who you are very comfortable with. And he recruited Sam Sidhu, who the Board appointed to be his successor. And Sam will be taking over as Customers Bank Chief Executive Officer effective July 1. We have also recruited several new teams and we will be talking more about those in the Q&A. And from a credit quality point of view, we are very, very comfortable with maintaining our credit profile over the next several quarters. And from the quality of the franchise point of view, you know our demand deposits today are about 22% of our total deposits and our CDs are only 5% and the quality of the franchise has dramatically improved over the last couple of years. In terms of our focused strategy and long term goals, what Dick and I and our colleagues have been very much focused on is building a bank which is built upon single point of contact or private banking for privately held businesses in a way that the customer feels the difference and wants to say, wow. We will continue to develop on top of that in-house digital banking services for small and medium-sized businesses and consumers. And we will continue to focus on improving our balance sheet. And it's a very, we both believe, a very high-quality and diversified earning asset base and a stable and growing core deposit franchise. At the company, capital allocation and risk management are always in the forefront of every single thing that we do. And we are very much engaged in not just short term quarter-by-quarter planning, but also on a longer term planning. And we are pleased to share with you that we are comfortable in reporting GAAP earnings of at least $5 a share in 2021 and 2022. And we are very comfortable with our goal, achieving our goal of $6 in core earnings by 2026. So it's my pleasure at this time to hand it over to our bank's incoming Chief Executive Officer, Sam Sidhu, to go over some of our business highlights. Sam?

Thanks Jay. It's a pleasure. Good morning everyone. On slide nine, you will see that we are off to a great start in 2021 with another terrific quarter that benefited from continued growth across the franchise. Let me briefly summarize our results. Firstly, from an earnings perspective, as Jay mentioned, we had core EPS of a record $2.14, which represented net income of $70.3 million. This translates to an ROA of 1.61% and PTPP ROA of 1.9%. Core ROE was 31% in the quarter and adjusted pre-tax pre-provision ROE was about 37%. Now moving to PPP revenue. We have made over $400 million to-date from our efforts in PPP and we still have $300 million more of net revenue to be booked. Importantly, this will be net of all internal and external costs throughout the life of the loan. Now moving to asset quality. Asset quality has always been a core pillar of our franchise and we continue to have superior credit quality to peers, with NPAs at just 26 basis points and our coverage ratio now at 1.7%. In terms of loan growth, total loans outstanding, including funded PPP loans, were up $5.8 billion over first quarter last year or 56.6%. Total loans, excluding PPP, grew in line with expectations by about $700 million year-over-year or 6.5%. In terms of funding, we had another incredible quarter. Total deposits grew by $4.1 billion year-over-year or 48%, with our demand deposits nearly doubling. Our total cost of deposits are now down 98 basis points to 53 basis points. And as we have previously stated, we expect this to drop below 40 basis points in the second quarter. Now looking at capital. This has been the most important achievement of the bank this year and we will continue to spend some time talking about this today. 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, at 7.1%. After we realize our PPP revenues, you will see Carla walk through a book value of $40 a share and TCE ratio approaching 10%. Flipping to slide 10 on loan growth and mix. 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 our multifamily and mortgage warehouse franchises. Now moving to slide 11, on deposits. This continues to be an unsung highlight of our franchise. Total deposits have grown nearly 50% over the past year, with majority of that coming from demand deposit growth. As mentioned, we expect our cost of deposits to drop below 40 basis points this quarter and I will talk more in a few minutes about our future plans to use our superior technology platform to create a blockchain-based B2B real-time payments network which will allow us to grow our zero cost core deposit base in anticipation of an eventual rising rate environment. Moving to slide 11. First, on NIM, excluding PPP on the left side. We are pleased that from our trough of 2.47% in 2018, we have been steadily increasing and are now stable at 3%, but are expected to rise throughout the year. In the first quarter, we built a large cash position in anticipation of PPP which started slow, but has now ramped up towards the end of the quarter in terms of funded loans. We are reaffirming our target of 3.10% to 3.30% NIM by year-end and we expect to narrow this range as the year progresses. Despite the drop in rates, our loan yields only declined 59 basis points due to the mix shift and bottomed out last year. Again, we expect this trend to improve through the year with a 3.8% spread between our loans and deposits widening even further. Moving to slide 13. To answer the question as to what is our strategy, we execute on a high-tech, high-touch, single point of contact community banking model, complemented by our niche businesses and these are, in all cases, supported by our best-in-class technology capabilities. Our differentiated business model continues to perform incredibly well. We have experienced and expect to continue to experience 7% to 10% growth in the franchise, driven through an increase in market share in existing business units, a recruitment of additional teams, as Jay mentioned, for this year, with two of them in new geographies in Texas and in Florida as well as one in a new business line through fund finance. Digitization and technology expertise is improving our performance in existing businesses like our consumer installment portfolio and automated small business lending, while also opening up greenfield opportunities like our small balance SBA loans which we have previously discussed. We have made significant progress in our deposit characteristics, as previously outlined. And we are still projecting 12% to 15% growth in 2021 while lowering our cost of deposits even further. With that, I will pass it to Andy Bowman, our Chief Credit Officer, to talk about our credit risk management.

Thanks Sam and good morning everyone. Moving to slide 16. As outlined on this slide, our credit quality remains strong and we are very pleased with how the portfolio has performed and continues to perform against the economic, social and political pressures brought about by COVID-19. NPAs to total assets stood at only 26 basis points and our deferments continued to decline in both our commercial and consumer portfolios. Overall, our near term credit outlook remains stable and we continue our commitment to strong credit quality and maintaining a strong coverage position, which was 1.71% as of quarter-end. Moving to slide 17. This outlines our CECL reserve for Q1 2021 which remains predicated upon a detailed portfolio-by-portfolio assessment based on various macroeconomic factors as impacted by COVID-19, a deep dive into individual portfolio attributes as impacted by said macroeconomic and COVID-19 factors and accounts for actual charge-off rates and NPA levels, with the end result being a reserve of $128.7 million or 1.71%, which equates to a 264% coverage of NPLs. Slide 18 outlines our loan deferments and an overall very positive trend with total P&I deferments of only 1% and overall deferments of just 1.7% after accounting for principal on these deferments where borrowers continue to pay contractual interest. Although hospitality remains the predominant industry receiving deferments, 53% of those deferments are principal only, with borrowers continuing to pay contractual interest. We fully anticipate our deferments to continue to run off over the next few quarters as we are seeing improved operating metrics within impacted industries and with our borrowers. And at this time, only 10% of the portfolio represents exposure to COVID-19 risk industry segments, into which we have added investment CRE office and investment CRE retail exposure, given continued concerns around demand. It's important to stress and I would really like to stress, that we have the minimum investment CRE office and retail exposure and our total deferments at risk industries was very limited to only 1.2% of total book. Slides 19 and 20 focus on our consumer portfolio and outline the very conservative attributes of and diversification within this portfolio and these conservative attributes and diversification that have played a vital role in the strong performance of the portfolio versus peers. Our consumer portfolio carries a strong average FICO of 740. It's more middle market in composition as evidenced by conservative debt-to-income ratios and higher overall borrower income levels, has strong geographic diversification and has minimal exposure to COVID-19 at-risk industries from a borrower employment perspective. Overall, we are extremely pleased with how this portfolio has performed during this trying time and we are committed to maintaining our consistently applied strong credit standards and conservative borrower attributes moving forward. Overall, our asset quality performance has been extremely strong during these trying times and this is attributable to our conservative underwriting standards, strong client relationships through our single point of contact model and a proactive portfolio management practice. We remain committed to these pillars moving forward even as the market improves as they are core to our credit culture and that we firmly believe in how we act during good times will dictate how our portfolio performs during downtimes. I would like to thank you for your time this morning and now we will be turning the presentation back over to Sam. Sam?

Thanks, Andy. As you can see, we are very focused on superior credit quality, both in good times and in bad and our results speak for themselves. Dave, if you could flip to slide 21. As I mentioned before, our high-tech, high-touch service model positioned us very well for the challenges of the last year. And thanks to our superior technology capabilities, we have done so despite mostly working from home. Our strategy is a hybrid model of bringing the best of a community bank along with the best of a fintech. We have been recognized as one of the top digital banks in the country by bankrate.com and we are hard-pressed to find a comparable organization in our peer group that has an average deposit per branch of $1 billion. PPP was an example of a high-tech, high-touch in action. Our hybrid approach combined the knowledge and experience from a top 100 SBA lending team along with fintech technology expertise. The same combination can be seen in our deposit efforts. We combined our relationship manager-driven deposit gathering and servicing expertise with technology to digitally market and streamline the account opening process. Digital deposits are now at $1.5 billion. CB Max Savings, a product we started in November of last year, has generated over 1,000 accounts and $165 million in deposits in just a few months. We are consistently looking at ways to leverage our existing hybrid experience lender strengths with our technology data analytics to drive additional value. One near term example of this is our effort to create a gain on sale business in our consumer installment vertical using all existing team infrastructure and tech capabilities. We are piloting this in the second quarter and are then looking to have this be a nice driver of fee income in the second half of the year. Flipping to slide 22. Here is a snapshot of some of our technology partnerships organized through the lens with which we manage our tech platform. Firstly, COVID served to accelerate a huge internal digitization effort that was already under way, where we have automated over 140 processes that have saved over 60,000 team member hours. You have and will continue to see this reflected in our efficiency ratio. Next, our external partnerships that helped us originate loans and deposits are driving significant impact on our financial results through, for example, as I previously highlighted, PPP as well as our digital deposit efforts. Finally, we have created a unique and bespoke embedded partnerships, delivering on our Banking-as-a-Service model that few of our commercial bank peers are able to emulate. We have centered this around a modern API-based modular infrastructure. Now moving to PPP on slide 23. When Congress turned to the banks to distribute vital funds to small businesses in need, we took that obligation very seriously and frankly, our technology platform was built for this. I am pleased to be able to report that we have approved over 300,000 loans for over $9 billion and over $400 million of pre-tax net revenues, again after our related costs over the life of the loan. Importantly, we are serving those truly small businesses that need the most help, with an average loan size of under $50,000 in 2020 and under $21,000 or approximately $21,000 in PPP 3. Among commercial banks, we have the smallest loan size among the top 15 lenders. We took our learnings in PPP 1 and 2 and applied it to serve the small businesses at an even greater scale this year, including white label partnerships for other banks and exclusive referral arrangements. Thus far, in PPP 3, we have approved over 200,000 applications for over $4.2 billion. This makes us the number two bank in the country in terms of number of loans. For reference, this is 30% higher than JPMorgan, 40% higher than Bank of America and 140% higher than Wells Fargo, as perspective. Moving to forgiveness on slide 24. Thus far, we have processed approximately 40,000 forgiveness applications for $2.2 billion, which is just under 50% of our round one and two originations from 2020. We have maintained a nearly 100% forgiveness rate on applications submitted. As previously highlighted, we have only recognized $100 million of pre-tax revenue to-date and expect to realize the majority of round one and round two revenue in 2021. We expect that nearly all of our combined PPP revenue should be recognized by the middle of next year. Flipping to slide 25. This is CB Net. I am very excited to share with you our latest tech initiative that is going to have an opportunity to further improve our already strong deposit franchise with the addition of likely zero cost core deposits. For the last six months, we have been working on establishing a blockchain-based payments platform to provide real-time intra-bank B2B payments via a closed private network through the use of a customer's bank stablecoin minted on the blockchain. This means that both sides of payments transactions will be Customers Bank customers, creating a network effect and importantly, deposits will stay within the bank. We began the evaluation of this business line more than six months ago when we took a deep dive into the real-time payment platform at Signature Bank. We have existing clients across healthcare, real estate, financial exchanges and institutional investors who will benefit immediately. We also consider this an excellent opportunity to become a leader in the payments space and grow our footprints in the verticals we have identified. There will likely be more to come on this in the coming weeks and months. With that, I will 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 would like to focus my comments on three very important topics. The first is earnings momentum, the second is capital and the third is tangible book value. Turning to slide 27. You can see that we continue to build the strong earnings momentum. First quarter 2021 results compared to fourth quarter 2020 include net income from continuing operations of $74.6 million or $2.17 per diluted share, which was up 27%, record core earnings of $70.3 million or $2.14 per diluted share, which was up 25% from Q4, core return on average assets of 1.61%, which was up 35 basis points, our core return on common equity of 31%, which was up 600 basis points, our adjusted pre-tax pre-provision net income of $86.8 million, which was up 11%, our adjusted pre-tax pre-provision return on average assets of $1.90, which was up 20 basis points, our net interest income of $132.7 million, which was up 8% and our NIM of 3%, which was up 22 basis points from fourth quarter 2020. Moving on to capital on slide 28. This slide shows the significant capital accretion resulting from the recognition of deferred origination fees from the PPP loans and strong core earnings. Starting at the end of Q1, our total risk-based capital was estimated at about 12.5% and our TCE ratio, excluding PPP loans, was 7.1%. 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 8.5%. 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 15.9% and the TCE ratio, again, excluding PPP loans, increases to 10.1%. So whether the income from the PPP loans is recognized in 2021 or in 2022, it is still significantly accretive to our capital ratio. Turning to slide 29. I will quickly talk about tangible book value. In one year, we have had 29% growth in tangible book value. At the end of first quarter 2021, our tangible book value was $30. That's up from about $23 at the year ago quarter. By the end of 2021, again, if you pro forma full recognition of the PPP revenues, our tangible book value is expected to be around $40. That's additional growth of about 33% and this is where we really see the value proposition. Building on all of this, slide 30 shows possible strategies that create further EPS expansion since the PPP revenue has effectively acted as a non-dilutive capital raise. The first strategy would be to consider adopting a common stock repurchase program. We are estimating that a $25 million common share buyback would be accretive to our EPS by about $0.14. We could also consider redeeming all or a portion of our preferred stock. Currently, both the Series C and the Series B preferred stock are redeemable. Redeeming both of those would be accretive to EPS by about $0.13. Also by the end of this year, the Series E and Series F also become redeemable. If we were to redeem all outstanding series of preferred stock, our EPS would increase by about $0.38. The capital accretion that we have been talking about also leaves us very well-positioned to support future growth of our balance sheet, particularly in our core C&I specialty lending niches. Lastly, turning to slide 31. Our updated financial guidance is as follows. Loan growth, excluding PPP and mortgage warehouse balances, is expected to average in the mid to high single digits over the next several quarters. The balance of commercial loans to mortgage companies is expected to decline to between $1.6 billion and $2.4 billion at the end of this year. Again, our total capital ratio is expected to exceed 14% by year-end 2021. And our TCE ratio is expected to be around 8.5%. We project NIM, excluding PPP loans, to expand between 3.10% and 3.30% by fourth quarter 2021. We are projecting an estimated effective tax rate from continuing operations between 23% and 24%. And we also expect to earn at least $5 in core EPS in 2021 and 2022 and then $6 of core EPS in 2026. Our core EPS guidance does include PPP-related revenues. The 2021 NIM expansion is expected to be achieved by, number one, remixing the loan portfolio away from commercial loans to mortgage companies toward C&I categories and consumer loans, bringing our total cost of deposits down to less than 40 basis points in the second quarter and the restructuring of the asset and liability side of the balance sheet that was completed in Q1. So before turning the floor back to Jay, I would like to reiterate, one, the strong earnings momentum that we have built, two, the significant capital accretion stemming from the PPP revenues and strong core earnings and three, the pro forma tangible book value of about $40, including full recognition of the PPP revenues. And with that, Jay, I will turn it back to you.

Thank you very much, Carla. As you all know, over the years, Dick and I and our colleagues have been very focused on building shareholder value with a company and a bank that has a very unique strategy. We call this high-tech, forward-thinking bank supported with high touch. Hope it's becoming a lot more clearer to everybody that we are building a bank of the future, a bank that's not reliant on what do we do with all our branches and how do we build earning assets and how do we build a funding franchise. Over the last two, three years, we have been very focused on these five priorities, which has becoming hopefully apparently clear to the street. Number one was, we shared with you that we wanted to take advantage of the BMT divestiture because we were building the company beyond $10 billion in size. That was done. And that was done at a gain and we did a special dividend of $70 million of BMTX stock to our shareholders and for the benefit of our longer term shareholders. We believe that that stock will become tradable sometime this quarter. And just to share with you, we are very upbeat on the value of that stock. It's not just being for today's stock price, but we think the future value of having created one of the fastest growing digital banks in the nation will be very beneficial for our long term shareholders who wish to hold on to that stock. I, as a large shareholders of Customers, obviously got a decent amount of BMTX stock and I am holding on to it. Number two is, we have been very focused on capital allocation and capital management and being very opportunistic. So as you saw, all concerns, in our opinion, regarding the lower-than-average TCE ratios for Customers Bancorp have been addressed. And we believe that we have achieved our capital goals in a manner that was very significantly accretive to our PCD ratios, accretive to our tangible book value. And we believe that the $40 per share in tangible book value per share is achievable within the next year or so. Number three, we have been very focused on the quality of our franchise and quality of our deposits. As you heard from my colleagues, we intend to have a lower, still lower, but also through our blockchain-based payment systems, a business model that is going to be supporting the growth of our franchise and growth of our quality of our deposits going forward at even a better pace than what you have seen in the past. Number four, we have been very focused on risk management, especially on credit quality. And as you heard from Andy that we also have no concentration risk which we believe is very important. And we believe that there is, in the future horizon, probably a commercial real estate crisis which may be based upon office space and we have absolutely minimal exposure because we have been expecting that for the last couple of years. We were ahead of our time, probably too soon, but that's okay. And we think that's coming and we are very well-positioned whenever that happens. And lastly, as Carla shared with you, is building a company with earnings momentum and a company that is very focused not just on short term, but also in the long term. Okay. So with that, Lisa, if you can please open it up for Q&A.

[Operator Instructions]. Your first question comes from the line of Peter Winter with Wedbush Securities.

Good morning. A very nice quarter. I wanted just to ask, if I think about January's guidance to today, you increased the EPS forecast by $1 for 2022 to $5. Obviously, a lot of that is driven by the PPP with the success in round three. But what are some of the other drivers to the increase in the outlook for earnings next year?

I think the drivers have been and again, I will ask my other colleagues to step in, but the drivers have been and obviously, like you said, I am much more comfortable in having the money in the bank so-called from PPP 3. And in two-and-a-half months, having generated $200 million in revenue, gives us a lot of comfort about the future. Number two is really our focus on credit quality. And that's been very, very clear, hopefully, to everybody. Number three is our comfort level in originating high-quality earning assets in this kind of an environment and for the future and seeing those margins expand. Number four is really for the future, as Sam talked about, the clarity of something that we have been working on for the last several months, but also the blockchain-based technology that we expect to implement sometime in the second half of this year to build our core deposit funding. And we believe higher rates are inevitable and we believe we are going to have a commercial real estate recession before that. That's part of our thinking and we are very well-positioned in those cases and this gives us some momentum for this year. And it gives us the confidence level to continue to reaffirm our $6 in 2026.

And I would just add to that, Jay and Peter, for your benefit, the advent and introduction of some additional fee income businesses, specifically the gain on sale business, both from SBA which we had previously disclosed as $1.5 million a quarter or $6 million for the year. So leading in on our expertise and learnings from PPP as well as the introduction of a similar business in the consumer installment portfolio.

Okay. That's helpful. And then just, Carla, you outlined some opportunities on the capital front with potential share buyback and redeeming some of the preferred. What's the likelihood that that happens maybe in the second half of the year, just given a better outlook on the capital ratios?

Yes. So I will just give a few thoughts around that. You can see the slingshot effect that's going to occur as of 6/30, just from the full recognition of the revenues from PPP rounds one and rounds two. So we are well-positioned to consider doing either the common stock buyback in the latter part of this year or early 2022 and also to consider our preferred stock redeeming that.

I think we have said in the past that we are very, very focused on shareholder value creation. If our stock does not respond and does not get to market multiples and peer group multiples, we are not going to be shy about buying the stock back.

Okay. And then just my last question. Could you give a little bit more color on the teams, the four teams you hired this quarter? And maybe what's in the pipeline as we go forward?

Sure. I will take the first shot at that. We have hired teams in the C&I lending area right here in Pennsylvania, in New York, one in, it's all related to C&I and deposit generation to private banking for privately held businesses and one in Orlando and one in Dallas, Texas. On top of this, we have our teams in Chicago which continue to do well. And then as Sam mentioned, we have started a fund finance group and that team has been already in place today. And so those are the teams that we have added in the last few months.

And I would just add, Peter, that's about a dozen new team members collectively in the geographies that Jay just mentioned. And we have also had one of our senior leaders move to one of those geographies as well to help open up an office.

Great. Thanks for taking my questions.

Thanks Peter.

Your next question comes from the line of Casey Haire with Jefferies.

Yes. Thanks. Good morning everyone. I had a question about loan growth, two-part actually. So apologies if I missed this. But the $4.2 billion of PPP round three, what's the expectation for that? Like where does that end up, number one? And then two, the core loan growth, mid to high single digits, I think that's been your guide for the last couple of quarters. You have been shy of it, but obviously have done very well on the PPP side. So I am just wondering, you don't have to make as much room for PPP? You can focus on core loan growth? Is that the way to think about it going forward?

Sam, do you want to take that?

Sure. So good morning, Casey. Glad to have you on the call. So firstly, in terms of PPP, the $4.2 billion that we have originated this year, similar to how we thought about it last year, the goal post for forgiveness is typically what the SBA copies of services, the time period through which the SBA services the loans which is at a maximum of about 16 to 18 months. So that's where we are sort of thinking about the middle of next year as the end goal post for PPP 3 originations. Getting back to overall C&I, core C&I loan growth, the first quarter, as you typically see for our businesses, was a little bit slower. Having said that, we are reaffirming our loan growth expectations. We are seeing green shoots across the franchise. We have a strong pipeline that's building and we feel comfortable about our previous guidance that we have given on loan growth.

Okay. But the PPP will continue to grow from that $4.2 billion in round three?

It depends on how long that funds are available. The program is extended through May 31. Having said that, the money may not last through that full period of time. But I would remind you that while we funded a good portion of this with cash to-date, the PPPLF and other liquidity facilities are available for 100% financing. So it's not at the expense of traditional Customers Bank loan growth.

Okay. Great. And just circling back to the capital management front. So the EPS guide for this year of $5, does that presume any buyback embedded? Or if buyback was, if you did choose to redeem preferred or initiate a buyback, that would be upside to that number?

All of the numbers and the projections that you have seen in the document exclude a buyback or preferred stock redemption. So all of that would be upside.

Okay. All right. And just lastly for me, the balance sheet restructuring in the quarter, do you feel like you have got the balance sheet where you want it in this kind of rate backdrop? Or should we expect more?

No. I think we have -- Go ahead, Carla. Sorry.

I was just going to give a little more color on the balance sheet restructuring. So we did terminate $850 million of cash flow hedges that were essentially used to lock in wholesale funding at a fixed rate. And so we did unwind those hedges and sold an offsetting amount of security, investment securities to essentially neutralize that on our capital impact. We were able to replace those securities with a like book yield, such that we expect that restructuring to build about 15 basis points going forward by the end of 2021 in our NIM. And I will just add, there is some remixing of the loan that we do expect to happen just as mortgage warehouse hits that seasonal decline at the end of the year.

Okay. Thank you.

Thanks Casey.

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

Good morning everyone. Congrats and best wishes to Dick on his upcoming retirement here. I want to start maybe with, going back to the PPP program. With regard to the second round draws, you have 55,000 eligible by May 31. Just wondering, how much is there beyond May 31 if we get an extension of the program?

I don't have the numbers off the top of my head. I will tell you that we don't anticipate that there would be a further extension because there would need to be additional funds, as I previously mentioned. So we think that the addressable market we are approaching is somewhere in that 50,000 to 60,000 range.

Okay. All right. That's helpful. And then in terms of the share repurchases here, just kind of curious as to how to think about that in terms of capital? You guys have historically run the bank at, call it, a 7% TCE ratio. So heading up toward 10% is pretty meaningful. Do we think about it maybe in terms of 50 to 100 basis points of TCE, just kind of maybe sizing that up a bit?

I think that's possible. Like Carla shared with you very clearly that we have opportunities both for stock repurchase as well as for redemption of our preferred. And so we will be looking at capital allocation whether we put it into the repurchases and it will depend upon how our stock is performing. And if we are not trading at market multiples and we remain very comfortable with the future. There is no question about it. Stock repurchase will become a priority. And otherwise, we would be focused on the preferred. And of course, we would always continue to look at capital allocation for the lower risk, higher margin and from a profitability point of view. So that's sort of our model for capital allocation.

Okay. And then in terms of the blockchain payments rollout here, just kind of curious how you guys are thinking about it, just maybe in terms of primarily as a deposit gatherer? Or should we think perhaps there will be some fee generation, whether it's interchange or some sort of things along those lines?

Sure. I will take that. So I think that at the end of the day, this is a very strategic play for us. Instant payments don't need to be delivered over the blockchain. Having said that, SMB and corporate customers are requesting and, in some cases, demanding this type of service from banks. So we are making sure that we are building a platform to where the puck is going. From a strategic perspective, number one priority is low to zero cost deposits. Number two would be potential fee income down the line. Having said that, looking at some of the banks that have been first movers in providing and building this type of service, typically they are providing both the payments for free at the moment and for that, they are getting zero cost deposits. So down the line, we will have to think about once we have a sense of what the opportunity is, what the associated payments rails are. Absolutely, one could justify that there could be fee income down the line. But that's more in the medium to long term once we build a business around this.

Okay. That's helpful. And then just one other thing in terms of just looking at the expectations for consumer installment loan growth going forward, curious as to the drivers here. How much do you guys expect will be the CUBI versus partners going forward?

Sure. Great question. We are currently originating direct somewhere between $75 million to $100 million a month in the first quarter. And as you can see, we have slightly ticked up the portfolio this year and we expect that that to continue with a target of reaching potentially the low end of the range of the 15% to 20% by the end of the year. And that will be majority, if not all, in some quarters direct.

Okay. Great. Thank you very much. Nice quarter.

Thanks Steve.

Thank you.

Your next question comes from the line of Will Curtiss with Hovde Group.

Hi. Good morning everyone.

Hi Will. Good morning.

Carla, I guess I wanted to follow up in terms of the discussion around the $5 of EPS. And I don't know if you mentioned it, but what does that assume for expense growth?

I am sorry. What does it assume for what? I couldn't hear you.

I am sorry. Yes. I am just curious what your $5 of EPS, what does that kind of assume in terms of expense growth for this year?

Yes. For expense growth, we said that our focus is on positive operating leverage to the extent we add expenses. The expectation is to grow revenues by two times that amount. What we are forecasting in our models is that we essentially hold expense growth flat outside of that.

Got it. Okay. And then, Jay, I wanted to see if you could expand a little bit on the comments in the slide about market expansion, just give us a little bit of a sense in terms of some of the markets that might be of interest to you.

Sure. Our business model is really branch-light. In fact, people always ask me, how many branches does Customers Bancorp have? And my answer usually is 11 too many because we have got 12 of them. So we are driven by how do we expand and reach out to the client, our base, without having any traditional branches, but doing it with private banking for privately held businesses, which means acquisition of teams. So we did an analysis in terms of where do we see the greatest growth in privately held small to medium-sized businesses? And where do we see disruptions in the marketplace? And where do we see some talent as a result of that available? And so we can attract the teams. So today, as you know, we are in Boston. We are in Providence. We are in Manhattan, in New York, in the different boroughs of New York. We are in Philadelphia. We are in Suburban Philadelphia, which includes Lancaster, Harrisburg and Reading area. And we were in Chicago. And then through our analysis, we identified the Orlando, Tampa, Jacksonville market. We identified the Dallas, Texas market because we already had some clients there. So our objective for the next two years, a year-and-a-half to two years, is to concentrate in these markets and really see how things are going before we have an expansion or further expansion into new markets. Now we might do a fill-in in Carolina markets as an example, that sort of a thing. But that's our focus, is Eastern. We might look at with our funds finance group that there could be an opportunity to go to the West Coast, just because there are quite a few private equity venture capital firms over there. But that would not necessarily be into the private banking for privately held businesses.

Great. Thank you very much.

Your next question comes from the line of Michael Perito with KBW.

Sorry. We can hardly hear you.

Yes. Hi Jay. It's Mike Perito. Can you guys hear me okay?

Yes, Mike. Good to hear your voice.

Good. Thanks for the deck and obviously, most of my questions have been answered at this point, but I have a few clarifications, things I just want to spend a minute on. I guess just not to kind of beat a dead horse here, but on the buyback versus preferred conversation, I just trying to get in your heads a little bit here. I mean from my seat, it seems like the buyback, at least near term here, would seem more timely and strategically impactful? Obviously, the earnings impact from the preferred is pretty objective. But you don't always get to buy your stock back at just above book value. I mean is that similar to how you guys are thinking about it as we are just trying to map out the capital deployment over the next two to three years? Or is there any other element we should kind of be thinking about as we try to make those assumptions?

I think over the next two years, two to three years, we believe we will be trading at market multiples. So with that, there's no question about it, right. And our performance will lead us to that. We don't know what's going to happen tomorrow or in 30 days, 60 days or three months, but we are looking at that horizon. So it would be fair to assume that within that three year period, all our preferred would have been redeemed by us, right. And then through our normal earning asset generation, we will be opportunistic. You are absolutely right since we are trading below book, it's almost a no-brainer to be looking at buying back your common stock.

Got it. That's helpful. Okay. Thanks. And then on the blockchain payment, so obviously, I think this whole thing started with Silvergate, right, with their Silver Exchange Network and then been seeing that form to kind of compete with that. But seeing that's brought in the way from crypto and try to use this in other areas like payroll and stuff like that, it seems like you guys, I guess, just to clarify first, based on the slides and your commentary, I mean, it seems like you guys at this point aren't looking to necessarily compete in the crypto realm with this. I guess, one, just want to confirm that. But two, as you think about some of the areas that you guys are laying out in the slides, I mean, what's the kind of the game plan of growth? Like, for example, in the hospital systems, you get the insurance carriers first and then cross-sell to the hospitals? There's kind of, at least in my experience with these types of networks and obviously, there's only been a couple but there has been some type of kind of targeted marketed game plan to how you grow them? I am just curious if maybe you could expand about how you are thinking about that more kind of in the early innings here.

Sure. Absolutely, Mike. Thanks for the question. So on the first question, we are looking at the Signature playbook and we are looking to try to ambulate it. They have done a very impressive job in such a short period of time and there's a large addressable market. So a significant focus of ours is going to be, for example, on the synapse between institutional investors and the platforms and exchanges that they transact on. But to your question about growth, I think the important thing here and this goes for anyone who's setting up basically a private or closed blockchain-based payments network, is that you first go to a provider that has power, power as a vendor, power as a supplier. And that's who you go to first in these verticals and industries that we have identified. And then they have the ability to bring in the other side of the transaction. And in some cases, it's the first participant that is trying to sort of get the real-time payments capabilities. And in other cases, it's a first participant that moves, but it's the other side of the transaction that are demanding it from the main participants. So it's a little bit of an interesting strategy. There's a number of different use cases that we have identified and that we will continue to explore and lean in heavily on as and when we launch. Now the last thing I would mention is that, I touched on this before, a blockchain-based payments network is not required to provide instant payment capabilities. However, as we think about where the puck is going, this is a private closed network. In the long term, a private closed network, we don't have the benefits that a more semi-private or public network could. So having said that, we have also been studying what the large banks are doing and we are viewing this as a very strategic initiative, whereby in the medium term after a successful launch and hopefully, after enhancing our deposit franchise, we could create an infrastructure that could be interbank with some of the mid-sized banks to be able to compete with the deep pockets and IT infrastructures of the very large banks.

No, that makes sense. I mean it's definitely something where it feels like in the sales cycle, those first one or two sales are probably the most difficult, but the most critical ones. And then after you get those onboard, the network starts to build and people are more willing to jump on and open a deposit account and reap the benefits of it. So very interesting. Thank you, Sam, for that. And then just lastly, I just want to clarify because the release had a couple of different comments on 2022 EPS in there. But just to make sure I got it right, the $4 number was just recurring revenue, which would exclude PPP, right? And then the $5 number, that's core, but includes PPP, right? That's the only variance between those two figures in the ER?

Yes. I think what we had said earlier was that our $4 number was excluding the PPP 3. And so you have got to look at this, yes. So we are very hopeful now and we are very comfortable with $5, not just for this year, but $5 for next year GAAP earnings is our guidance.

And that kind of includes a base assumption that it's fair to think that a decent chunk, I mean who knows what the exact number is, but a fair amount of the third wave forgiveness will fall into the first half of 2022, correct?

That is correct.

Okay. Excellent. Thank you guys for all the color. I appreciate it.

Thank you Michael.

Your next question comes from the line of Russell Gunther with D.A. Davidson.

Hi. Good morning guys.

Good morning.

Just one really big picture question left as most of mine have been asked and answered. So as we look all the way ahead to your path to $6, that 2026 number, is there any way to size up what the differentiated model here at CUBI contributes to that? So whether it's the blockchain payments or the Banking-as-a Service, some of the other internal and external tech partnerships, how do you think about that as a contributor to the $6 of longer term earnings per share target?

I think we had given the longer term earnings target even before we talked about blockchain. So we don't look at we need to do this otherwise we are not going to make it. We are going to make our $6 a share anyway. It's just a matter of, we are a company that is clear about its strategy, clear about its vision and is constantly evaluating the external environment, is constantly looking at innovation because we are a forward-thinking, forward-looking, high technologies-based, but still very much in a high-touch community banking type of a model. So I think the right question for you might have been, can you do your $6 a year by 2025? We don't know yet. Or is it going to be something? We are very focused on doing the right things and we feel very comfortable that the guidance we have given to you of 2026, $6 this year. And we are also telling you that we are assuming a recession between now and 2026. And that will be coming probably because of the office market problems, CMBS problems and some banks who are heavily concentrated in that as well as some people who are also pretty heavily concentrated in the shopping malls.

All right. Jay, thank you very much guys. That's it for me.

Your next question comes from the line of Bill Dezellem with Tieton Capital Management.

Thank you. I have two questions. First of all, of the 200,000 round three PPP loans of $4.2 billion, how much of that is from the white label PPP partnerships and I guess, versus what you have originated internally?

So first of all, good morning, Bill. Thanks for your question. So firstly, in terms of the direct scene or kind of direct white label relationships, it was about somewhere in the range of about 40,000 of the originations came through those relationships.

And was there any size difference? Or were they essentially similar to your $21,000 average?

The ones that came from banks, as you can appreciate, were on the larger side. But overall, as you can even look at some of the larger commercial banks that are on the top 15 list in the SBA disclosures, overall the industry has trended significantly down in average loan size this round, mainly because of the 25% revenue test. So overall, still lower than you would have seen last time, but trending higher than our $20,000 for the ones that come from banks. But then we also have exclusive partnerships with non-banks as well. And many of those were closer to the average.

Understood. Thank you. And then I am going to expose my ignorance here on the blockchain front. Would you talk to the advantages that essentially why a firm would choose to do such a thing? I understand the advantage of a low cost deposit or zero cost deposit for you all. But given that instantaneous money movement already can happen, again my ignorance of not understanding what the advantages are, so can you walk us through that, please?

Sure. Absolutely, Bill. Good question and good clarification. So the ACH network, which is typically how interbank transactions occur, is typically, as you know, a one to two day settlement process in terms of an outbound delay as well as sort of an inbound potential delay. So the benefit is instant payments, instant settlement. So think of this as an example, say what PayPal is. If you said there's a B2B PayPal, you can instantly transfer amongst a buyer and a seller, say, on eBay. But imagine that in a B2B world with two sort of supplier and a vendor instantaneously. Having said that, now as opposed to in a PayPal account where that now needs to be settled to your bank which would traditionally be done through ACH with that same delay type period, now you have both of those technologies existing within a bank. So you can have an instant U.S. dollar transfer as well and settlement.

Great. Thank you Sam.

Absolutely.

And now Mr. Patti will ask a few questions from the webcast and email.

Thank you Lisa. Our first question comes from Jim Ludlow, an investor in Central Pennsylvania, who would love to know, Jay, if you could comment a little more on what he perceives to be the low ratio of our PE to the stock price? It's something that, of course, you have talked about before. And also, he asked if you would consider a dividend on common stock?

I think I will address the second one first. Capital allocation is a very important aspect of where our Board of Directors and our management is constantly focused on. And we pretty much have the PPP revenues in our hip pocket. But through GAAP, we want to first recognize that before we would look at dividends. But dividend will be a part of our capital allocation process. Now in terms of why our PE is so much lower, I think I will leave it up to the analysts. We just focus on performance. And I think if I have heard what the analysts have told us is what I addressed in those questions, there was some confusion as to when and how the BMTX divestiture would be there. It's all behind us. There were some concerns about our lower than peer average capital ratios. That's been addressed by us. There was some concern whether we have a good core deposit franchise. That has been addressed by us. And also for the future, we believe we will have a better quality deposit franchise. There were some concerns at one time about heavy concentration in multifamily loans by us. We have addressed that. And there was some concerns about our consumer loan portfolio. I think market should be able to feel very comfortable about that. And there were some concerns about the earnings momentum by some analysts. And we think and we hope that performance speaks better than words on that.

Thank you Jay. And we have a question from our friend, Oliver Mihaljevic at Seven Pillars Capital in London. Oliver writes, does the expectation to generate over $400 million of pre-tax revenue over the life of the loans, he is quoting from our release, refer to all PPP vintages, that means that the 2020 plus 2021 loans. So is it collective? And has management made any allowance from the probability of current PPP program funding running out of funds before the end of May, something that Sam has touched on.

Thanks Dave. I will take that. So yes, it is a combination of all vintages. In the fourth quarter, in January, in our earnings release and IR deck, we talked about over $150 million for 2020 vintages of PPP. So backing into that that would be $250 million-plus of PPP 3 to-date and this is based upon the originations. So it's not a projection of future originations between now and when the money runs out.

All right. Thank you. I see no additional questions. I think everything else has already been answered or addressed. Please, if anyone is listening to the webcast, feels that we didn't fully cover the questions, feel free to email us or send something in. You can find my contact information on the Investor Relations page and I will provide those to our speakers. But otherwise, I believe that's exactly the questions for now.

Yes. Well, thank you very much, everybody. Really appreciate your interest in Customers Bancorp. And like Dave said, please just give us a call, email us any time you have any questions and we look forward to speaking with you. And please join me once again in congratulating and saluting my friend and my partner, Dick Ehst. His contributions to our company have been absolutely unbelievable and we will miss him, but he's staying on our Board. So thank you, Dick and enjoy your retirement and thank you. Thank you very much, everybody, for joining us. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Presenters, please remain on line.