Customers Bancorp, Inc. (CUBI) Q2 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Customers Bancorp 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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Patti. Please go ahead.

Thank you, Alicia, and good morning, everyone. Thank you for joining us for the Customer Bancorp'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 Bancorp Chair, Jay Sidhu. Jay, the audience is yours.

Thank you very much, David, and good morning, everybody. I do want to welcome you to Customers Bancorp's Q2 earnings call. We really appreciate your interest in Customers Bancorp. Before we begin, please join me again in saluting my friend and the bank's former Chief Executive Officer, Rick Esht, who retired effective July 1st after an illustrious and a very meaningful 50 year 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 Rick. And Sam is also the President and Head of Corporate Development at Customers Bancorp. Today also happens to be Sam's birthday. Sam's vision, leadership, passion is already making a huge positive difference at Customers Bancorp. 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 Sam joining me today for this call is Carla Leibold, our Chief Financial Officer; Andy Bowman, our Chief Credit Officer. And all four of us will participate in this call and we’ll 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 4, 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 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 midsized banks. Now moving on to Slide 5, talking about our exceptional profitability and growth. As you know, our core earnings were $1.76, up 182%. Our double WPS [ph] 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% this quarter, and that was up from 68 basis points last year's same quarter. From a pre-tax pre-provision return on average assets, it was 1.8% at Q2, and that's up from 1.5% 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 an allocation of balance sheet to lower risk, higher quality, higher-yielding assets. And in spite of that, we've seen we've been able to show somewhat of a slight increase in loans and leases. And you will hear from my colleagues today that we 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 nonperforming asset ratio was only 24 basis points, and we believe that compares 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 30, 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 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 6, 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% nonperforming assets at that time. From that kind of a foundation, we built what is Customers Bancorp today. This growth has been pretty rapid, but it's not been a straight line. We paused for to build the capital, we pause to take advantage of certain opportunities. For example, we were one of the first ones in the country to build consumer digital bank and then we decided to divest it the four 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 turbine. So, that is something which is world-class in our opinion, that we have already built and we continue to improve it. From an asset quality and deposit growth, we are very, very focused and you should not expect us to have about here nonperforming assets ever as well as we are developing strategies today. When the industry is flushed with liquidity, we are building strategies 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 very strong experienced bankers, and they are complemented also with very significant technology experience that we are bringing in on to our management team as well as in our Board room. 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 C&I 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 will 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, on loan growth. 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 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 point spot rate as of mid-July, and we'll 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 and anticipation of an eventual rising 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 to the further remix of our loan portfolio as well as continued lowering of our cost of deposits with a target of around 30 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 and 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. We should expect that to continue to evaluate new markets driven by a single point of contact, team missed [ph] out strategy. Moving on to SBA on Digital 7(a), 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% anticipate an inability to make payroll in the second half ’21. And finally, the most important factor for a small business and obtaining an SBA loan at speed of decisioning. Many of these businesses don't have preexisting banking relationships and a number of them came to Customers Bank for their PPP loans. This is why we are creating a Digital 7(a) product. And 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 million 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 we'll 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 team 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 our 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 7(a) followed by term loans and credit card, all on the road map. 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 well 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 consultancy to rebrand and relaunch our omnichannel 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 into eventually into a profit center. Consistent with previous guidance, we expect our SBA gain on sale revenue to increase 4X -- four times in 2021 and have been working on a consumer held-for-sale initiative that is on a similar growth trajectory. Both are on 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, and good morning, everyone. Starting on Slide 14, outlines the quarter end, credit 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 NPAs to total assets of only 24 basis points, which is less than half of peer averages. Total 30-to-89-day delinquency stood at only 7 basis points or 0.07%, marking a five-year low and annualized net charge-offs to average total loans and leases of only 16 basis points or 0.16%. 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 deferment 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 attributes as impacted by these macroeconomic factors and account for actual charge-off rates and NPA levels. With the end result being reserve 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 point of 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 the community bank along with the best of the fintech. We are hard-pressed to find a comparable organization in midsized 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 PPP 1 through PPP 3. In this year's PPP 3, 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 center banks like Wells Fargo, Citi, TD and P&C 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 [ph] run on originations. Our borrowers have maintained a nearly 100% forgiveness rate on applications submitted. As you may have read in the 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 to the topic. 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 for 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 the proforma 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 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, the proforma 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 billion 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 our 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 ’22 and we expect to achieve $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 buybacks or redemptions. 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 past core EPS of $6 in 2025 rather than 2026, applying reasonable growth assumptions and a return on average assets of about 1.10, you can see how we hit that $6 target with assets somewhere between $18 billion and $20 billion. Before turning the floor back to Jay, I'd like to emphasize two points: one, the significant capital prediction stemming from PPP revenue and strong core earnings; and two, a proforma 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 how that 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. 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 our 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 as I recall 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 far exceeds any of the accretion that you've seen from bank mergers and acquisitions and those sort of 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, if you can open it up for questions, please.

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

Good Morning.

Hi, Peter.

Good morning. I wanted to start with the margin. If you could talk about some of the drivers to the increase in 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 3.25 is below the second quarter results?

I think Carla, if you can take it. But 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 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 has 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 quarter and 3.50 range.

Okay. Thanks. Could 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 a 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. And 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 remix and yield remixing spread, but also an opportunity to really show far above our loan growth. Andy, did I miss anything?

Yes. I think also -- and I would just add, even from a core C&I lending perspective, even with the geographic expansion, we're seeing 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 we're seeing it really -- it's not just in the special point, but also very good in the core lines -- the core C&I lines of business. And I think you see that it's a good margin business as well. So overall, all the pipelines are robust, but predominantly specialty and for 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.

Peter, I'll take that question. Yes, absolutely, Peter. It's a timing. It's a when, not if. I think the operative word is at least or a minimum of $6 in both years. You're absolutely right that if we're also saying at $4 a 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 and then 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 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 7 this year, we could make 6.50 we could make 8. But we would just take it a little bit from next year, and we don't want to have technical messes due to uncertainty on borrowers stepping up in the government review and timing. But this is also why we partnered with the SBA on their direct forgiveness platform that I touched on. That is to try to put some of this uncertainty in the rearview mirror, focused on business as usual and start getting to a 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 as well as a breakdown of the $118 million that has already been realized to date, that will help some of the modeling.

Sure, Sam. So as Sam mentioned, we are projecting 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 net deferred origination fees. That breaks down in rounds 1 to 2 by about $100 million and then $235 million relates to ground fee. So when we think about this, that’s what Sam saying about it's when not if. And so, for PPP round 1 and 2, 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 place during 2021. On round 3, the $235 million 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 a $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 your models, 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. Riley Securities.

Good morning.

Good morning Steve.

That closed really helpful. Maybe just in terms of 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, if you can just discuss your appetite for a stock buyback here and how aggressive you want to be?

Steve, we have shared with you that once we have crossed the 7.5% TCE ratio, we want to make that the absolute floor for us. And we've also shared with you today that once all these PPP revenues have been recognized, we could be at 10% TCE. So that gives us a 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 no 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. And but at the same time, if there are any market disruptions and our common equity becomes attractive, to buy back 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 preferred buyback. And you can see it's about $82 million is an opportunity for us if we do take advantage of it and that itself will save us several million dollars of after-tax income, which is accretive to our EPS.

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

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 tip.

Okay. And then in terms of the -- just going back to the margin for a moment, when I exclude PPP, it looks like they're around a 4.5 type 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?

[Indiscernible].

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, floors are starting to compress a little bit. So we just maintain a little bit of flexibility into Jay's earlier point, making sure that we had conviction on the range that we're providing.

Okay. Got it. And then just in terms of gain on sale with -- Sam, you mentioned the consumer held-for-sale initiative. Is that more we think about the gain on sale there is 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 our plan is to see to do this with regularity on a quarterly basis, 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 for six plus months. So as part of our guidance for 2021 and also part of our guidance for 2022. But if it ramps up sooner or faster, we'll be in communication 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 Perito 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 want to make sure that I was kind of thinking about it the right way. I was looking at the outlook why do you guys or the long-term guidance slide. You guys talked 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 when we look at the mortgage warehouse guidance for, I think, 1.6% to a little over $2 billion. If you take the midpoint, call it $2 billion, there's about $900 million of validation there and you still have a little over $6 billion of PPP. So is it fair and 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 billion $12.5 billion asset level as we think about long-term asset growth Carla.

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

Okay. And so...

And Mike just,

Sorry. Go ahead.

Just to put a little fine point on that. We're $13.3 billion at the end of June 30, the loan growth in the second half of the year will mitigate the prospective midpoint of the range of mortgage warehouse drops.

Got it. So obviously, it's not unreasonable. We'll make our own assumptions around PPP kind of forgiveness and the 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% over a multiyear period. I mean at least that's how you guys are kind of thinking about it today?

That's correct.

I think it will be 13%. 13, I would say, would be our floor because of what -- when we are looking at our TCE ratios, we are looking at that $13 billion to $13.5 billion.

Got it. Okay. So it's little higher. Got it. That's helpful. Thank you, guys. And then as we take strategically longer term, this slide it when appeared on [technical difficulty] 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, 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 on the and the commercial type stuff seems a little bit more and 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 multiyear 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. And then just to highlight, in the near term, many of the items that we discussed on Slide 12 are reasonably balance sheet light, the SBA business is it's a combination of retaining a portion and the 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 toward.

And the -- on the -- sorry, was that...

No, I was just -- 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 some of them. And you can make some assumptions of the opportunity that sort of thing that can have for our core low interest cost deposit franchise.

Yeah and Jay that was going to me my next question right. I mean, the technology stood up. You guys did fairly quickly soft launch in the next 60 days which is great. I think I asked a version of this question where I asked Carla but would love an update or some specifics now you can close to that launch. What’s the roadmap or the plan? I mean, I think when I think about Signature and Silvergate as you mentioned, I mean they obviously created strong networks which kind of are a necessity right now for these RTP networks to really take off and get the customers under the deposit flow. I mean what’s the sales plan, I think last quarter you had a quite a few different industries in the deck that you were targeting but would love just some additional color on where are you going to focus your efforts and what’s the kind of 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 we can appreciate there are digital asset ecosystems for example that we’ve seen Silvergate and Signature focus on. Similarly, we’re in advance discussions with many of our existing customers. So when we sort of think about a soft launch, which is really just a combination of existing customers plus counter parties and a network creation as well as new customers, while with new customers, you have to bring on the network altogether. That's we would do a soft launch at the end of the third quarter, early fourth quarter and then within 90 days to sort of a more broader 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 thing. What I would say is that in parallel, there are dedicated teams for business development and sales and relationship management and treasury as well as on the technology project manager infrastructure. So this is a -- it's full steam ahead.

Very helpful. And then just one last one for me. Sorry to keep going here. But just on capital, as I think back to the company history, right, I mean, Jay, you guys have always had pretty decent growth. And certainly, now just looking at the Slide 12, there's no shortage of opportunities for you guys to grow, and it's clearly been a really great 12 to 18 months for CUBI and there's been a lot of progress. But just as we think longer term here, 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 we'll 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 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. Having said that, with the benefit of all of the PPP capital accretion, I'd sort of say our range, which we previously were guiding toward were more 7% to 8%. That's up to 7.5% to 8.5%, where 7.5% being a minimum and a bias toward the high end of that range in the medium term.

Absolutely right. Got it. Okay. So, I think if I can just kind of comment on summarize I mean it sounds like there's you guys aren't trying to run around with a 9% or 10% handle on your capital. But relative to historical, it's fair for us to think that you're going to run with a little bit more capital relative to the peer group than maybe historically, which would make sense, right? Because I mean, historically, you guys had the multifamily book is much bigger and now you're looking at some higher-yielding assets. But I just want to make sure I'm kind of thinking about that conceptually the same way you guys are.

That's right.

Okay, excellent. Thank you guys for taking all my questions. Appreciate it.

Thanks Mike.

Your next question comes from the line of Frank Schiraldi 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 side, 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, Chicago, our deposit franchise is in excess of $750 million today, and our loan book is in excess of $100 million. So, you can see there 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 niche, certain niches which were unserved. And we think that's sort of where we have goals by each and every geography. And they are not all lending driven, like I've 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 at 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 Frank, it's a deposit-driven strategy followed by loans, each one of our geographies, Chicago, Dallas and Florida are typically at least 75:25 deposits to loans. So majority deposits 3:1 on a deposit perspective, as Jay talked about sort of the deposit levels that in Chicago in Florida and Texas combined. We're tracking on a 9-figure deposit growth already in just a very short period of time. And each of them from an asset generation perspective as you appreciate a new geography should have a minimum threshold of at least $50 million to $75 million of loan growth in the first year with, frankly, an upside goal higher than that.

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

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 the team. So, we have geographies on the Eastern Seaboard, as you can imagine, that makes sense, including a reboot of our DC metro area type geography. But it's again, as we previously said, 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 Dezellem of Tieton Capital Management.

Just that -- Good morning. I had a couple of questions. The first one is relative to the SBA forgiveness platform that you announced yesterday, albeit a 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. What the FDA is seeking to do in partnership with banks and new lenders, new SBA lenders is to essentially try to create a borrower-friendly SBA platform that not only allows a sort of programmed white label type relationship with a bank or a lender as opposed to having a two-tiered process where a bank wants to forgiveness passes it to the SBA, passes it back to the bank passes it to 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 as they have created sort of a data analysis to make some determinations, especially for second draw loans, which had a 25% revenue cast 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 test via 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're 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.

Yeah, we really appreciate your interest in Customers Bancorp. 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.