Customers Bancorp, Inc. Q1 FY2021 Earnings Call

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. Please be advised that today's conference is being recorded. 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 Customers 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 the incoming President and Chief Executive Officer of Customers Bank, when Dick retires at the 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. 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. 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. The only difference between core earnings and GAAP earnings is 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 to the management of BMTX. This is all going to be historical. We would like for you to 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, which improved about 25% this past quarter, with our nonperforming assets only 26 basis points, as well as our reserve coverage of 1.71%. An important milestone is a significant increase in our capital ratios. Our bank capital ratio was 13.2% at March 31. 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 about 11 years ago to start New Century Bank. From New Century Bank, we became Customers Bancorp. At the launch of this bank, we took over a $250 million asset-failing bank, and today, it's $13.6 billion in total core assets and about $18 billion, including PPP. Fortunately, with significant contributions, we put together a highly experienced management team with an average of about 30 years of banking experience, which Dick was the one who recruited. We told Dick, you cannot retire until you find a successor whom you are very comfortable with. He recruited Sam Sidhu, who the Board appointed to be his successor, and Sam will take over as Customers Bank Chief Executive Officer effective July 1. We have also recruited several new teams, and we will talk more about those in the Q&A. From a credit quality point of view, we are very comfortable maintaining our credit profile over the next several quarters. 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. In terms of our focused strategy and long-term goals, what Dick, I, and our colleagues have been focused on is building a bank that provides single points of contact or private banking for privately held businesses, so that the customer feels the difference and wants to say, 'Wow.' We will continue to further develop in-house digital banking services for small and medium-sized businesses and consumers. We will focus on improving our balance sheet, which we believe is a very high-quality and diversified earning asset base with a stable and growing core deposit franchise. Capital allocation and risk management are always at the forefront of our operations. We are not just engaged in short-term quarterly planning but also in longer-term strategies and are pleased to share that we are comfortable reporting GAAP earnings of at least $5 a share in 2021 and 2022 and achieving our goal of $6 in core earnings by 2026. It is now my pleasure 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, which 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 the 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. As we have stated before, 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 and 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 a 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 shortly 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 12. 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 by 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 about 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 by an increase in market share in existing business units, recruiting additional teams, as Jay mentioned, for this year, with two of them in new geographies in Texas and Florida, as well as one in a new business line through fund finance. Digitization and technology expertise are 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 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 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, along with a deep dive into individual portfolio attributes affected by these factors. The end result yields 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 and 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. 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 like to really emphasize, 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 and diversification within this portfolio. These conservative attributes and diversification have played a vital role in the strong performance of the portfolio versus peers. Our consumer portfolio carries a strong average FICO of 740, is more middle-market in composition as evidenced by conservative debt-to-income ratios, has higher overall borrower income levels, features 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 these trying times, 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 strong during these trying times, 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. I would like to thank you for your time this morning, and now we will turn the presentation back over to Sam.

Thanks, Andy. As you can see, we are very focused on superior credit quality in both good times and 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. Thanks to our superior technology capabilities, we have done so despite mostly working from home. Our strategy is a hybrid model, combining the best of a community bank with the best of a fintech. We have been recognized as one of the top digital banks in the country by bankrate.com. It's 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 combines the knowledge and experience from a top 100 SBA lending team with fintech technology expertise. The same combination can be seen in our deposit efforts. We merged our relationship manager-driven deposit gathering and servicing expertise with technology to digitally market and streamline the account opening process. Digital deposits have reached $1.5 billion. CB Max Savings, a product we started in November, has generated over 1,000 accounts and $165 million in deposits in just a few months. We consistently look for ways to leverage our existing hybrid experience, lender strengths, and technology data analytics to drive additional value. One near-term example is our effort to create a gain on sale business in our consumer installment vertical using our existing team infrastructure and tech capabilities. We are piloting this in the second quarter and expect it to 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 accelerated a huge internal digitization effort that was already underway, where we have automated over 140 processes, saving over 60,000 team member hours. You will continue to see this reflected in our efficiency ratio. Next, our external partnerships that help us originate loans and deposits are driving significant impact on our financial results through, as I previously highlighted, PPP as well as our digital deposit efforts. Finally, we have created unique and bespoke embedded partnerships, delivering on our Banking-as-a-Service model that few of our commercial bank peers can emulate. We centered this around a modern API-based modular infrastructure. 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 report that we have approved over 300,000 loans for over $9 billion and generated over $400 million of pre-tax net revenues after our related costs over the life of the loan. Importantly, we are serving the truly small businesses that need the most help, with an average loan size under $50,000 in 2020 and approximately $21,000 in PPP 3. Among commercial banks, we have the smallest loan size among the top 15 lenders. We applied our learnings from PPP 1 and PPP 2 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, which 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. 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 our latest tech initiative that will improve our already strong deposit franchise with the addition of likely zero-cost core deposits. For the last six months, we have worked 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 customers 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 started evaluating this business line more than six months ago and launched 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 footprint in the verticals we 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: earnings momentum, capital, and tangible book value. Turning to slide 27, you can see we continue to build strong earnings momentum. First quarter 2021 results compared to the 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, a core return on common equity of 31%, which was up 600 basis points, adjusted pre-tax pre-provision net income of $86.8 million, which was up 11%, adjusted pre-tax pre-provision return on average assets of $1.90, which was up 20 basis points, net interest income of $132.7 million, which was up 8%, and NIM of 3%, which was up 22 basis points from the 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 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%. 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%. 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 seen 29% growth in tangible book value. At the end of the first quarter 2021, our tangible book value was $30, up from about $23 in 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 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 estimate 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 Series B preferred stock are redeemable. Redeeming both would be accretive to EPS by about $0.13. By the end of the 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 discussing leaves us 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. 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 Q4 2021. We are projecting an estimated effective tax rate from continuing operations between 23% and 24%. We 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 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 restructuring the asset and liability side of the balance sheet that was completed in Q1. Before turning the floor back to Jay, I would like to reiterate the strong earnings momentum we have built, the significant capital accretion from PPP revenues and strong core earnings, and the pro forma tangible book value of about $40, including full recognition of the PPP revenues. With that, Jay, I will turn it back to you.

Thank you very much, Carla. As you all know, over the years, Dick, I, and our colleagues have been focused on building shareholder value with a company and a bank that has a very unique strategy. We call this a high-tech, forward-thinking bank supported with high touch. I hope it's becoming clearer to everybody that we are building a bank of the future, one that is not reliant on traditional branches and instead focuses on building earning assets and a funding franchise. Over the last two to three years, we have focused on five priorities, which, hopefully, are apparent to the street. Number one, we wanted to take advantage of the BMT divestiture because we were building a company beyond $10 billion in size. That was done at a gain, and we issued a special dividend of $70 million of BMTX stock to our shareholders for their long-term benefit. We believe that this stock will become tradable this quarter, and we are upbeat about its future value. Number two, we are focused on capital allocation and management, being opportunistic. As you saw, all concerns regarding our lower-than-average TCE ratios have been addressed. We believe that we have achieved our capital goals significantly accretively. Number three, we have been very focused on the quality of our franchise and deposits. As you heard from my colleagues, we intend to cultivate a lower-cost funding structure and are expanding our blockchain-based payment systems to enhance the growth of our franchise and deposits at a better pace than before. Number four, we have worked hard on risk management, particularly on credit quality. Andy highlighted that we have minimal concentration risk, which we feel is very important. We anticipate a commercial real estate crisis based on office space, and our exposure is minimal. Lastly, as Carla shared, we are building a company focused on earnings momentum, both short-term and long-term. With that, Lisa, please open it up for Q&A.

Your first question comes from 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 colleagues to step in, but the drivers have been, and obviously, like you said, I am much more comfortable having the funds from PPP 3. 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. That's been very clear, hopefully, to everybody. Number three is our confidence in originating high-quality earning assets in this environment and seeing those margins expand. Number four is the clarity of something that we have been working on for the last several months—the blockchain-based technology we expect to implement in the second half of this year to build our core deposit funding. We believe that higher rates are inevitable and anticipate a commercial real estate recession before that. This gives us momentum for this year and confidence to reaffirm our $6 in 2026.

I would just add to that, Jay and Peter, the advent and introduction of 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 happens maybe in the second half of the year, just given a better outlook on the capital ratios?

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

We have said in the past that we are focused on shareholder value creation. If our stock does not respond and does not reach market multiples and peer group multiples, we won't be shy about buying back the stock.

Okay. And then my last question. Could you give a 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. We have hired teams in the C&I lending area right here in Pennsylvania, in New York, focused on C&I and deposit generation for private banking. We have one in Orlando and one in Dallas, Texas. We also continue to perform well with our teams in Chicago. Additionally, we have started a fund finance group, and that team is already in place. These are the teams we've added in the last few months.

Just to add, Peter, that's about a dozen new team members collectively in the geographies that Jay just mentioned. We also had one of our senior leaders move to one of those geographies to help open up an office.

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? 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 guidance for the last couple of quarters. You've been shy of it, but obviously have done well on the PPP side. So I am wondering if you don't have to allocate 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. Good morning, Casey. Glad to have you on the call. Firstly, regarding PPP, the $4.2 billion originated this year, similar to how we thought about it last year, the goalpost for forgiveness is typically what the SBA covers. That time period is a maximum of about 16 to 18 months. So that's where we see it, potentially around the middle of next year for PPP 3 originations. Regarding overall C&I, core loan growth was a bit slower in Q1. However, we are reaffirming our loan growth expectations. We see positive signs across the franchise with a strong pipeline building, and we feel comfortable with our previous guidance on loan growth.

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

It depends on how long those funds are available. The program is extended through May 31, but the funds may not last through that full period. However, while funding a good portion of this with cash to date, the PPPLF and other liquidity facilities are available for 100% financing. This won't impact traditional Customers Bank loan growth.

Okay. Great. And just circling back to capital management. So the EPS guide for this year of $5, does that presume any buyback embedded? Or if the buyback was initiated, that would be upside to that number?

All numbers and projections you have seen in the document exclude a buyback or preferred stock redemption, so this 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 going to give more color on the balance sheet restructuring. We terminated $850 million of cash flow hedges that were used to lock in wholesale funding at a fixed rate, unwinding those hedges and selling an offsetting amount of investment securities. We replaced those securities with a like book yield, expecting that restructuring to build about 15 basis points in NIM by the end of 2021. There will be some remixing of the loan that we expect to happen as mortgage warehouse hits that seasonal decline at year-end.

Good morning everyone. Congrats and best wishes to Dick on his upcoming retirement here. I want to start by 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. We don't anticipate further extension because additional funds would be required. We believe the addressable market we are approaching is somewhere in that 50,000 to 60,000 range.

That's helpful. And then in terms of share repurchases, just how should we think about that in terms of capital? You all have historically run the bank at around a 7% TCE ratio. Moving toward 10% is meaningful. Should we think in terms of 50 to 100 basis points of TCE as potential?

That is possible. We are focused on shareholder value both through stock repurchase and redeeming preferred. We will evaluate allocation based on stock performance and overall profitability. It’s a viable model for capital allocation.

And in terms of the blockchain payments rollout, how are you guys thinking about it? Should we see it primarily as a way to gather deposits? Or are you considering fee generation as well?

This is a very strategic play for us. Instant payments do not require blockchain, but SMB and corporate customers are requesting this type of service. Our priority is low to zero-cost deposits. Potential fee income could be considered in the longer term as we build the business around this.

That’s helpful. And lastly, what are the expectations for consumer installment loan growth going forward? How much do you expect will be the CUBI versus partners?

We are currently originating direct somewhere between $75 million to $100 million a month in the first quarter. We expect this trend to continue with a target of reaching the low end of the range of the 15% to 20% growth by year-end, predominantly with direct origination.

Hi. Good morning everyone.

Hi Will. Good morning.

Carla, I wanted to follow up on the discussion regarding the $5 of EPS. What does that assume for expense growth?

For expense growth, we aim for positive operating leverage. The expectation is to grow revenues at twice that amount. We forecast holding expense growth flat outside of that.

Got it. And Jay, could you expand on the comments about market expansion?

Our business model is branch-light. We focus on reaching clients without traditional branches through private banking for privately held businesses. We've targeted markets with potential growth for small to medium-sized businesses. We are currently evaluating the Orlando, Tampa, and Dallas, Texas markets and establishing offices in those locations.

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

Yes, Mike. Good to hear your voice.

Thanks for the deck and the comments. Most of my questions have been answered, but I have a few clarifications. First, regarding the buyback versus preferred conversation: from my perspective, it seems like the buyback would be more timely and strategically impactful. Is that similar to your thinking as we map out capital deployment for the next two to three years?

We believe we will be trading at market multiples in the next two to three years, which validates our future performance. Assuming success, it would be fair to conclude that all preferred stock would have been redeemed, and we will focus on buying back stock if we trade below book value.

On the blockchain payments, it started with Silvergate, right? Are you looking to compete in the crypto realm with this?

We are looking to apply the Signature playbook and replicate it. There is a vast addressable market. First, we will engage with key vendors and suppliers in the identified verticals and industries to launch our services effectively.

What is your growth game plan with these platforms? Are you targeting certain markets or players?

We need to identify key providers and partners in the targeted verticals to initiate and grow the network. This approach allows existing clients to access instant payments while enhancing our deposit growth.

We have received some questions from the webcast. Jay, can you comment on the low ratio of our PE to stock price and if you would consider a dividend on common stock?

In terms of capital allocation, dividends are part of our strategy but depend on capital recognition from PPP revenues. We focus more on performance, and the market should feel comfortable with the changes we've made regarding our capital ratios and concentrations.

Following up on Oliver's question regarding PPP revenue, does the expectation to generate over $400 million refer to all PPP vintages?

Yes, it includes all vintages. Based on our prior disclosures, it would be around $250 million-plus of PPP 3 revenue.

With that, I see no additional questions. Thank you for joining us. If you have any further questions, please reach out via the Investor Relations page. Jay, would you like to conclude?

Thank you all for your interest in Customers Bancorp. Please join me in congratulating my friend and partner Dick Ehst for his contributions. We will miss him, but he's staying on our Board. Thank you, Dick, and enjoy your retirement. Thank you all for joining us and have a good day.

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