Earnings Call
Customers Bancorp, Inc. (CUBI)
Earnings Call Transcript - CUBI Q1 2020
Operator, Operator
Good morning and welcome to the First Quarter 2020 Customers Bancorp, Inc. Earnings Conference Call. At this time, I would like to turn the call over to Mr. Bob Ramsey. Please go ahead, sir.
Robert Ramsey, Investor Relations
Thank you, Travis, and good morning, everyone. Customers Bancorp's first quarter 2020 earnings release was issued yesterday afternoon along with our investor presentation. Both are posted on the Investor Relations page of the Company's website at www.customersbank.com. Our investor presentation includes important details that we will be discussing this morning, and I'd now encourage everyone to pull up a copy. Before we begin, I 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's CEO, Jay Sidhu. Jay, the floor is yours.
Jay Sidhu, CEO
Thank you very much, Bob, and good morning, ladies and gentlemen. Thank you for joining us for this call. I hope you all are safe and healthy. As you can imagine, we are all speaking from several different locations today. I thought it would be a good idea to have several members of our management team present to be able to answer any questions you may have, because this is an important time for everyone to understand Customers Bancorp well. We encourage you to please look at our investor deck that we have posted on our website and follow along. Joining me today besides Dick Ehst, who is our President of Customers Bank; and Carla Leibold, who is the Chief Financial Officer of Customers Bancorp; and Sam Sidhu, the Chief Operating Officer of Customers Bank, we also have several important executives from the Management Board of Customers Bank. Those include Andy Bowman, our Chief Credit Officer, Steve Issa, our Chief Lending Officer as well as President of the New England market, along with the Commercial Finance Group or the Equipment Leasing reporting to him. Also joining us is Lyle Cunningham, our Market President of Metro New York, overseeing our private banking teams, as well as the Head of our Specialty Lending, and Chicago market. Tim Romig, President of our Pennsylvania New Jersey markets, also heads our Small Business Administration group, which has been very active in the last few weeks contributing significantly different numbers than what you've seen from our peer groups. Lastly, we have Glenn Hedde, the Head of our Banking, and Jim Collins, our Chief Administrative Officer. So, if we go to Page 2 of the investor deck for the first quarter, I want to start off by talking about how privileged and proud we are of our team members who have risen to the occasion and are working remotely; 85% of them are working remotely and they have done an exceptional job serving our customers and our communities. We have implemented some special considerations including bonuses and additional incentives for them. We have had no furloughs and we have also added 2,500 zero-interest loans for our team members who are non-executive officers of the Company. I'm pleased to share with you that we are fortunate that none of our team members have been directly impacted so far by COVID-19, though there are family members who have been, and we pray for all those who are suffering right now. In terms of helping consumers, you can imagine our customer care center has been open 24/7. We have had a few branches that we have opened with drive-in windows and appointment banking. It's important for consumers to know that it is under 5% of our consumer loan customers who are in deferment right now, which attests to the quality of our consumer loan portfolio, and we will discuss more of that in detail. Regarding our business customers and the not-for-profit segment, we are very pleased to share with you that we have advanced over $5 billion in PPP loans – that’s about five to six times the average of our peer group. This has generated approximately $85 million to $100 million in revenues for Customers Bancorp, helped us attract thousands of new prospects, and we have already opened about a thousand new business checking accounts from various sources, which is multiples of what you would expect from a bank in this environment where branches are not open; we are doing it all digitally. We are in touch with 100% of our commercial clients, and we are pleased to share with you that only 8% of our commercial loan customers have sought deferment. This again speaks to the quality of our C&I business and the commercial real estate business we have been doing. As you all know, we have not focused significantly on commercial real estate other than multifamily. For our communities, I am pleased to share that Customers Bank has contributed directly or indirectly over $1 million in donations for urgent COVID-19 efforts. We have also conducted a webinar for the entire business community in our franchise, discussing how to not only survive but also thrive in the post-COVID-19 environment. I had the privilege of being invited by CNBC to share the perspectives of Customers Bank during this crisis. Moving on to Page 3, I want to talk a little bit more about the Paycheck Protection Program, as we have really outperformed our peers. The results have shown our ability to assist smaller-sized businesses across our communities. We developed partnerships with several SBA-approved and other fintech platforms to expand our reach and ability to aid our customers. I am pleased to share that as of Friday, 75,000 small businesses established a relationship with Customers Bank, and we were able to offer them a little over $5 billion in PPP loans. Our average loan size was in the low-70s, which is well below what you've normally seen from some of the banks we were competing against. We expect to add approximately $85 million to $90 million in revenues from origination alone. Initially, those revenues will translate to approximately $1 million in net interest income within the first two months, potentially leading to significant future earnings depending on forgiveness rates. The industry expects that 25% to 35% of these loans may not be forgiven and will remain on the balance sheet. We will put the outstanding loans to the Federal Reserve window for the PPP loan funding, ensuring funding availability without impacting our capital. Therefore, if 25% of these loans are not forgiven, we could expect an additional $8 million in annual net interest income. All in all, we're talking about potentially $95 million to $200 million in revenues for our company, alongside helping 75,000 businesses, and this would approximately equate to a $2.50 increase in book value or tangible common equity, just from the PPP loans. We've been conservative in our reserving, which has still added around $100 million to our reserves in the first quarter. Importantly, we would have added around $90 million to $100 million when considering net interest income. This places us in a much stronger position, having bolstered our balance sheet without negatively impacting tangible common equity. From the standpoint of loan modifications, we were very proactive in establishing deferment initiatives for borrowers directly impacted by COVID-19. We made the decision to proceed with 30 to 90-day deferments, and we are engaging in meaningful dialogues with our clients since we believe merely granting deferments is often just postponing the inevitable; we are comfortable with our asset quality and the kind of customers we have. It's critical to stay actively engaged in portfolio management. To put it in simple terms, our total deferment or relief represents 5.1% of our portfolio, with about 4.3% being consumer loan customers and 7.9% commercial clients. However, C&I deferred loans only represent 1.7%, largely because we have historically avoided industries considered higher risk; the majority of our commercial deferments have been in the multifamily sector. We're actively communicating with our clients to gauge their situations and minimize any potential credit deterioration. Each borrower that we have in deferment is currently being contacted weekly, with monthly follow-ups on every account. As we look at our first quarter 2020 highlights on Slide 4, we reported $7 billion in GAAP earnings after providing $23 million in provisions in Q1. Our PPNR, or pretax, pre-provision net revenues, stood at $38.6 million, showing a robust 53% increase over the previous first quarter. This was driven by a 37% year-over-year rise in net interest income and an 11% increase in non-interest income. We’ve bolstered our reserves by over $100 million since the last figures we reported at 2019 year-end, and our current reserves now stand at 2.1% of our total loans. This is an increase from 0.8% for the same period in 2019, and it contrasts with 1.7% reserves for all regional banks in the United States, aligning with the industry’s measures of risk. Within the overall statistics, our reserves account for around 6.5% of our consumer loans, and our reserves equal approximately 240% of our non-performing loans, which are currently at 0.6% as of March 31. We’ll discuss this more in detail later. Our loan portfolio has grown by 18% year-over-year, demonstrating our robust performance. C&I loan growth was a notable 29%, while we have been gradually reducing our multifamily loans over the past few years, revealing a 36% drop from last year. C&I loans constitute more than 50% of total loans, and when factoring in commercial real estate (including multifamily), that portion expands to 33%. Without including multifamily, commercial real estate comprises just under 10% of our overall loans; meanwhile, our other consumer loans—spanning home improvement loans, personal loans, and student loan refinances—account for only about 13% of total loans. Our mortgage portfolio stands at around 4%, with absolutely no subprime loans present. As for deposit growth, our deposits rose 13% year-over-year, with demand deposits seeing an impressive 38% increase. In terms of capital maintainability, our CET1 and Tier 1 risk base stood at 10.7% and 12.3%, respectively, as of March 31, alongside a Tier 1 leverage ratio of 10.1% at Customers Bank. Excluding CECL, tangible book value showed a stable $801 million or around $25.50 per share, while including CECL, it stood at $23.51. With the inclusion of the revenues from PPP, it is back up to $25.47, although we anticipate some timing differences regarding capital recognition attributed to the loans. According to Slide 5, our year-over-year financial highlights indicate Tier 1 equity capital increased by 9%, maintaining a CET1 ratio of 10.7%. PPNR surged by 53%, with PPNR ROAA (Return on Average Assets) improving by 29 basis points. Our adjusted PPNR return on common equity rose significantly to 17.4% at March 31, a 570 basis point improvement year-over-year. We have shared with you our insights on the loan portfolio and demand deposit growth, amounting to 38% year-on-year, coupled with an 11% rise in our non-interest income and 37% uplifts in net interest income. Regarding Slide 6, you can observe the tangible book value per share figure, noting the $25.60 position, demonstrating that we are trading at 43% of tangible book value. Over the last few years, as expected, our book value per share has demonstrated year-on-year growth between 8.5% to 9%. If we move to Slide 8, we will highlight our focus on risk management and the five primary risk management priorities we have. These are: portfolio management to maintain superior asset quality; preserving and expanding our margins—separate comments will follow on that; ensuring strong liquidity; prudent capital management and allocation; and lastly, focusing on sustaining and improving profitability. Slide 9 delves into the portfolio management that we are fixated on, specifically on conservative underwriting standards. As Andy Bowman, our Chief Credit Officer, will detail in a moment, we have taken a conservative approach by assessing scenarios that allow us to ascertain how our loans stand during a recessionary environment. We proactively disentangled higher-risk loans while focusing on those that are more robust. In regard to our margin, we anticipate it to be at the end of 2020. Predominantly, our margin expanded by 40 basis points year-over-year while we are targeting a margin above 3% by the year-end and staying above that point throughout the year. We believe it is more critical during this period to focus on preserving our margin and ensuring a stronger balance sheet compared to merely boosting loan volumes. Hence, everything we do revolves around disciplined credit quality and pricing, alongside minimizing high-cost funding. As per our liquidity practices, strong demand deposit growth and core deposits have already been highlighted, which contribute to decreased reliance on borrowings. Our loan-deposit ratio, excluding our mortgage warehouse business, sits at 87.5%, with over $3 billion in excess of 30% of our average assets remaining highly liquid. I’d like to share that we do not see any reason that would push us to redeem our preferred stock this year considering its callable status. Last year, based on our pre-recession strategy, we opted to add $100 million in capital during the third and fourth quarters, with the PPP also projected to add around $85 million to $100 million to our equity capital in the upcoming weeks. Notably, both the bank and the holding company remain well above well-capitalized status while aiming to preserve profitability. Our PPNR is exhibiting remarkable growth. Though uncertainty exists, we confidently anticipate placing ourselves in the top quartile of peers with our return on average assets and return on equity targets that remain in the range of 1.25% ROA and 12% ROI, eventually leading to an EPS figure of around $6 within approximately five or six years amid the COVID challenges. As we shift to Slide 10, we can elaborate on our asset quality and the makeup of our commercial loan portfolio. Our C&I loans account for roughly $2.6 billion, with Middle Market and Business Banking at $1.5 billion, Specialty Lending at about $675 million, and Equipment Finance reaching approximately $364 million. These segments yield an average of 4.7%, demonstrating the solid composition of a well-diversified portfolio. Our Mortgage Warehouse Lending unit shows an asset average outstanding of $1.8 billion, up by 46%, and we hold 55 top-quality mortgage clients across the nation, resulting in a significant positioning as a major lender in that market. Our commercial real estate lending has taken a back seat over the years, especially concerning retail sectors. The portfolio in this regard indicates a year-over-year downturn of 20%, with multifamily loans now around $2.1 billion—a radical 36% decline. While we are adhering to high-quality opportunities, we will act with caution, prioritizing disciplined pricing and underwriting practices. For our consumer loans, we have diversified our portfolio, intending for growth while exercising caution and making those decisions drawn from data insights, aiming to restrict our exposure. Our consumer loans total $1.3 billion, reflecting the absence of subprime loans. I will now invite Andy Bowman to share insights into our credit culture, and what that means for our business.
Andy Bowman, Chief Credit Officer
Absolutely, Jay, and thank you, and good morning everyone. I'd like to take a few moments to share why we believe the bank is well-positioned to maintain robust credit quality metrics throughout this challenging economic period. First and foremost, we have a highly experienced and well-seasoned 49-member credit team. Our credit officers, spread regionally throughout our footprint, average over 20 years of credit management experience and many have between 25 to 30 years. Personally, I have been in the credit industry for 32 years. Our credit culture is conservative, prioritizing sound underwriting practices and highly interactive portfolio management, structured through our single point of contact customer-facing model. In 2019, we initiated a strategy to run our various credit lines of business as if we were in a pre-recessionary environment, assessing their portfolios to evaluate performance in a recession. This also led us to implement exit strategies for high-risk credits, increasing staffing in portfolio management and loan workout segments. Enhanced communication frameworks were established between our relationship management teams and borrowers, facilitating proactive measures, such as payment deferral options and leveraging our SBA preferred lender status. Notably, while assessing our overall commercial loan portfolio, our major lines of business, such as mortgage warehouse lending and multifamily lending, have historically shown resilience in stressful economic times. I would now like to hand the floor over to Dick Ehst, our President and CEO, to review our overall loan portfolio management moving forward.
Dick Ehst, President and CEO
Thank you very much, Andy, and thank you to everyone who has taken the time to listen to our story today. Listening to Jay reminds me of the passion that has fueled our company for over a decade—the creation and retention of jobs. Our role as a conduit for financing to the 77,000 customers and applicants we've processed, totaling $5 billion as Jay noted, showcases the essence of what Customers Bank represents. Following along with the program, let me direct you to Page 11 of the deck. Here, you will observe the behavior of various portfolios within the Company over recent years, highlighting the consistent growth of our C&I loans, stabilization of investment CRE loans, while noting the downturn of multifamily loans. Our business model operates under a single point of contact approach, ensuring each commercial or business customer has a dedicated team providing comprehensive banking services. The credit experience of our teams averages 30 years, which showcases our continuity and expertise. Our banking efforts primarily span from New England to Northern Virginia along the I-95 corridor, with specialized groups such as our Commercial Finance team led by Sam Sidhu in Portsmouth, New Hampshire; Lyle Cunningham leading our Specialty Finance and other market leaders including Steven Issa in Metro New York and Tim Romek in Pennsylvania and New Jersey, all emphasizing market-centric lending. Additionally, our mortgage banking business operates on a national scale, with our SBA program considerably magnifying our reach. To reassure about our credit quality, let's delve into our exposures: Currently totalling $64 million across around 120 restaurant accounts, our LTV varies from 70% to 75%, primarily centered on leased or owner-occupied properties. The second area of concern is hotel exposure, which currently stands at $395 million. About 60% of that relates to flagged properties like Marriott, Hyatt, and similar brands while 25% falls under seasonal resort facilities, and the remainder various entities. We have about $211 million of hotel loans subject to deferral, while a significant 15% of our hotel portfolio is contracted for use by government authorities. Conclusively, I will now ask Sam Sidhu to elaborate on consumer loan strategy.
Sam Sidhu, Chief Operating Officer
Thank you, Dick. Good morning everyone. We understand this call is taking longer than expected, but it’s imperative considering our current environment. On Slide 15, I will walk you through our consumer business model. Our total consumer portfolio is approximately $1.7 billion, providing diversification. We offer home equity and residential mortgage loans in conjunction with unsecured consumer loans acquired through partnerships with third-party fintech firms. Over recent years, we've seen online lenders evolve from a small fraction to an expected market leader which necessitates a change in how we engage in our lending practices. Our approach thus far has resulted in a hybrid strategy comprising both direct originations and collaborative agreements with leading online lenders. As we progress into Phase 3, we align our digital banking assets to integrate our deposits with consumers at a broader scale. Our current FICO average stands at 744, without any subprime exposure. Our borrowers maintain a low debt-to-income ratio, with almost half keeping ratios below 20%. Our geographical distribution lies in line with population dispersal across the U.S., while our employment statistics reveal that half of our borrowers are in professions such as healthcare and education. We consistently monitor our use of funds, driving stability within our portfolio. Moving to Slide 16, we must highlight again there are no subprime loans in our portfolio, underlining the importance of our risk management practices. Regarding our residential and home equity businesses, we regularly evaluate to ensure sound capital allocation. If we transition to Slide 17, as previously communicated, we deliberately slowed growth in our consumer business, tightening our credit standards by raising the FICO cutoff to those above 700. We also adopted natural disaster deferment plans between 30 to 90 days. As of April 25, we reached 4.27% on the portfolio's deferment, which is a notable decline from $34.9 million in March to under $17 million by April 24, signifying a 50% reduction. With a substantial share of loans attributed to our Upstart platform, we are proud to report we are operating under 4% in deferments—well beneath industry peers. Slide 18 reflects outstanding credit quality; our metrics reveal a substantial fall in delinquency compared to our competition. Historically, we recorded around 53 basis points; notably, only one credit caused fluctuations, concerning a Class A office building which should close transaction for sale soon. I will now turn it over to Carla Leibold to explain our CECL process.
Carla Leibold, CFO
Thanks, Sam, and good morning, everyone. The following slides, specifically focused on our CECL adoption effective January 1st and the reserve adjustments in Q1 2020. At the end of last year, we held an allowance for loan and lease losses of $56 million, or approximately 80 basis points. The day one adoption at the beginning of this year resulted in an 80 million impact. As previously mentioned, our economic outlook at the start of the year assumed a pre-recession phase. Consequently, we applied Moody's S3 baseline scenario at the end of 2019, along with qualitative adjustments to determine the total allowance for credit losses of 136 million—an increase of 141% compared to the previous allowance. We then factored in net charge-offs from Q1 totaling about 6 million and portfolio balance changes which added about 10 million to our allowance balance. At March 31, we revised our CECL framework using Moody's baseline and went through a disciplined approach similar to day one, which resulted in an allowance for credit losses of 152.6 million, with a coverage ratio of 2.10%. Our provision expense in Q1 amounted to 22.3 million. Slide 20 provides insight into our healthcare investment portfolio as of March 31st, detailing the amortized costs, estimated lifetime loss rates alongside the associated provision expenses by lending type. To highlight, our coverage of 2.1% offers prudent credentials, surpassing the industry average of 1.7% for regional banks and 1.3% for mid-cap banks. Addressing our initiatives to preserve margin outlined on Slide 22, we illustrate the notable advancement in our balance sheet restructuring over the past six quarters, which saw yields on interest-earning assets decrease marginally, while the cost of interest-bearing liabilities dropped significantly. Our expectations indicate further deposit cost reductions in the latter half of this year, while our aim for a margin above 3% remains unchanged—not accounting for the SBA PPP loans incorporated into our balance sheet strategy. Reinforcing our liquidity management, we actively monitor strong deposit growth, demonstrated via decreased core loan to deposit ratios reflected on Slide 24 at 88% around March 31, 2020. Our liquid asset averages remained at $3.2 billion in Q1, prominently featuring our mortgage warehouse portfolio of $1.8 billion, designated as self-liquidating under stress conditions. Importantly, we maintain access considering how our PPP loans are pledged to the Fed's lending facility, reinforcing our favorable capital treatment. Our capital ratios, as depicted on Slide 26, reflect markedly above the required well-capitalized metrics, and we will defer our CECL impact over the five-year transitional period. Discussing profitability through Slide 28, our GAAP earnings were reported at $0.22 for Q1, while core earnings stand at $0.26. Adjusted PPNR reported a $38.6 million figure, marking a 53% year-over-year growth, with net interest margins amplifying by 40 basis points. By Q1, both consolidated and business banking efficiency ratios showed signs of improvement compared with last year's figures. On Slide 29, the trends in noninterest expenses provide insights into the past years, denoting the substantial costs alleviated by renegotiating vendor contracts last year. We anticipate upcoming expenditures to level out in the coming quarters. I will now turn it back to Jay.
Jay Sidhu, CEO
Thank you so much, Carla. And I apologize for the duration of the call; however, it is essential to cover considerable details in our discussion. To summarize key takeaways: First, the Company is exceptionally positioned to execute our strategies for 2020 and beyond. NIM should remain above 3%, and I reiterated our expectations for approximately 3.10 by year-end. Operating expenses, as mentioned by Carla, are expected to moderate in the upcoming quarters, with the tax rate projected to fall between 22% and 23% for 2020. Excluding PPP loans, our balance sheet by year-end 2020 is anticipated to resemble the position it held at 12/31/2019. Coupling the capital from PPP loans alongside retained earnings—given we are not buying back stock or issuing dividends—we should exhibit significant growth in our equity-to-asset ratios as we conclude 2020. Importantly, I want to emphasize the necessary commitment to the SBA PPP, which is a major initiative. Our hundreds of team members working tirelessly to execute this vision deserve immense gratitude. As I outlined, expected revenues stemming from origination fees alone hover around $85 million, while factoring in net interest income on top of that yields a potential of $95 million to $100 million. We remain focused on long-term strategies, believing our earnings per share could reach approximately $6 over the coming years, with improving ROA and ROE metrics. To maintain our NIM, we will prioritize measured growth in assets while ensuring disciplined pricing, maintaining the integrity of higher credit quality instead of aggressively expanding our loan portfolio. Lastly, I echo Carla's comments regarding our digital deposit volumes expected to reduce repricing as favorable rate adjustments are anticipated in the near future. We are advancing in our deposit efforts while strategizing targeted approaches. So, with that, Travis, please proceed to open the floor for at least 15 minutes of Q&A.
Operator, Operator
Thank you. [Operator Instructions] We do have our first question.
Steve Moss, Analyst
Good morning. It's Steve Moss with B. Riley FBR.
Jay Sidhu, CEO
Hi, Steve, how are you?
Steve Moss, Analyst
Good, thanks Jay.
Jay Sidhu, CEO
Great, thank you, Steve.
Steve Moss, Analyst
I want to start with the PPP originations here, a really big number of partnership with others. I take it the $5 billion you guys are retaining pledging. Just kind of wondering, how you structured this partnership with the fintech partners and perhaps any lender liability or any other color you could share there?
Jay Sidhu, CEO
Steve, I'll ask any my colleagues, please jump in if I didn't answer the question completely, but there is no lender liability because we are an approved SBA lender. We know how to do this business. This is a business that we've done in accordance with SBA regulations. We've looked at outsourcing many of the servicing functions under our SBA approved agreement to ensure we can efficiently serve these clients. Approximately a little over $1 billion was processed directly by our relationship managers, while the remainder was accomplished through partnerships with various high-quality fintechs. And this opportunity has undoubtedly transformed our business model to cater to small businesses and non-profits effectively. Sam or Tim, would you like to contribute anything else?
Sam Sidhu, Chief Operating Officer
No, I think that was a good summary, Steve. The liquidity is very important, as Jay and Carla mentioned, and we intend to pledge all to the PPP lending facility. If there is a chance that some portion of these loans are not forgiven, they will remain on our balance sheet but we will still enjoy the benefits of the facility, leaving us with shared risk with the Fed and ultimately generating income over the next two years for the portion that isn’t forgiven.
Jay Sidhu, CEO
So the bottom line is, there is no credit risk, there is no operating risk. We are navigating through servicing issues, and it allows us to engage with these clients who will be encouraged to become primary banking customers of ours.
Steve Moss, Analyst
Great. That's helpful. And then in terms of CECL here, a big day 1 build and obviously big provision here. It sounds like you guys used the late March Moody's numbers. Kind of wondering, given that the economic scenario deteriorated after March 31, how you all are thinking about the provision for the second quarter?
Jay Sidhu, CEO
That's a very good question because, as Carla shared, we used a multi-tiered qualitative analysis as we preemptively considered that we would enter a recession, alongside the fact that we were operating based on that assumption. We’ve relied on a systematic approach with Moody's assessment to align with our internal evaluations. Since this economic environment is uncertain, it’s prudent for us to hold off on fully guiding what to expect for provisions in the forthcoming quarters, though we are focusing on conservatively reserving until we have more clarity.
Steve Moss, Analyst
Okay. That's fair. And then in terms of the -- just wondering what the total restaurant and hotel exposure you guys have at the current time and what loan-to-values are there?
Jay Sidhu, CEO
Sorry, that we kind of jumped over there a little bit. But our exposure is minimal, and Andy, maybe you have those numbers.
Andy Bowman, Chief Credit Officer
Yes, absolutely. Our total exposure in the restaurant industry is very minimal. In aggregate, right now, it stands at about $64 million across approximately 120 customers with varying degrees of aggregation. In terms of LTVs on those properties, many fall in the 70% to 75% range depending on if they are leased or owned.
Jay Sidhu, CEO
And Andy what percentage of these loans are linked to national chains compared to independent restaurants?
Andy Bowman, Chief Credit Officer
Yes, I would estimate out of that $64 million, somewhere around $20 million is tied to franchise restaurants—Dunkin’ Donuts, Taco Bell, etc.
Steve Moss, Analyst
Okay, great.
Jay Sidhu, CEO
What about hotels?
Andy Bowman, Chief Credit Officer
Sure, our total exposures to hotels right now amount to about $395 million. This represents a small portion of our core portfolio. Of that amount, flagship hotels—Marriotts, Hyatts, etc.—account for around 60%, while 25% pertains to established resort-type hotels. The remainder is further segmented.
Steve Moss, Analyst
And I think Andy, if you can comment on what percentage of our hotels are considered strong borrowers at this point?
Andy Bowman, Chief Credit Officer
Currently, about $211 million of the hotel loans are in deferment, while the others are paying as agreed. Additionally, approximately 15% of our hotel portfolio is secured by contracts with government authorities for use of facilities for displaced persons or similar purposes.
Steve Moss, Analyst
Okay, great. And do you have the loan-to-values on those hotel loans?
Andy Bowman, Chief Credit Officer
Our underwriting typically begins at a 65% loan-to-value based only on real estate; we do not assign value to furniture, fixtures, or equipment.
Steve Moss, Analyst
Okay, great. And then just in terms of the margin moving forward, does your margin guidance include or exclude the PPP loans?
Jay Sidhu, CEO
It excludes any impacts from PPP loans. Our adjusted margin forecasts placed the projection around 3.1% for year-end, successfully meeting targets for our overall objectives.
Michael Schiavone, Analyst
Hi, good afternoon, everyone. This is Michael Schiavone from KBW. Thanks for taking my question.
Jay Sidhu, CEO
Yes. Welcome, Michael.
Michael Schiavone, Analyst
On the day one CECL adjustment, it was a bit more than we expected. Can you talk about what drove that? Because I think it's correct to assume that the COVID-19 should not impact that figure, right?
Jay Sidhu, CEO
That is correct. What impacted our day one figure was our history through mid-last year whereby we anticipated a recession occurring in 2020, hence we proactively adjusted our strategies and tightened our underwriting practices as well as shifted focus on risk management, leading to higher conservative reserves by management. The inputs we used were meticulously evaluated to align with our portfolio performance expectations in a recessionary environment.
Michael Schiavone, Analyst
That's helpful. Thank you. And on expenses, how much of the build was due to some of the COVID-19 actions you outlined in the earnings release? Additionally, what were the primary drivers, and can you comment on expected run-rate from here?
Jay Sidhu, CEO
Carla, would you like to take that on, please?
Carla Leibold, CFO
Yes, of course. Year-over-year, our expenditures rose due to a few notable items. First, we incurred a $1 million legal settlement for a partial settlement associated with our DOE. We also included an increased reserve for unfunded commitments, amounting to $22 million focused on our loan and lease portfolio. Additional expenses added $800,000 related to unfunded commitments appearing on other non-interest expense lines. Furthermore, we allocated increased funds towards cash-related items like depreciation associated with capitalized development costs for technology implemented in 2019, along with other technology-related costs that weren't capitalizable. Overall, we expect our operating expenses to moderate moving forward in the next few quarters.
Michael Schiavone, Analyst
Great, thanks. And for the PPP program, is it reasonable to assume that should help boost capital levels later this year when the revenue starts to be realized? Additionally, when would you possibly reconsider redeeming your preferred stock?
Jay Sidhu, CEO
The reality is within the next two months, the estimated 65% to 75% of revenues from the $85 million reported will materialize, significantly impacting our capital and allowing a stronger equity capital position moving into the summer. Regarding preferred stock, our policy stance remains clear: we prioritize capital in this uncertain environment; hence, redeeming preferred will be given a lesser focus. We’d assess future capital strategies while prioritizing lasting strength on maintaining our balance sheet.
Michael Schiavone, Analyst
Okay. Thank you very much for your answer.
Jay Sidhu, CEO
Thank you.
Unidentified Analyst, Analyst
Hi. This is [Tony Astazio] with [Anthony Astazio Consulting]. And you've sort of answered this question, but I just want to ask one quick about the preferred. The one coming due in June is LIBOR, and of course LIBOR is a discontinued rate. A year ago it was 2.58, which would have put that over 8%, but it’s way lower now. Have you formally determined what rate you intend to use for that variable rate preferred or as a proxy for the 90-day LIBOR?
Jay Sidhu, CEO
Carla, do you want to take that on? Did you lose Carla? Sorry, everyone; we’re all in different locations. Our LIBOR is expected to remain in place, at least through 2021. So we're using LIBOR currently.
Unidentified Analyst, Analyst
Okay, all right. You're going to use some block LIBOR even though it’s been discontinued?
Jay Sidhu, CEO
That is correct. Hopefully, it doesn’t discontinue; who knows? Yes, as you know, the Federal Reserve on the Main Street lending program had suggested LIBOR as a rate and then reverted back to LIBOR for a four-year loan duration.
Robert Ramsey, Investor Relations
Any other questions at all?
Operator, Operator
Yes, we do have a few.
Frank Schiraldi, Analyst
Hi everyone, it's Frank Schiraldi from Piper Sandler. Just quickly, Jay, I wonder if you, as you get back to the 7% TCE ratio by year-end. I know the PPP program should help significantly. Just wanted to discuss the puts and takes in the rest of the balance sheet. It sounds like the multifamily will continue to shrink, but wondering about the rest of the loan portfolio. Additionally, as you've seen good growth, it seems like in the digital deposit space and where you believe Loan to Deposit Ratio will end-up later this year?
Jay Sidhu, CEO
No, we believe the Loan to Deposit Ratio will stabilize between 85% to 90%. We don’t target building our loan book at this stage; we focus more on return on assets and maximizing our capital ratios while also maintaining credit quality and liquidity. We've concentrated on maintaining a robust equity position, significantly increasing equity by around $85 million to $100 million over the last three weeks, allowing us a strong buffer moving ahead. The balance sheet's resiliency comes from not only tightening but also increasing the reserve levels for risk exposure caused by the COVID-19 pandemic.
Frank Schiraldi, Analyst
Got you. Yes. Okay. And then just finally on, I wondered if you could share trends in loan delinquencies through the end of the quarter. And then, even if you could share through the end of April? Are those elevated, or did those just get captured by deferrals at this point? Thanks.
Jay Sidhu, CEO
That's a very good question again, Frank. Thanks for asking. Our consumers in deferment remain below 5%, and you’ve pointed out a smart question: How is the rest of the portfolio performing? I’m pleased to announce we're seeing no significant changes in delinquencies since Q4 year-end. Our delinquency rates are aligning harmoniously with our standards as we've seen numbers remaining flat. Those who choose to defer have shown positive behavior by re-engaging and making payments following the government assistance checks.
Frank Schiraldi, Analyst
Thank you.
Operator, Operator
Next question?
Unidentified Analyst, Analyst
My question was just answered. I was going to ask about borrower behavior specifically in April. If you have anything you want to add, that's fine. Otherwise, we can go to the next question?
Jay Sidhu, CEO
Thank you. That's why we decided to give you have a slightly later call, so we can give you the April buyer behavior and borrower behavior rather than being rushed to give you the first quarter earnings.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.