Earnings Call Transcript - CUBI Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Customers Bancorp, Inc. 2020 Fourth Quarter and Year End 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. It is now my pleasure to turn the call over to your speaker today, Mr. Dave Patti, Communications Director. Sir, please go ahead.

Dave Patti, Communications Director

Thank you, Ray and good morning, everyone. Thank you for joining us for the Customers Bancorp’s earnings call for the fourth quarter and full year of 2020. 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 download, use 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’s Chair, Jay Sidhu. Jay, the floor is yours.

Jay Sidhu, Chair

Thank you very much, Dave, and good morning, ladies and gentlemen. Thanks so much for taking the time to join us this morning for our call. I hope you are all safe and healthy during these unprecedented times. Joining me from different locations this morning is our President and Chief Executive Officer of Customers Bank, Carla Leibold, our Chief Financial Officer, Sam Sidhu, the Chief Operating Officer of Customers Bank, Andy Bowman, our Chief Credit Officer, and Jim Collins, our Chief Administrative Officer. These are my colleagues who make up what we call the office of the Chair at our company. We have all worked together for many years and for many of us, Sam has been with us for about a year now. So, congratulations Sam on your first anniversary with our company. Before I share my comments, I would like you to join me in saluting our team members. They have performed beyond anybody's expectations. It's easy for me to take this opportunity to share with you these very good results that we’ve achieved, but it has been extraordinary contributions from our team. About 95% of our team members have been working remotely because we don’t have branches and they have all performed beyond anybody's expectations. Your company, Customers Bancorp, rose to the challenge, while we took extraordinary steps to support our team members and their families, our communities, and our clients. I think that will become pretty evident as we share our results with you this morning. Another major accomplishment for us was that we provided support to approximately 100,000 small businesses across the country and saved at least a million jobs in America, while also adding approximately $150 million in revenues for our company. This was coupled with our core bank expanding loans while maintaining superior credit quality and managing our expenses. Another major accomplishment, which we announced in January, was the closure of the divestiture of BankMobile Technologies Inc. We are pleased to see that our shareholders own $75 million in stock, where previously there was no value based on the valuation of CUBI, which is now valued at approximately $200 billion on the New York Stock Exchange. Some highlights of our accomplishments include an increase in total loans and leases, which we recognize to be about $4.6 billion driven by PPP loans, along with growth in our T&I business and commercial loans to mortgage companies. Excluding PPP loans, we showed a 12.1% increase year-over-year in loans. On the deposit side, we recorded a 30.8% year-over-year increase in deposits, including a $2.2 billion or about 84% increase in demand deposits over one year. This is a relentless focus to improve the quality of our franchise, and we are very pleased with those results. From an asset quality perspective, our total deployments declined to about $215 million, but importantly, these deployments only account for about 0.8% of our loans excluding PPP loans. I’d like to draw your attention to page 5 for an overview of our franchise. Excluding PPP loans, we are about $18.5 billion in size. We continue to expand our loan portfolio, funded 100% by deposits totaling also $11.3 billion. Our return on common equity was 24.2% this quarter, and our adjusted pre-tax pre-provision ROA was 1.63%. This presents tremendous opportunities for shareholders, as the market cap of the company, although we’ve outperformed the market, is only about $700 million. We think there is huge potential to grow, given that we are trading at about 6.5 times last 12 months earnings, and about five times our guidance for earnings for 2021. We welcomed three new analysts who initiated research coverage on us since this is the first time they are joining us, I would like to welcome Will Curtiss from Hovde, Casey Haire from Jefferies, and Peter Vincent from Red Bush, who picked up coverage at a very optimistic time. We will not disappoint you and will be transparent while focusing on building shareholder value. We are committed to hosting an Analyst Day in the coming months where we intend to share more detailed opportunities that Customers Bancorp presents to our investors. On page 6, we position ourselves as a high-tech, forward-thinking bank with high touch. There are huge transformational opportunities available to tech-savvy banks. Customers expect these banks to not only be tech-savvy but also relationship-oriented. We are focusing on solving the financial needs of privately held companies through private banking and becoming an industry-leading digital bank with digital lending platforms supporting small businesses and consumers. We're maintaining quality balance sheets while striving for superior returns. We expect to achieve above $4 million in core earnings in 2021, reaching $4.50 in 2023 and confirming our goal of $6 in core earnings by 2026, with several paths to reach these goals. We believe there are opportunities to get there and are focused on our digital transformation to meet and exceed our goals.

Andy Bowman, Chief Operating Officer

Thanks, Jay, and good morning everyone. Starting on slide 11, overall credit quality remains strong. We are very pleased with how our loan portfolio is holding up against the economic, social, and political pressures brought about by COVID-19. The total assets stood at 39 basis points at year-end, and as Jay noted, would have stood at only 30 basis points if we had taken into account the successful resolution of a large non-performing asset earlier this month. This non-performing asset, which at year-end was a flagged hotel, was successfully sold without incurring any additional loss through a competitive bidding process with multiple active bidders. Despite this successful large non-performing asset resolution, I do not foresee significant increases going into 2021. We have retained a very strong reserve position of 1.9%, given the continued uncertainty associated with COVID-19 and the associated economic and social recovery. Moving to slides 12 and 13, regarding CECL and reserve build throughout 2020, which remains predicated upon a detailed portfolio assessment of various economic factors impacted by COVID-19. The reserve field accounts for actual charge-off rates and NPA levels, with the results for Q4 showing a reserve of approximately $144.2 million or 1.9% of loans held for sale. This equates to approximately 204% coverage of NPAs at year-end and nearly 267% coverage from the resolution of the successful large NPA earlier this month. We are confident that this level of reserves will position us well to deal with the residual effects of COVID-19 moving into 2021. Moving on to slides 14 and 15, slide 14 outlines loan deferments at year-end, showing an overall positive trend with a steady decline in deferment rates within both our commercial and consumer portfolios. The peak of $1.2 billion dropped to $750.5 million in July, and further decreased to $302 million at the end of Q3, and ending at $218.5 million or 1.9% at year-end. Slide 15 provides a granular view of commercial deferments at year-end, indicating that 95% of deferments in our investment commercial real estate or multi-family portfolio and 53% of deferments in our hospitality portfolio were principal-only. Overall, we expect deferments to remain near current levels, while significant improvement in highly impacted industries such as hospitality is likely not to take hold until later in 2021 after successful vaccination rollouts.

Sam Sidhu, Chief Financial Officer

Thanks Andy. Good morning everyone. To update you on our round one and two PPP loan forgiveness, we administered over $5.1 billion in PPP loans across over 102,000 loans, which represents 2% of all true. While the industry had a slow start on forgiveness, we have submitted approximately 15% of our loan balances for forgiveness and experienced a 99%-plus forgiveness rate. In December, Congress approved an easy application for forgiveness for loans below $150,000, which has significantly accelerated applications in the New Year. As of January 25, we have $1.3 billion of forgiveness. It's worth noting that about 94% of our loans are below $150,000, and we anticipate this easy application will encourage borrowers to apply for forgiveness more quickly, allowing for the majority of our PPP loan balances to be forgiven in the first half of the year and thus accelerating our capital realization. Moving on to slide 23, I want to talk about PPP Round 3. While it's still early days, we believe we are one of the first banks in the nation to begin collecting borrower applications on January 11th, eight days before the program officially opened. Our application portal is intuitive and customized for each applicant, leading to a specific borrower journey. We amplified our origination process by offering an end-to-end white-label program for banks and lenders across the country who are unable or unwilling to participate in this round. We have signed direct agreements with hundreds of banks nationwide, including banks with over $10 billion and one slightly over $50 billion, as well as a top five bank in the country for a portion of their customer base. The biggest change in PPP Round 3 for Customers Bancorp investors is that there is now a minimum fee of $2,500 on PPP loans between $5,000 and $50,000. Last year, over 80% of our loans were below $50,000, and previously we earned about $25 million from originating these loans. With this new structure in place, we anticipate earning over $70 million more from our share of origination fees. As a result of the strong reputation we built in Round 1 and Round 2 among SMBs nationwide, we already had over 50,000 applications in process last week. That number has now increased significantly as of today, and over 70% of our pipeline consists of new first-time customers, with an average loan size of under $40,000. We've begun funding loans last week, and on Monday of this week, we had approximately 3,000 loans approved by the SBA in just one day.

Carla Leibold, Chief Financial Officer

Thanks, Sam, and good morning everyone. Before reviewing our updated financial guidance for 2021, I thought it would be helpful to discuss the accounting and financial reporting impact of the BankMobile divestiture on our first quarter financials. The accounting for this transaction depends on the mix of cash and equity considerations we received for our ownership interest in BankMobile and whether we would own 50% or more of the newly formed BM Technologies Inc., which I will refer to as BMTX. Upon closing of the transaction, we received $23 million in cash and 6.2 million shares of the BMTX stock, which had a fair value of approximately $92 million and accounted for 52% of the equity interests of BMTX. Of the 6.2 million shares we received, 4.9 million were distributed to our shareholders as a special distribution, and 1.3 million were granted to certain team members of BankMobile as severance payments. The accounting for this transaction will be recorded in two different steps. The first step will account for the sale of a non-controlling interest under a continued consolidation scenario with no gain recognized in our first quarter earnings. The difference will be accounted for as an increase in additional paid-in capital. The second step will account for the distribution of the 6.2 million shares of the BMTX stock, which will reduce retained earnings based on our carry value. The net effect of these entries will be neutral from a capital perspective. I’ll add that the transaction will be taxable to us, estimating the tax expense related to this transaction will be between $20 million and $25 million. Now, on slide 29, as Sam mentioned, our 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 total risk-based capital ratio is expected to exceed 13% by year-end 2021, and our tangible common equity ratio excluding PPP loans is expected to be between 7.5% and 8% by year-end 2021. We project a net interest margin expansion, again excluding PPP, in the range of 3.10% to 3.30% by the fourth quarter of 2021. Non-interest income in Q1 will be projected between $9 million and $11 million, and operating expenses will be between $59 million and $61 million. We expect an effective tax rate for 2021 between 21% and 22%, subject to our continuing operations. Our earnings trend is likely to be volatile over the next several quarters due to our participation in PPP, but we do expect earnings of at least $4 of core EPS in 2021 and $4.50 in 2023. We will remain on track to earn $6 in core EPS by 2026.

Jay Sidhu, Chair

Okay. Thank you very much, Carla. Very good report from our team. I just wanted to open it up for Q&A to emphasize a few important things that we are very focused on. One is maintaining our superior credit quality and focusing on portfolio management, which remains our number one priority. Next is exceeding tangible common equity targets as we believe this increases both our franchise value and shareholder value. We are also focused on improving the quality of our funding while maintaining or expanding our margins and ensuring revenue growth while maintaining positive operating leverage expected from quality companies. Lastly, we have a relentless focus on continuing to build our technology capabilities and remain forward-thinking in taking advantage of banking as a service alongside fintechs and other clients. We believe there are significant opportunities beyond PPP that exist right now. Emily, please open it up for any questions.

Michael Schiavone, Analyst

Hi. Good morning, everyone. Can you maybe just spend a bit more time explaining your loan growth strategy, the main verticals you expect to drive it? Will it be direct or indirect? And also, how will the technology investments the company is making help scale that growth?

Sam Sidhu, Chief Financial Officer

Sure, Carla. Why don't you start with the components of the loan growth by vertical, and then I can touch on technology?

Carla Leibold, Chief Financial Officer

As mentioned before, we expect loan growth to be stronger in the first half of the year due to our core C&I business. We have a strong pipeline at this point. In addition, we expect growth in our SBA portfolio and other specialty lending businesses. We also expect to see some growth in our consumer book, focusing on direct origination.

Jay Sidhu, Chair

Core strength lies in C&I lending, which typically revolves around our private banking through established private banking offices, aided by approximately 20 teams working closely with their clients. This comprehensive approach generates valuable loans and deposits, fostering relationships that strengthen the franchise.

Steve Moss, Analyst

I'm curious about a couple of things here—how do you think about the revenue sharing this time around? Is it going to be similar to the prior model?

Sam Sidhu, Chief Financial Officer

Yes, we expect revenue share to be similar to the previous model. We’ve set agreements that are at or above prior levels.

Clara Leibold, Chief Financial Officer

We project that our total mortgage warehouse to remain between 15% to 20% of our total loan book.

Andy Bowman, Chief Credit Officer

We aren't expecting significant credit deterioration moving into 2021. Our NPA levels stand at 30 basis points.

Jay Sidhu, Chair

Thank you very much for your questions and your interest in Customers Bancorp. We look forward to working with you. Please don't hesitate to reach out for any follow-up questions, and we hope you all have a great day.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.