Customers Bancorp Inc

NYSE:CUBI

Earnings Call Transcript 2020-Q4

[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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

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, Director of Corporate Communications]

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 risk 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, CEO]

Thank you very much, Dave, and good morning, ladies and gentlemen. And thanks so much for taking the time to join us this morning for our call. Hope you all are safe and healthy during these unprecedented times. Joining me from different locations this morning is our President and Chief Executive Officer of Customers Bank that is Carla Leibold is our -- as you know our Chief Financial Officer, Sam Sidhu and Chief Operating Officer of Customers Bank, Andy Bowman, Chief Credit Officer as well as Jim Collins our Chief Administrative Officer. These are my colleagues who make up what we call the office of the Chair at our company. And we've all worked together for many, many years for many of us and Sam has been recent -- one year ago. So, congratulations Sam on your first anniversary with our company.

Before I comment -- I share with you my comments -- I'd like to have you join me in saluting our team members. They have just performed beyond anybody's expectations. It's so easy for me to take this opportunity to share with you these very, very good results that we've achieved. But it's been extraordinary contributions of our team. We've had situations where about 95% plus of our team members have been working remotely because we don't have branches and really perform beyond anybody's expectations.

So does your company your bank customers, Bancorp rose to the challenge of the same time we took extraordinary steps to support our team members and their families. We took extraordinary steps to support our communities and of course our clients and I think that's going to become pretty evident now when we all share our results with you this morning.

Another major accomplishment for us was that we provided to approximately 100,000 small businesses and our profits across the country and saved in our estimate at least a million jobs across America, while we also added approximately or would add approximately $150 million in revenues for our company at the same time. So that was in addition to our core bank expanding name as well as maintaining superior credit quality and while we watched our expenses and created positive operating leverage.

Another major accomplishment in which we announced in January, but we've been working on it for some time now was the closure of the divestiture of Bank Mobile Technologies Inc., and we are so pleased to see that our shareholders own $75 million in stock as that were -- no value in that in the past based upon the valuation of CUBI and today that company is valued at approximately in the New York Stock Exchange. That's close to $200 billion dollars.

And so, it's a -- tremendous amount of accomplishments, so some of the highlights of the accomplishment the total loans and leases increased -- and we recognize that about $4.6 billion of that will be driven by PPP loans but it was also the growth in our T&I business as well as our commercial loans to mortgage companies and then you combine all of that up excluding PPP loans still we showed a 12.1% increase year-over-year in loans.

On the deposit side which is a major accomplishment of ours we recorded 30.8% year-over-year increase in deposits which included $2.2 billion or about 84% increase in demand deposits in one year and that is something which was been our relentless focus to improve our quality of our franchise and we are very pleased with those results.

From an asset quality point of view and we'll get into some of these later on our total deployments did they declined to about $215 million, $218 million but the important thing is the deployments which are two deployments which is principal and interest deployments they are only about 0.8% of our loans excluding PPP loans.

So now I'd like to draw your attention to page 5 and just to give you a overview of our franchise so excluding PPP loans we were about -- including PPP we were about $18.5 billion in size. From a loan portfolio like I shared with you we continue to expand that so excluding PPP, we were $11.3 billion.

We funded 100% of loans including loans to mortgage companies or the warehouse all by deposits, and so our deposits were also $11.3 billion and we are very pleased to report that our return on common equity was 24.2% this quarter and our adjusted pre-tax pre-provision ROA was 1.63%.

At the same time that we see tremendous opportunities for our shareholders, investors because the market cap of the company although we’ve outperformed the market in the last couple of weeks, we still think it's a at $700 plus, minus million market cap. We think there is huge potential because in our opinion we’re only trading at about 6.5 times last 12 months earnings and about five times our guidance for earnings for 2021.

We had last year three new analysts who picked us up on research coverage since this is the first time that I know all of them have joined us, I just wanted to welcome Will Curtiss from Hovde, Casey Haire, Jefferies and Peter Vincent from Red Bush who picked up coverage on our asset at a very optimistic time. And we will not disappoint you and we will do everything possible to be totally transparent and be very focused on building shareholder value.

So now we have I think seven or eight analysts who cover us and we are committed to having some time in the next couple of months, our Analyst Day also where we are -- we intend to share with you a lot more detail about the all the opportunities that Customers Bancorp presents to our investors.

If you move to page 6 it's really our key features you saw on our title page. We call you -- calling ourselves as a high-tech forward thinking bank with high touch. What do we mean by that? We mean that we think there is a huge, absolutely huge transformational opportunities available to banks who are tech savvy and digital savvy.

But at the same time that customers expect those banks not just to be tech savvy but also to be relationship oriented we are calling that high-touch. So on everything about our strategy if we want to summarize that in one sentence. It is that we are a high-tech forward thinking bank with a high touch culture as far as customers are concerned.

So if you look at page 6 or slide 6 you can see that we have -- we started about 10 years to 11 years ago. We did our IPO in 2011 I think and since from that time of the $200 million, $225 by $250 million failing bank with 35% to 40% non-performing assets of that bank but today without doing any M&A we are on an asset basis about $18.5 billion on our core bank about $14 billion in size.

And at the same time we built a tech startup and one of the first fintech in this industry and this management team averages about 30 years of banking experience and we are very focused on the fundamentals of the business which is outstanding credit quality, outstanding risk -- from other types of financial institutions that are also in the lending business. So our core deposits which is our non-interest bearing DDAs are 21% of our total deposits now and -- and we still call that to organic growth.

From a -- we are very focused on our long-term stated goal and I think so, we are very focused on solving the privately held companies through private banking for them and we are very focused on becoming an industry leading digital bank and having digital lending platforms and primarily supporting small businesses and consumers and continue to focus on the quality of our balance sheet and continue to focus on risk management capital and at the same time be very focused on delivering superior returns, which will come and measured by return on assets, return on equity, but you've got to do that by also reporting return -- reporting earnings.

So, we are giving you the guidance that we will be above $4 million in core earnings in 2021 above or at $4.50 in core earnings in 2023 and we are not shying away and confirming our goal of fixed dollars in core earnings by 2026 and we have several ways to get there.

Now, on page -- slide 7 a little bit more on what do we mean by this digital bank transformation. As you know, people always ask me how many brands that you guys have? And you know my answer, 11, too many because we got technical 12. That's how we believe it the new ways to reach your customers that finally banks and everybody in the industry recognizing the diminishing value of branches.

We built our company based upon having no branches. And so today -- done and gradually we believe we will end up with very, very few branches and less than what we have today. Our average branch size is about $950 million today and we think you will see within the next three to four years in America $1 billion average branches emerge all across America among successful banks.

Among the digital capabilities we set up about 15 months ago, fintech group that we first discussed at the KBW conference in Florida and people were scratching their heads, what is this? We hope it becomes clear to you that we have developed capabilities and we've analyzed every single technology platform that's available in this universe and how can be the provider of value to all of them.

And at the same time, they become a provider of value to us. That is how we see this because we think the technology that the distribution system, the generation of business is changing very rapidly. And yesterdays business models are not going to be relevant and as you can see that, that out of the 5,000 banks why is that there are only three or four banks who were on the list or t banks who were on the list of at the top and PPP lenders in United States and we are again going to be we believe among the top 10 PPP lenders in United States by the time this PPP one, two or three whatever one call that is done that is all because of tech focused -- our tech focused approach and working with fintech partners and we see that all as an opportunity.

At the same time we can now fully onboard commercial customers totally digitally and we at the same time have been testing and utilizing market segmentation for our consumer banking going after high net worth customers and then whatnot and then we developed capabilities where every one of our bankers today is undergoing and is continuously going to be undergoing and look at are there better digital ways to digitize all our platforms and we are not shy to be working with every single digital platform that which is very valuable like Salesforce and Docusign and ServiceNow and Snowflake et cetera to incorporate them and we have no pride in building everything ourselves while we take a tremendous pride in using what's been built and putting it to work.

We've created basically in the last 12 months operating efficiencies where we will live [indiscernible] jobs by coming up with seven -- 62,000 team member our reduction through the processes and those so far have been mainly in the back offices but once the COVID environment is behind us we will be accelerating that digital transformation again.

If you move to page -- our financial results very, very quickly. As you all know that our earnings were up 121% from quarter-to-quarter. They were up 83% year-to-year. And so, we -- we believe that only 4% to 5% of our PPP loans have been forgiven yet so far by December 31st and the other 85% to 90% -- 90% that much are going to be forgiven this year most of them in the first half of this year and that's going to really accelerate the generation of capital by this year.

If you look at the asset quality as my colleague and partner, Andy Bowman will be discussing it, we are right now at 30 basis points non-performing assets to total assets. Now because just last week we sold without taking any additional losses our largest non-performing assets on our -- on our balance sheet and -- and that is you know why we believe that -- that our asset quality will remain very strong and above average and we are confident about that.

From a deferrals point of view like I mentioned to you, our P&I deferrals are about 0.8, our total deferrals including those who are just on -- on principal-only deferrals and are paying us interest that is about 1.93% of our total loans, excluding PPP and such. And our -- from our value -- book value point of view, we are pleased to report that we are ending the year at about $28 in -- in tangible book value per share and by the end of 2021, we will be in about $32 or $33 in tangible book value per share.

If you move to slide 10, I want to talk about capital and we've been laser focused on generating tangible common equity at our company and doing it without issuing equity. And so you can see that we discussed last time. If our valuation is not totally reflective by the middle of this year, we will start buying back stock.

And so what you've seen over here is because we are determined and are we feel so confident about the future of this company and that there is no way that we will accept trading at discounts to the market. So even assuming a $50 million stock buyback in the second half of this year, you can still see about 7.5% to 8% tangible common equity to asset ratio achieved by us. When you take away any PPP loans that might go beyond our balance sheet because that is the liquid assets because always getting off our balance sheet after you've recognized all of that up the fee income.

So with that, I'd like to now hand it over to Andy Bowman to talk about credit with you. Andy?

[Andy Bowman, CCO, Customers Bank]

Thanks, Jay, and good morning everyone. Starting on slide 11, overall credit quality remains strong. And we're very pleased with how our loan portfolio was holding up against the economic, social and political pressures brought about by COVID-19 and 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’ve taken into account the successful resolution of a large NPA earlier this month.

The NPA which at year-end was a large flagged hotel, which we successfully sold the note at 1% of its written-down value as of year-end incurring no additional loss, this was done through a competitive bidding process though we had multiple active bidders.

Despite the successful large NPA resolution and although we are extremely pleased with their NPA performance overall, I do not foresee significant increases going into 2021. We've offered to retain 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 the CECL and reserve build throughout 2020 which remains predicated upon a detailed portfolio by portfolio assessment based upon various economic factors that's impacted by COVID-19 as well as we undertake a deep dive into the individual portfolio attributes that's impacted by these economic factors as noted on slide 13.

The reserve field accounts for actual charge-off rates and NPA levels and the results for Q4 being a reserve of approximately $144.2 million or 1.9% of loans held for sale. This equated to approximately 204% coverage of NPAs year-end and nearly 267% coverage as of successful large NPA resolution earlier this month. We're confident that this level of reserves will well-positioned to deal with the residual effects of COVID-19 moving into 2021.

Moving on to slide 14 and 15, regarding deferments, slide 14 outlines a loan deferment at year end and overall a very positive trend. We've witnessed a steady decline in deferment rates within both our commercial and consumer portfolios from a peak of $1.2 billion dropping to $750.5 million in July, climbing further to $302 million at the end of Q3 and also ending up at $218.5 million or 1.9% at year-end.

Slide 15 provides a little bit more granular view, touching upon that Jay previously talked about regarding commercial deferments at year-end showing at 95% of deferments in our investment CRE or multi-family portfolio and 53% deferments in our hospitality portfolio were principal only deferments.

Overall portfolio wide on the commercial side 53% of deferment were looking for deferments to remain near or at current levels at significant improvement in highly impacted industries such as the hospitality are likely not to take hold until later in 2021 after successful vaccination rollout.

Moving on and touching on slide 16 this slide basically indicates that the bank maintains a highly diversified loan portfolio comprised of multiple commercial and multiple consumer business lines. And while certain business lines have remained unchanged that you share of overall book.

What is the evidence is that throughout 2020 the bank gradually transitioned to a more well-balanced mix between investment-free and multi-family exposure and that of commercial C&I and warehouse exposure. This gradual transition throughout 2020 evidences our continued commitment in maintaining a well-diversified loan portfolio as a means to mitigate concentration risk from both the credits and revenue generation perspectives and continue to enhance the bank's overall value as a full services financial institution.

Slide 17 takes a little bit of a deeper dive into the commercial portfolio. And focuses on our exposure levels to those industries significantly impacted by COVID-19. Overall we feel the diversification of our portfolio positioned us well moving into the pandemic a significant portion of the portfolio represents the lending activity to industries not significantly impacted such as mortgage warehouse, lender finance and portions of our C&I and owner occupied CRE portfolios, it’s represented by manufacturers, wholesalers, service companies and professionals.

At year-end on a 6.1% of our commercial portfolio -- of commercial portfolio is comprised of what's termed as at-risk industries with the largest being a little over $400 million in hospitality exposure and only 3.6% of total book. Overall the bank’s exposure to at-risk industries is very limited.

Touching on slide 18 and sticking with the hospitality industry segment, I wanted to share with you some key characteristics around our hospitality portfolio and why we as an organization are quite bullish is through its ability to further weather the current pandemic.

First one nearly 20% of that portfolio are operating under a government contracts for transitional housing. 19% are comprised of high-end destination hotels located predominantly in Cape May, New Jersey, Avalon, New Jersey and Long Island New York that operated near capacity during the summer of 2020 and possess more than ample liquidity and reserves to continue to support operations moving into 2021.

Nearly 77% is supported by some form of personal recourse under guarantee agreements and 79% represents flagged facilities with a majority of the non-flagged being the destinations hotels I noted previously. Again hospitality deferments at year-end were only 31% of total book were a $125.9 million marking a significant reduction from the $301.5 million or 73% of the book in July.

The current hospitality deferments as I stated earlier 53% of principle only. And also overall we continue to see gradual improving occupancy trends within our hotels and no hospitality loans transitioned in NPA status over the last three quarters nor do we anticipate any transitioning into NPA status over the next few quarters looking forward.

Slide 19 it's really a touch upon our healthcare sector. And although it was not defined as a high risk industry there has been considerable focus around this industry segment throughout the pandemic. We wanted to share with you that overall our healthcare portfolio which is approximately $359 million has performed extremely well and we've had no payment deferment requests and or delinquencies within that portfolio. The portfolio encompasses about 5,500 beds and is quite geographically dispersed with the majority being in New York, New Jersey and Pennsylvania given the banks traditional trade area.

In addition a key component is the insurance payer mix is both private and government with the majority being comprised in Medicaid and Medicare which have both significantly increased reimbursement rates during the pandemic to help defray costs for PPE staffing as well as to deal with decreased occupancy levels as mandated by many states and the commonwealth. The portfolio predominantly is real safe secured is virtually fully backed by personal guarantees.

Sticking with a specific industry segment on slide 20 we're talking about some characteristics around our multi-family investment CRE portfolios. Overall these trends then continue throughout 2020. The decision to reduce really had nothing to do with the performance in the portfolio as I’ll share with you, the overall portfolio has performed well and predominantly it was that because of the conservative underwriting standards that we implement as evidenced by low LTVs, in-place conservative debt service coverage ratios and Boston and Philadelphia, [ph] license origination of 3.8 years.

And from the multi-family perspective around historically less volatile workforce housing. Deferments have steadily decreased reaching a local $139.9 million or 1.6% of the portfolio at yearend. And so increasing 95% of those deferments are principal-only.

Overall, the portfolio is predominately comprised of performing stabilized properties, but only managed by experienced professionals with very little speculative or construction exposure.

I'm wrapping up the credit component on my side of the presentation. On slide 21, note some key statistics around our banking to mortgage companies portfolio, which is extremely robust as evidenced by 59% year-over-year volume increase at yearend. We had $61.0 billion in turnovers throughout 2020 and that came predominantly from the refinance activity.

However, home purchase volume was strong I also wanted to note that this line of business traditionally carries a very low credit risk profile given the fact that the bank’s hold period on these individual assets is less than 30 days, 90% to 95% of these are Fannie, Freddie or Ginnie eligible.

We have a sub-100% funding rate and the traditional market sales rate of between 102% and 105%. Overall, we are extremely pleased with how one business performed in 2020 garnering nearly to 2% of the entire share of the US mortgage market.

So with that, I'd like to pass it along to Sam Sidhu, our Vice Chairman and Chief Operating Officer. Sam?

[Sam Sidhu, VC, COO Customers Bank]

Thanks, Andy. Good morning everyone. Slipping to slide 22, we wanted to update you on our round one and two PPP loan forgiveness. As you know, we administered over $5.1 billion in PPP loans across 102,000 plus loans which represents 2% of all true. You'll see that while the industry had a slow start to forgive we had submitted approximately 15% of our loan balances forgiveness and have experienced a 99%-plus forgiveness rate.

In December, Congress in the coronavirus bill approved an easy application for forgiveness from loans below $150,000, which as you can see has really 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 and allow for the majority of our PPP loan balances to be forgiven in the first half of the year. And to Jay’s earlier point accelerate our capital realization.

Slipping to slide 23, I wanted to spend a minute to talk about PDP three. Well, it's still early days, I want to let you know that we believe we are one of the first banks in the nation to begin collecting borrower applications on Monday, January 11th eight days before the program officially opened.

Our application portal is intuitive and it's customized for each applicant, a specific borrower journey which is not the way most banks are taking applications. We amplified our origination process by offering an end-to-end white label program for banks, lenders and agents who are unable or unwilling to participate in this round.

I'm pleased to inform you that today we have signed up direct agreements with hundreds of banks across the country including banks and over $10 billion, one slightly over $50 billion and additionally a top five banks in the country for a portion of their customer base.

The biggest change in PPP Round 3 for CUBI investors to be aware of 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. However we only earned approximately $25 million of our $100 million plus in origination fee on these loans. Had this structure be in place we would have earned over $70 million more as our share of origination fee. This new structure will tremendously benefit check forward institutions like ourselves who serve the smallest borrowers across the country.

As a result of the incredible reputation we built in Round 1 and Round 2 with SMBs around the country as of last Friday, we already had over 50,000 applications in process. That number has now increased by tens of thousands as of today. Again it's interesting to note that over 70% of our pipeline, are new first to our customers with an average loan size of under $40,000. We began funding loans last week and to give you perspective on Monday of this week we had approximately 3,000 loans approved by the SBA in just one day.

Now moving on to our consumer portfolio, on slide 24, again we wanted to share with you SBA in just one day. Now moving on to our consumer portfolio in slide 24 again we wanted to share with you updated metrics on our portfolio. The key takeaway is we continue to maintain a highly diversified quality portfolio of higher earners with great products that are not as impacted by COVID.

The portfolio is performing above expectations at underwriting pre and post-COVID with minimal deferrals over 80 basis points at year-end and even lower since then. Looking ahead to slide 25, again we wanted to show you that we continue to outperform the industry and are doing so today at an even better margin than during the pandemic. At peak we were 70% better than the industry despite the challenges and despite the challenges the country is facing. We are back to near normal performance.

Flipping ahead to slide 26, moving to deposits this continues to be an unsung highlight for the company. As Jane mentioned we grew deposits by $2.7 billion year-over-year and dramatically improved our mix and $2.2 billion of that growth coming in the form of demand deposits.

Our borrowings assets ratio is going to settle in the mid to high-single digits ex-PPP which is a fraction of historic levels. Additionally, our cost-to-deposits continues to decline and now stands at 58 basis points and it is expected to decline even further this year.

Now moving ahead to outlook, it’s beginning on slide 28, as we’ve previously stated we will continue to focus on building franchise value by leading into our single point of contact model, high-tech, high-touch approach. Our C&I loans are expected to grow by 7% to 10% over the next year excluding mortgage warehouse on which businesses will grow by 10% or more.

And in terms of digital lending as Jake touched on, we have an industry-leading consumer lending origination platform supported by an AI driven approach to underwriting.

We're adding new product lines to that portfolio and program including direct-to-home improvement, auto and credit cards on the roadmap in 2021.

In terms of commercial digital lending, building off of our success in PPP, we will continue to serve SMBs around the country who are underserved by their banking and lending partners. We are meeting first with an SBA 7(a) digital lending business where we are building a reputation for expedited processing with a smart credit box.

In the fourth quarter, we had a $1.7 million gain on sale and we are targeting to achieve this amount or more for each quarter in 2021. Finally, we will manage our multi-family book to $1.5 million. We expect mortgage warehouse balances to stabilize approximately around $3 billion and then down to $2 billion at year end based on Mortgage Bankers Association projections. And we will continue to evaluate that team selectively and around our target community banking markets.

Now I'd like to pass it on to Carla for financial guidance.

[Carla Leibold, CFO, Customers Bank Corporate bank]

Thanks, Sam, and good morning everyone. Before reviewing our updated financial guidance for 2021, I thought it might be helpful to review the accounting and financial reporting impact of the BankMobile divestiture on our first quarter financials.

As previously reported, the accounting for this transaction depended upon the mix of cash and equity considerations that we received in exchange for our ownership interest in BankMobile technology 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 that we received, 4.9 million were distributed to our shareholders as a special distribution and 1.3 million were given to certain team members of BankMobile and severance payments. It is important to note that the actual accounting for the transaction will be recorded in two different steps.

The first step will be to account for the sale of anon-controlling interest under a continued consolidation scenario with no gain recognized in our first quarter earnings. The difference between the non-controlling interest recorded and the cash received will be recorded as an increase in additional paid-in capital.

The second step will be to account for the distribution of the 6.2 million shares of the BMTX stock. The special distribution of 4.9 million shares to our shareholders will be recorded as a direct reduction to retained earnings and will be accounted for based on our carry value.

The 1.3 million shares given to certain BankMobile team members in the form of severance payments will be accounted for at their value of approximately $20 million and will be recorded as merger-related expense in Q1 with an offsetting increase to equity. As a result, the net effect of these entries will be neutral from a capital perspective.

Lastly, I'll just add that the transaction will be taxable to us generally based on the fair value of the consideration that we received or about a $150 million less on that investment in BankMobile which is about $25 million. So we are estimating that the tax expense related to this transaction will be between $20 million and $25 million.

For reference this information was included in the Form 8-K that was filed on January 5. I'll also add that beginning in the first quarter of 2021 the historical financial results of BankMobile Technologies for period prior to the divestiture will be presented in our financial statements as discontinued ops. And with that high level overview of the transaction I'll turn to our updated financial guidance 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 balance of commercial mortgage companies is expected to decline between $2.8 billion and $3.2 billion at March 31, 2021 and then down to $1.6 billion to $2.4 billion at December 31, 2021.

We are expecting to continue to see stronger volumes in the first half of the year and then declines in the second half of the year. The total risk-based capital ratio is expected to exceed 13% by year-end 2021 and our TCE ratio excluding PPP loans is expected to be between 7.5% and 8% by year-end 2021. We are projecting the NIM again excluding PPP loans to expand between 3.10% and 3.30% range by the fourth quarter of 2021. Also our non-interest income and non-interest expense will be impacted by the divestiture of bank mobile.

So, we are giving some guidance for the first quarter we project that non-interest income in Q1 will be between $9 million and $11 million and operating expenses excluding the -- benefits that I talked about earlier will be between $59 million and $61 million. We also project an effective tax rate for 2021 between 21% and 22% and this will be from 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 to earnings at least $4 of core EPS in 2021 or $4.50 in 2023 and remain on track to earn $6 in core EPS in 2026. I will note that our core EPS guidance does include the net interest income that we do expect to earn on the PPP.

Also our 2021 NIM expansion is expected to be achieved by mixing our loan portfolio. When we think about our loan portfolio mix for 2021 and the remaining years in our planning horizon, we see the core C&I portfolio making up about 35% to 45% of the total loan book, multi-family will be between 10% and 15%. Our investment CRE will stay flat by around that 10% mark.

Our commercial loans towards banking companies will be between 15% and 20% and our consumer growth will be approximately will be between 15% and 20% and our consumer book will be approximately 15% to 20%. Again we are focused on continuing our efforts and bringing down our deposit costs and we expect to bring them down to less than 40 basis points in the near future.

Moving to the next slide. This is just the path to getting to a core EPS of $6 in 2026. It is very similar to what we included in last quarter’s deck. It's really trying to show the significant value proposition that we see.

And with that, I'll turn it back to you Jay.

[Jay Sidhu, CEO]

Okay. Thank you very much, Carla. Very good report to our team. I just wanted to probably open up for Q&A to just emphasize their full of things that we are very focused on. One is number one. Number one is maintaining our superior credit quality. You'd never get away from both and we’ll never get away from portfolio management, although we continue to feel very comfortable about it, but it is our number one priority as our focus today is portfolio management.

Next is in terms of the leading or exceeding our tangible common equity targets that we shared with you. We are laser focused on that because we think that will really increase our franchise value as well as our shareholder value. Number three is improving the quality of our funding, while maintaining or expanding our margins along with the bulk of average revenue growth and maintaining that positive operating leverage that you expect from quality companies.

And last but not least is an absolute relentless focus on continuing to build our technology capabilities. And we intend to remain very forward thinking and continue to opportunistically take advantage of banking as a service. And that's what we call in working with -- with fintechs and other clients and prospects of us and we think that in this environment, there are very significant opportunities way beyond PPPP that exist right now.

So, with that, Emily I would ask you to please open it up for any questions.

[Operator]

[Operator Instructions] Your first question comes from Michael Schiavone from Keefe, Bruyette & Woods. Your line is open.

[Michael Schiavone, KBW]

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

[Clara Leibold]

Sure. Sam, you want to take that?

[Sam Sidhu, VC, COO Customers Bank]

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

[Clara Leibold]

Sure. So, what as we mentioned before, we do expect that we're helping business to fluctuate in the first half of the year being stronger and then levelling off to in the second half of the year and we really see that growth coming through our core C&I business.

So, we have a strong pipeline at this point in time. We do expect to continue with our SBA portfolio and some of our other specialty lending businesses.as I mentioned our commitments currently on our books and we expect those to fund over the course of 2021 and we also expect to see some growth in our consumer book to direct origination process. Sam and if you want to take it from there.

[Sam Sidhu, VC, COO Customers Bank]

Sure. Absolutely. So I’d like to touch on the impact of the technology and our approach to originating from digital first customers. But we are currently originating about $50 million to $60 million a month direct in our consumer lending portfolio. We are now up to 40% direct and our direct originations represent almost all of our overall monthly originations.

The portfolio balance has been more or less flat in 2020. But as the stimulus money has also flowed through the system we have seen accelerated pay downs. So we do anticipate that there will be as we previously stated on the consumer loan book and Carla just mentioned eventual growth. But most of that growth is going to be driven by our direct lending.

Similarly on the SBA side we have originated to-date about a $1.25 billion of remaining principal of which about a $60 million remains on our books today the rest is has been sold and we continue to service that portfolio. We anticipate that by the second half of the year to get your perspective that we will be originating about $20 million a month in our SBA portfolio based upon the technology platform that we have set up which will allow us to do smaller ticket SBA loans.

Again we've added one to two FTEs and really using our in-house technology expertise to be able to launch that platform. Similarly in the small business side, we will or in apparently define small businesses as $1 million or below within our organization.

We plan to establish a more of a direct origination platform there as opposed to more of an inbound request platform that we have today, that will kick in in the second half of the year. And we may similar to consumer lending portfolio, work with some originators on an indirect basis who are originating on our behalf within our credit box. Having said that similar to consumer lending business once we have a mature business and we built that in-house expertise and learn from our partners in the market that will again be a direct majority direct business for us. Hopefully that answers your question.

[Jay Sidhu, CEO]

Yeah. And then top of that Mike, really core strength is in C&I lending which is 100% of all usually private banking through private banking offices that we have and private banking team so we have about 20 teams that are working with the company. And these teams have their own P&L and we are very, very focused on generating loans as well as deposits, public relationship, et cetera. So, when you combine all of that we build -- we believe a very valuable franchise which cannot be copied easily.

[Michael Schiavone, KBW]

Okay. Thanks for that.and my second question just following the divestiture of bank mobile, can you guys just provide an update on your fees for capital generation and deployment going forward?

[Jay Sidhu, CEO]

I think the color given to you pretty much the guidance on you know how our income statements would look like and I have also we give you the total guidance on where you see the income coming in. So, from a capital point of view, we see you know achieving those goals, which you can translate those into -- into the -- into the capital allocation process. So, I don't -- if there is any of that specific question Mike that you had related to that?

[Michael Schiavone, KBW]

Yeah. I mean I was just trying to get an idea of what your capital like just capital deployment -- employment priorities were. But you're -- the target you provided are helpful. Thank you.

[Michael Schiavone, KBW]

And then just one more question, you -- you provided some important guidance, but can you just spend some time on how you expect PPP and as such liquidity to impact the NIM over 2021?

[Jay Sidhu, CEO]

I think we've given you the guidance on the NIM where we see the NIM to be for -- by the end of 2021 excluding PPP. That PPP as you know the accounting, it requires us to put the -- the rating agencies also through the NIM.

So, as Carla said that there will be some volatility in our earnings, but Sam mentioned to you we expect 80% to 90% of our PPP loans that we originated last year to be given in the first half of this year and they are all going to flow through the income statement generating a -- a significant amount of revenues and profitability and capital for us. It's very difficult for us and we -- we need to give you quarter-by-quarter NIM guidance, but we've given it to you for the year and by yearend.

[Michael Schiavone, KBW]

Okay. Thank you for taking my questions.

[Operator]

[Operator Instructions] Your next question comes from Steve Moss from B. Riley Securities. Your line is open.

[Steve Moss, B. Riley Securities]

Good morning. Starting with PPP I’m just kind of curious a couple of things here maybe one do you think -- how do you think about the revenue sharing this time around is it going to be similar to the prior model? And then I know this REMS should be smaller, but you guys seem to have more partners. And so just kind of curious as to how you're thinking about maybe sizing this one up versus the REMS last spring?

[Jay Sidhu, CEO]

Sam do you want to take that?

[Sam Sidhu, VC, COO Customers Bank]

Sure. Absolutely. Hi, Steve. Good morning. So from a revenue share perspective we're at or above where we were last time in terms of shares with partners and partners can also include servicing et cetera. And as we think about the origination going forward to give you perspective I think I mentioned 80,000 loans we earned about just under 2% on those loans that were below $50,000, the gross origination fee would have been 17% on those loans using the $2,500 minimum structure and our share would have been 8% after 1% agency -- agent fee of 50% split.

[Steve Moss, B. Riley Securities]

Okay. In terms of just the volume this time just going up the partners here and I guess a couple of things. One is I think you have more touch points is probably a fair assumption. And then with the banks that you have you highlighted a top five bank the number is $10 billion or $50 billion banks. How do we -- are you guys will retain those PPP loans on balance sheet or will those be retained by those respective banks?

[Sam Sidhu, VC, COO Customers Bank]

That's right we will originate process fund service forgive all those loans.

[Steve Moss, B. Riley Securities]

Okay. Okay that's helpful. And then in terms of moving on to just the reserve releases here and in your strong reservations just kind of truth as to how you're thinking about reserve trends going forward in 2021?

[Sam Sidhu, VC, COO Customers Bank]

Carla you want to take that.

[Clara Leibold]

Sure. So I'll just comment that we're not giving specific guidance related to our provision in 2021. That said, there was no belief that we recorded in the fourth quarter was largely driven by the improvement in the macroeconomic variables, we use the Moody's baseline model. We do not expect any significant deterioration in our credit quality going forward. That being said, and as an estimate you know for projections, if you were somewhere between $10 million and $15 million a quarter, the provision expense that will be seen on recent.

[Steve Moss, B. Riley Securities]

Okay. And then in terms of just -- as you’re thinking about $10 million to $15 million in provision expense, is that driven on loan growth here or just covering charge-offs as I think about that?

[Clara Leibold]

A combination of both I would say, some loan growth as well as some charge-offs. We have factored that in as well.

[Steve Moss, B. Riley Securities]

Okay. And then one more question if I may just on the multi-family fund. I’m thinking about the balance sheet mix. You guys are here at the slide deck, the loans are about 20 years old at this point, and usually it’s about before you start to see revised --story by the way it was sort to pick up. So you guys owe to the bank about a $1.5 billion I think by year-end, kind of curious as to what are the dynamics and drivers that you see keeping or it is only a modest decrease in 2020?

[Sam Sidhu, VC, COO Customers Bank]

Yeah. So, we are expecting to keep about that $1.5 billion in multi-family book. So you're right. We will need to replace that one-off, so as we think about the different markets where we can add some additional multi-family lending and we are considering that. I feel confident that we will be able to replace that one-off to keep our multi-family about kind of 15% of our total book.

[Operator]

There is no further question at this time. You may continue.

[Dave Patti, Director of Corporate Communications]

Okay. Thank you. We do have questions online. We’ll take questions from three individuals Jay, and I'll read them to you. Some of these things we probably touched on, I'll read the questions so that the questioner knows that they’ve been asked. The first comes -- the first five questions come from Casey Haire from Jefferies. Jay, the first question that he describes is a big picture question, why not buy back shares of 75% total book value with a 10.6% capital -- Tier 1 capital ratio rather than grow loans that are in the mid to high-single digits?

[Jay Sidhu, CEO]

Yeah. Casey this is absolutely right and we will buy back but right now we see a huge opportunity to build capital by expanding our balance sheet temporarily through the PPP loans. But I want to be very, very clear that if we are not trading at least at book value, which I shared with you, which is going to be somewhere between $32 and $33 by the end of this year, we will be buying back stock.

And but do not expect us to make it a priority to buy back stock in the first half of this year. That should be more off the second half of this year. We think that will be after we've -- we've gotten in excess of 7% PCD ratio and we've already taken to our balance sheet majority of the revenues that we are getting from PPP 1 and PPP 2. We -- obviously we will continue to get more revenues from this so called PPP you know initiatives that that is going on right now, but we will deploy our capital appropriately and -- and we are not going to be shy to buy back the stock if we’re trading below book.

[Casey Haire, Jefferies]

Okay. Thank you. The second question is about NIM. And Casey asked what is new money yield on loan production and which deposit bucket makes the biggest contribution to getting down to 40 bps as the cost of deposits?

[Jay Sidhu, CEO]

Yeah. Okay. So, first of all next quarter around Casey come on into our -- into our section where you can ask these questions directly. And so obviously I think the interest-bearing deposits money market as well as interest-bearing DDAs, those are the ones which offer the greatest potential for us to decrease our cost of funds. And from the average yield that we’re getting on the loans right now, it's running between 3.5% to 3.25%.

[Dave Patti, Director of Corporate Communications]

Okay. Casey next question is about mortgage warehouse. And so, as MVA forecast is down about 20% versus your guidance are down about 40% in 2021. What percent concentration are you targeting for mortgage warehouse long-term?

[Jay Sidhu, CEO]

I think again Carla give you that guidance. We’ve expect that to be Carla, you want to reiterate that. I just want to make sure the numbers.

[Clara Leibold]

Yeah. We are expecting our total mortgage warehouse to be between 15% and 20% of our total loan book. And as I mentioned earlier, we expect the volume to be strong in the first half of the year to lag a little bit in the second half of the year. So, at the end of the first quarter we're expecting somewhere between 2.8% and 3.2%. And at the end of the year somewhere between 1.6% and 2.4% from an average balance perspective for the full year somewhere between 2% and 2.5%.

[Dave Patti, Director of Corporate Communications]

Thank you. Next question Jay is what do we see as the allowance for credit loss landing spot versus a 1.9% rate? And how quickly does can we get there assuming no change in the forecast?

[Jay Sidhu, CEO]

I think Carla shared a good view, clearly we use the Moody's model this time around and we get quite a big effect of S3 as well as politically adjustments to trying to keep the good to be conservative and looking at our reserving because of the uncertainty in the environment. That's pretty consistent with some of the more forward thinking banks.

And so, we will be conservative on our ARPU and that would be aggressive. And it allow obviously the actual amounts will be dependent upon our forecast for the future economic activity as well as the trends that we have seen in our portfolio. We are seeing very strong credit quality and indeed shared with you some details.

So, we do not envision a significant change in our coverages as of right now. And I think the guidance that Carla gave which is principally for growth and charge-offs in the consumer portfolio which has by nature we’ll have $25 million to $30 million in charge-offs in a year and that's why having a $10 million to $15 million a quarter in growth in -- or rather in provisions is a good number as we see it.

[Dave Patti, Director of Corporate Communications]

Okay well and Casey final question it’s probably a good one for Sam. Sam can you give us what's our estimate for the magnitude of this new round of PPP?

[Sam Sidhu, VC, COO Customers Bank]

Thanks Jay. Casey it's difficult to say at this point in time I think you can back into basically the average loan size of approximately what the pipeline looks like. One thing that is unique about banks and fintech lenders that have application portals available online which don't require you to be a pre-existing customer of that institution as that there it could be a tendency to have multiple applications with a couple of organizations.

So as we sift through the pipeline in the next -- in the coming weeks we'll have a much better sense but we feel pretty comfortable based upon the pipeline that approximately half of the origination volume that we did last time around it feels to be the base case.

[Dave Patti, Director of Corporate Communications]

Three questions from Peter Winter of Wedbush Securities. And this first one I think we answered but let me read it again in case anyone wants to elaborate as the economic outlook improves where do you think the allowance for credit loss ratio could fall to?

[Clara Leibold]

So, I think we've already addressed that previously. Again, I’ll say that we are not expecting any significant credit deterioration on the horizon or on the short-term horizon. That being said, it's difficult to predict where we'll end up at the end of next year. I will just repeat that. We're -- if we’re using an estimate of somewhere between $10 million or $15 million of provision expense a quarter, that seems reasonable.

[Dave Patti, Director of Corporate Communications]

Okay. Thank you, Carla. And Peter’s next question involves NIM guidance. And so, with our -- with our guidance that we will expand to the 3.10% to 3.30% range without PPP in -- in for what are some of the drivers that we take to get to the high-end of that range?

[Clara Leibold]

So I'll -- I’ll just give a little extra color to it instead and explained upon some of Jay's earlier remarks. Again, we remain focused on continuing our efforts. We've made significant progress in reducing our cost of deposits. We do have a little north of $600 million of CDs that are available forre-pricing in 2021. About $500 million of those will re-price in 2021 and about two-thirds of those willre-price in the first half of the year and then right now the cost is about $115 to $120 range. So, there's some significant ability there to bring down the overall cost of deposits.

[Dave Patti, Director of Corporate Communications]

Thank you. And Peter's final question is -- is returning to the credit losses. Peter asks what's the range for net charge in 2021? It was only 20 on bps in 2020? And secondly, is there potential only higher stress as the remaining loans come off of deferral?

[Andy Bowman, CCO, Customers Bank]

Yeah. This is Andy. And, yeah, I'll handle that one. I think it's probably kind of mentioned, right. We're looking at that $10 million to $15 million loss rate per quarter. And I think that's really realistic given where we stand today from the quality of the overall portfolio and the aggressive stance we've taken in moving off non-performing assets. I think it's evidenced with the first quarter -- sorry, the first month move to the hotel asset up in Massachusetts. And concerning stress on the portfolio as far as loans coming off of the deferment. We're not really haven't seen that in the loans coming off of deferment today.

They've been successful in coming off of the deferment. We don't feel there's a lot of significant stress on those assets. We did longer term deferments on those assets and did very sound forward looking cash flow analysis on those assets to ensure that between the deferments and the payments as well as to build cash reserves on their end to operations that they will be able to get through all of 2021 as we really think that it's going to take to the end of 2021 for this economic cycle to really fully recover especially for those industries that have been highly impacted such as hospitality.

So what I can really share and those have been coming off of deferment today to date have been coming off successfully and we think that trend will continue. And for those specialty hardhead industries or at-risk industries we have made sure in working very closely with those borrowers that they're in a position to weather all 2021 when we get back to somewhat semblance that normalcy moving forward.

[Dave Patti, Director of Corporate Communications]

And Jay we have a final question from the Web from Daniel investments and then Steve Moss have the follow-up that he will give to you. Daniel ask realizing the PPP initial processing fees are taken into income over life of the loans how much was taken into the income in the fourth quarter and approximately what do you estimate will be taken into income in the first half of 2021?

[Jay Sidhu, CEO]

Carla?

[Clara Leibold]

So I think if just a little bit of color around what we’ve recognized today on our PPP loans. So in response to the fourth quarter from a net interest income perspective we've recognized about $30 million of the interest income there was about $17 million of that that was really the recognition of deferred fees we did have some level of forgiveness in the fourth quarter.

Year-to-date 2020 there was about a total amount of $65 million of interest income recognized on the PPP loans and a little over half of that was from deferred fee recognition. So that gives some color on the first half of 2021 we haven't given specific guidance on that but we are still projecting a significant amount of around one and two to be forgiven in the first half of the year and overall from a NIM perspective again I'll just repeat that 310 to 330 range for the fourth quarter.

[Dave Patti, Director of Corporate Communications]

Thank you Carla. Ray we can return to Steve Moss for his question which will be the last question for us today and then you can give it to Jay for closing remarks.

[Operator]

Sure. Steve Moss like is open.

[Steve Moss, B. Riley Securities]

All right. Then thank you and a couple of just follow-ups in terms of starting with maybe the on the PPP aspect, the recognition, how do we think about the timeline for the new -- how you are going on types of fees into income with the latest round of PPP?

[Jay Sidhu, CEO]

Yeah. I'll take that quickly. With the latest on the PPP, Steve the closings will start in the next -- sometime in this first quarter we think which already of that will be done in the first quarter. And then, you will see since these are below our average loan size is expected to be below 50,000 as Sam shared with you. So the forgiveness process will determine the exact recognition.

We practice some conservative estimates in our guidance that we've given to discreet that you should expect us to make over $4 a share this year. And you should probably expect us to make more than $4 per share during next year and following year is $4.50 that we've given you the guidance. So, I think it's very difficult as Carla mentioned there'll be volatility in our earnings on a quarter-to-quarter.

But the core bank is also expected to continue expanding its margins, as continue looking at loan growth unless as you know was pointed out to us once again by Casey that unless we see that the street is just not putting enough capital into the banking sector. In that case, we might still be trading below where we think we ought to be trading.

And we will be aggressive in buying back stock with all these revenues that we are generating. You already heard from Carla and what’s that you know from PPP1 and PPP2 our estimated revenues are in $50 million. We can put that after adjustment for taxes. We could be using all of that to buy back stock.

And if we think we can raise another similar amount, you can see huge opportunities for our company to buy back stock and make sure our shareholder value is truly reflecting the value of our company.

[Sam Sidhu, VC, COO Customers Bank]

I would just add to that that it’s a 1% interest rate 35 basis point cost of the -- and 16 month charge.

[Steve Moss, B. Riley Securities]

Okay. So then fees you would probably amortize on like a six months basis and to the extent forgiveness is accelerated you would -- it’s going to flow through is that kind of…

[Sam Sidhu, VC, COO Customers Bank]

That’s right.

[Steve Moss, B. Riley Securities]

How to think about it? Okay. Great. And then in terms of the -- the other thing just going back to provision for a sec, just as I think about that, is it fair to assume that basically $8 million with that or so if you will is just a normal churn -- quarterly churn in a consumer portfolio?

[Sam Sidhu, VC, COO Customers Bank]

That's correct. Charge-offs are expected to be in the $7 million to $8 million. Maybe a little bit more or less on that on a quarterly basis. And that's already been factored in by us, coming up without margins and not only the asset expectations and then when Carla gave you the guidance of $10 million to $15 million, the rest is for group.

[Steve Moss, B. Riley Securities]

Great. Okay. Great. Thank you very much. Appreciate that.

[Jay Sidhu, CEO]

Yeah. Thanks everybody. Really appreciate you taking -- your interest in Customers Bancorp. We look forward to working with you. And please don't hesitate to call us any time with any follow-up questions. And once again for Peter, Casey and Will please join us on the call so that you can directly ask us questions. Thank you so much. And have a -- stay safe and have a good day.

[Operator]

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