Customers Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Customers Bancorp is a bank holding company operating through Customers Bank, serving commercial and consumer customers. The statements are unaudited.
Financial performance and position
| Metric | Q3 2021 / Sept. 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $219.9 million | $107.4 million in Q3 2020 |
| Net interest margin | 4.58% GAAP; 4.59% tax-equivalent | 2.50% in Q3 2020 |
| Net income from continuing operations | $116.0 million | $51.0 million in Q3 2020 |
| Net income available to common shareholders | $110.2 million; diluted EPS $3.25 | $47.1 million; diluted EPS $1.48 in Q3 2020 |
| Total assets | $19.1 billion | $18.4 billion at Dec. 31, 2020 |
| Total deposits | $17.0 billion | $11.3 billion at Dec. 31, 2020 |
| Cash and cash equivalents | $1.05 billion | $693.4 million at Dec. 31, 2020 |
| Allowance for credit losses (loans and leases) | $131.5 million | $144.2 million at Dec. 31, 2020 |
| Shareholders’ equity | $1.28 billion | $1.12 billion at Dec. 31, 2020 |
For the first nine months of 2021, net interest income was $491.4 million versus $280.7 million, continuing-operations net income was $252.0 million versus $84.5 million, and net income available to common shareholders was $201.5 million versus $65.7 million. Diluted EPS was $6.02, compared with $2.07. Net cash provided by continuing operating activities was $274.5 million, versus $73.8 million.
Q3 total non-interest income was $25.6 million, compared with $24.9 million a year earlier; non-interest expense rose to $80.0 million from $56.3 million. The filing reports income before tax of $152.3 million and income tax expense of $36.3 million for the quarter. Nine-month net loss from discontinued operations was $38.0 million.
Material changes and drivers
- Net interest income and margin rose substantially year over year, reflecting larger average earning assets, lower funding costs, and significant PPP-related origination-fee recognition. PPP loans contributed $117.1 million of Q3 interest income, including fees; the reported Q3 margin was 3.24% on a tax-equivalent basis excluding PPP loans.
- Deposits increased $5.7 billion from year-end, including growth in both non-interest-bearing and interest-bearing demand accounts. Management said the growth supported lower-cost funding and included $1.5 billion of deposits from new customers preparing for the CBIT launch.
- Customers repaid its $4.4 billion PPPLF borrowing during the quarter; it had no PPPLF, FHLB advance, or federal funds purchased outstanding at September 30. Other borrowings were $223.2 million and subordinated debt was $181.6 million.
- Loan and lease balances, excluding mortgage warehouse and PPP loans, increased to $8.0 billion from $7.6 billion at year-end. The ACL decline was attributed mainly to improved macroeconomic forecasts; installment-loan growth increased reserves in that portfolio. Q3 net charge-offs were $7.1 million, or 0.17% of average loans and leases on an annualized basis.
- Non-interest expense increased, notably technology, communication and bank operations, professional services, and a $6.2 million deposit-contract adjustment fee. Technology and bank operations included $15.1 million paid to BM Technologies under a deposit servicing agreement in Q3.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said the future economic effects of COVID-19 remained uncertain and that a weaker-than-expected recovery could require additional credit-loss provisions. Its adverse-scenario sensitivity analysis indicated a $42.8 million higher modeled ACL than the baseline scenario; management cautioned this was illustrative, not an expected reserve increase.
- Customers completed the BankMobile Technologies divestiture on January 4, 2021. Historical BMT results are presented as discontinued operations. The transaction included cash consideration and a distribution of BM Technologies shares to Customers shareholders; continuing operations also incur service-related costs under agreements with BM Technologies.
- Customers launched the blockchain-based CBIT real-time B2B payments platform on October 18, 2021, after quarter-end. The filing identifies risks involving customer concentration in the digital-currency industry, adoption, competition, regulation, operational and cyber threats, and possible loss of deposits.
- Customers redeemed Series C and D preferred stock for $82.5 million in September, recording a $2.8 million loss on redemption. It issued $100 million of 2.875% senior notes due 2031 in August. A common-stock repurchase authorization covers up to 3,235,326 shares; no shares were repurchased by September 30, although 167,233 shares were purchased for $7.2 million in October.
- Capital ratios exceeded stated minimums. At September 30, the Bank’s common equity Tier 1 ratio was 12.765% and its total capital ratio was 14.161%; the holding company’s corresponding ratios were 10.412% and 13.629%.
- Contingencies include a bankruptcy trustee’s action seeking recovery of an $8.1 million PPP loan payment; the Bank intends to defend the claim and could not estimate the likelihood or range of loss. Management said other ordinary-course legal matters were not expected to have a material financial-statement effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings and margin depends on PPP fees and whether those benefits persist as loans are forgiven.
- The source, concentration, pricing and retention of the substantial deposit growth, particularly the $1.5 billion associated with preparations for CBIT.
- Trends in installment-loan delinquencies, charge-offs and reserve needs, and the sensitivity of the ACL to changing economic forecasts.
- The continuing expense burden and contractual arrangements with BM Technologies following the divestiture.
- Developments in the $8.1 million PPP-payment litigation and the operational, regulatory, cyber and deposit risks associated with CBIT.
- Execution of the repurchase authorization and the effect of preferred-stock redemption and new debt on capital, liquidity and shareholder returns.