Customers Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Customers Bancorp is a bank holding company operating primarily through Customers Bank, with commercial, mortgage warehouse, equipment finance, SBA and consumer lending businesses. BankMobile Technologies (BMT) was divested on January 4, 2021; its historical results are presented as discontinued operations.
Financial results and condition
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2021 | Comparable / change |
|---|---|---|
| Net interest income | $132.7 | $81.3 in Q1 2020; up 63.2% |
| Net interest margin | 3.00% | 2.99% tax-equivalent in Q1 2020 |
| Provision for loan and lease credit losses | Benefit of $2.9 | Expense of $31.8 in Q1 2020 |
| Non-interest income | $18.5 | $11.2 in Q1 2020 |
| Non-interest expense | $61.9 | $49.0 in Q1 2020; up 26.5% |
| Income from continuing operations, net | $74.6 | $8.5 in Q1 2020 |
| Net income | $36.6 | $3.1 in Q1 2020 |
| Net income available to common shareholders | $33.2; diluted EPS $1.01 | Loss of $0.5; diluted loss per share $0.02 in Q1 2020 |
| Total assets | $18,817.7 | $18,439.2 at year-end 2020 |
| Total deposits | $12,472.4 | $11,309.9 at year-end 2020 |
| Shareholders’ equity | $1,188.7 | $1,117.1 at year-end 2020 |
- Drivers and quality of earnings: Net interest income rose with average interest-earning assets up about $7.0 billion, including PPP loans. The lower cost of deposits and borrowings helped offset a decline in asset yields. PPP-related net interest margin was 2.99% on a tax-equivalent basis when PPP loans and related borrowings were excluded.
- Non-interest income included $23.6 million of gains on investment-security sales, partly offset by a $24.5 million loss from terminating cash-flow hedges. Non-interest expense included $13.7 million paid to BM Technologies under a deposit-servicing agreement; higher technology and operating expense was a major year-over-year increase.
- Net loss from discontinued operations was $38.0 million, versus $5.4 million in Q1 2020. Q1 2021 included BMT employee stock awards and $17.7 million of tax expense associated with the divestiture, which was treated as a taxable asset sale.
- Cash flow: Continuing operating activities provided $200.4 million; investing activities used $526.7 million; financing activities provided $171.1 million. Cash and cash equivalents ended the quarter at $515.4 million, down $178.0 million from year-end.
- Loans and credit: PPP loans were $5.18 billion, fully SBA-guaranteed, and generated $38.8 million of interest income including fees. Mortgage warehouse loans were $3.41 billion and reported at fair value. The allowance for credit losses on loans and leases was $128.7 million, down from $144.2 million; management cited improving economic forecasts. Net charge-offs were $12.5 million, or 0.33% of average loans and leases annualized. Non-performing loans and leases were $48.1 million, excluding other real estate owned.
- Funding, debt and liquidity: Deposits increased $1.16 billion. Federal funds purchased were $365 million; FHLB advances were $850 million; PPPLF borrowings were $3.28 billion, down $1.13 billion from year-end. The company reported $2.5 billion of FHLB borrowing capacity, with some capacity supporting municipal deposits. Customers Bank’s federal funds lines totaled $1.1 billion. These figures should be considered alongside the decrease in cash and the collateral requirements on borrowings.
- Capital: At March 31, the Bancorp’s CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 8.774%, 10.643%, 12.437% and 8.478%, respectively. Customers Bank’s corresponding ratios were 11.745%, 11.745%, 13.106% and 9.352%. Both met applicable capital requirements.
Material changes, outlook and risks
- Q1 results improved substantially from Q1 2020, reflecting higher net interest income, a credit-loss benefit rather than a provision, and higher security-sale gains. These comparisons also reflect the unusually high COVID-related credit provision in Q1 2020 and the BMT divestiture and discontinued-operations presentation.
- The BMT transaction closed January 4. Customers received $23.1 million cash consideration and distributed BM Technologies shares to eligible common shareholders as a special stock dividend. Customers continues to have servicing, software, transition, non-compete and loan agreements with BM Technologies, with terms ranging from one to ten years.
- Outlook: The filing provides no specific earnings or financial guidance. Management said the pandemic’s effect on operations and results for the remainder of 2021 remained highly uncertain. It cited continued monitoring of economic conditions and credit quality; a more severe downturn or slower recovery could require further credit-loss provisions.
- Credit and market risks: The allowance depends on economic forecasts and management judgments. A hypothetical 100% adverse-scenario weighting would increase modeled allowance by approximately $39 million; management cautioned this is a sensitivity illustration, not an expected reserve increase. Interest-rate sensitivity modeling showed estimated net interest income up 0.8% under an immediate 100-basis-point increase and down 0.1% under a 100-basis-point decrease. These are model estimates, not forecasts.
- Legal matters: A bankruptcy trustee is seeking recovery of an $8.1 million PPP loan repayment from Customers Bank; the bank said it would defend the case and could not estimate the likelihood or range of loss. A Department of Education matter was settled for $3.0 million, with the remaining $1.0 million expected from an acquisition escrow. Management reported no other unaccrued matters it believed would materially affect the statements, while noting outcomes remain uncertain.
- Management stated there were no material changes to the risk factors in the 2020 Form 10-K. It reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings growth is repeatable after excluding security-sale gains, hedge-termination losses, PPP-related income and divestiture-related items.
- Whether deposit growth and funding costs remain favorable as PPP loans are forgiven and PPPLF borrowings run off; assess liquidity, pledged collateral and available borrowing capacity together.
- Credit performance and reserve adequacy, particularly in installment lending and commercial real estate, against management’s economic assumptions and the disclosed adverse-scenario sensitivity.
- The ongoing cost, terms and operational dependence associated with agreements with BM Technologies, and the financial effects of the BMT transaction.
- Developments in the $8.1 million PPP repayment litigation and any changes in other legal or regulatory contingencies.