Customers Bancorp, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; signed February 28, 2022. The filing also presents unaudited fourth-quarter results. Customers Bancorp operates Customers Bank, a branch-light commercial and consumer bank with nationwide specialty lending and digital banking initiatives.
Business context and material changes
- Customers completed the divestiture of BankMobile Technologies (BMT) on January 4, 2021. BMT’s historical results are reported as discontinued operations; serviced deposits, loans and related net interest income remained with Customers Bank. This affects comparison with 2020.
- Sam Sidhu became Customers Bank’s President and CEO in July 2021. The company rebranded as a fintech-forward institution, launched CBIT, its blockchain-based instant B2B payments platform, and added fund finance, technology and venture capital banking, and financial institutions verticals.
- At year-end, CBIT-related customers contributed $1.9 billion in deposits. Customers Bank held another $1.8 billion of deposits serviced by BMT, expected to leave by December 31, 2022.
Financial performance and condition
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net interest income | $685.1 million | $403.7 million |
| Net interest margin, tax-equivalent | 3.70% | 2.71% |
| Provision for loan and lease credit losses | $27.4 million | $62.8 million |
| Non-interest income | $77.9 million | $63.8 million |
| Non-interest expense | $294.3 million | $215.0 million |
| Net income from continuing operations | $354.3 million | $143.0 million |
| Net income / net loss from discontinued operations | $(39.6) million | $(10.5) million |
| Net income | $314.6 million | $132.6 million |
| Net income available to common shareholders | $300.1 million | $118.5 million |
| Diluted EPS | $8.91 | $3.74 |
Net interest income rose 69.7%, while net income available to common shareholders increased 153.2%. The margin expansion reflected PPP fee recognition as loans were forgiven, asset-mix changes and lower funding costs. Excluding PPP loans, tax-equivalent NIM was 3.16%, up from 2.96%.
Fourth quarter: Net interest income was $193.7 million, net income from continuing operations was $102.3 million, net income was $100.7 million, and diluted EPS was $2.87. Net income available to common shareholders was $98.6 million.
- Balance sheet: Total assets were $19.6 billion, up 6.2%; loans and leases net of allowance were $14.4 billion; deposits were $16.8 billion, up 48.3%; shareholders’ equity was $1.37 billion, up 22.3%.
- Loans and credit: PPP loans were $3.25 billion at year-end, down from $4.56 billion. Consumer loans grew to $2.1 billion from $1.6 billion. Non-performing loans were $49.6 million, or 0.34% of total loans and leases, versus $70.5 million, or 0.45%, in 2020. Net charge-offs were $33.8 million, or 22 basis points of average loans, versus $54.8 million, or 41 basis points.
- Allowance: Loan and lease ACL was $137.8 million, equal to 1.53% of loans held for investment excluding PPP, compared with 1.90% in 2020. Management attributed the decrease primarily to improved economic forecasts, partly offset by consumer loan growth.
- Liquidity and cash flow: Cash and cash equivalents were $518.0 million, down from $693.4 million. Continuing operating cash flow was $295.5 million; investing cash flow was $(1.20) billion; financing cash flow was $754.8 million. The gross loan-to-deposit ratio was 86.8%, or 53.4% excluding mortgage warehouse and PPP loans. Estimated uninsured deposits totaled $12.1 billion.
- Funding and debt: Year-end short-term FHLB advances and federal funds purchased totaled $775 million; senior notes were $223.1 million and subordinated debt was $181.7 million. The $4.4 billion PPPLF balance outstanding at 2020 year-end was fully repaid during 2021. Average total cost of deposits fell to 0.44% from 0.89%.
- Capital: Customers Bank’s common equity Tier 1 ratio was 11.83%; the holding company’s was 9.98%. Both entities met applicable capital requirements. Customers repurchased 527,789 common shares for $27.7 million and redeemed Series C and D preferred stock for $82.5 million.
Outlook, commentary and risks
- The filing gives no formal earnings or revenue guidance. Management plans organic loan and deposit growth, expansion into new markets and specialty lending, and expects to expand multi-family lending toward approximately 15% of the loan portfolio.
- Management noted that PPP forgiveness and the associated accelerated fee recognition materially boosted 2021 margin and earnings; these effects should not be assumed to recur at the same level. PPP loans carry a 1% stated rate, although recognized 2021 PPP yield included fee accretion.
- The BMT deposit servicing agreement expires December 31, 2022 and will not be renewed. The anticipated runoff of $1.8 billion in serviced deposits presents a material funding and growth consideration. Customers incurred $59.5 million in 2021 expenses under that agreement.
- CBIT attracted substantial non-interest-bearing deposits, but its customer base is concentrated in the digital currency industry. Management cites risks from customer withdrawals, competition, regulation, cybersecurity, fraud and technology or platform failures.
- Other material exposures include economic and COVID-19 uncertainty; consumer installment loan growth and credit performance; mortgage warehouse lending; commercial real estate, including $685.3 million of New York multifamily exposure to rent-regulated properties; deposit concentration and funding costs; interest-rate and securities-market movements; and regulatory and operational risks.
- Management’s adverse-scenario sensitivity analysis indicated an approximately $44.4 million higher modeled ACL than under its baseline scenario; it is illustrative, not a forecast. The filing also records a $24.5 million loss on termination of cash-flow hedges after forecast transactions were no longer considered probable.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The ACL was identified as a critical audit matter. A PPP-related bankruptcy trustee claim seeking $8.1 million was dismissed on summary judgment in February 2022; the trustee did not appeal.
Most important facts for investors to verify
- Whether the $1.8 billion in BMT-serviced deposits left as expected, and how Customers replaced that funding at what cost.
- How much 2021 net interest income and margin depended on PPP fee accretion, and the sustainable margin excluding PPP.
- Whether CBIT deposits remain stable and diversified, including the deposit balances’ concentration, customer terms and sensitivity to competition or digital-asset market changes.
- Consumer installment loan delinquency, loss and reserve trends as that portfolio grows; also review the ACL assumptions and adverse-scenario sensitivity.
- Credit quality and collateral values in New York rent-regulated multifamily properties and other commercial real estate exposures.
- Interest-rate sensitivity, securities portfolio valuation and realized/unrealized effects, alongside the company’s liquidity, uninsured deposit levels and available borrowing capacity.