Customers Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results. Customers Bancorp is a bank holding company operating through Customers Bank, with commercial banking, mortgage warehouse lending, equipment finance and digital banking businesses.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net interest income | $107.4 million | $75.7 million | $280.7 million | $199.7 million |
| Provision for loan and lease credit losses | $13.0 million | $4.4 million | $65.7 million | $14.5 million |
| Non-interest income | $33.8 million | $23.4 million | $78.0 million | $55.1 million |
| Non-interest expense | $65.6 million | $59.6 million | $195.5 million | $173.2 million |
| Net income | $50.5 million | $27.1 million | $76.3 million | $51.8 million |
| Net income available to common shareholders | $47.1 million | $23.5 million | $65.7 million | $41.0 million |
| Diluted EPS | $1.48 | $0.74 | $2.07 | $1.30 |
| Net interest margin, tax-equivalent | 2.50% | 2.83% | 2.68% | 2.69% |
Q3 net interest income rose 41.9% year over year, while common income roughly doubled. Higher average earning assets—especially PPP lending—supported growth, partly offset by lower asset yields and a lower net interest margin following Federal Reserve rate cuts. Management reported tax-equivalent margin excluding PPP of 2.86% for Q3 and 2.93% year to date.
Q3 non-interest income included $11.7 million of gains on investment securities sales, versus $1.0 million a year earlier. Year-to-date securities-sale gains were $20.0 million. Higher equipment lease income and mortgage warehouse fees also contributed; interchange and card revenue declined, including due to new interchange fee limits effective July 1, 2020. Expenses increased, notably salaries, technology and regulatory/FDIC costs.
Financial position, liquidity and capital
- Total assets were $18.78 billion at September 30, up $7.26 billion (63%) from year-end 2019. The balance-sheet expansion chiefly reflected $4.96 billion in PPP loans and growth in mortgage warehouse loans.
- Deposits were $10.84 billion, up $2.19 billion (25%). Cash and cash equivalents were $331.4 million; investment securities were $1.13 billion.
- Loans and leases receivable, net of allowance, totaled $16.42 billion, including $4.96 billion of PPP loans and $3.91 billion of mortgage warehouse loans carried at fair value. The mortgage warehouse portfolio had an average life under 30 days and was reported current.
- Allowance for credit losses on loans and leases was $155.6 million; the additional allowance for unfunded lending commitments was $3.3 million. Management cited COVID-related economic uncertainty, portfolio growth and charge-offs. PPP loans were fully SBA-guaranteed and had no recorded allowance.
- Non-performing loans and leases were $43.9 million; total non-performing assets were $44.0 million, excluding $19.7 million of non-performing loans held for sale. Net charge-offs were $17.3 million in Q3 and $46.3 million year to date.
- Borrowings included $4.81 billion under the Federal Reserve PPP Liquidity Facility, at 0.35%, secured by PPP loans; $850 million of FHLB advances; and $680 million of federal funds purchased. The PPPLF borrowing capacity was up to $5.0 billion.
- Shareholders’ equity was $1.05 billion, essentially unchanged from year-end. The company and bank met regulatory capital requirements. At September 30, the company’s CET1 ratio was 7.49% and the Bank’s was 10.12%; reported ratios reflect regulatory transition relief for CECL and PPP.
- For the first nine months, operating cash flow was $73.5 million, investing cash outflow was $7.09 billion, and financing cash inflow was $7.13 billion. Financing inflows primarily included PPPLF borrowings and deposit growth; investing outflows largely reflected loan originations and securities purchases.
Material changes, outlook and risks
- CECL adoption: Effective January 1, 2020, the expected-loss standard reduced opening retained earnings by $61.5 million, net of tax. Management said the nine-month reserve build was $19.2 million after adoption effects; the loan allowance was $155.6 million at quarter-end.
- COVID-19 and credit: Commercial and consumer payment deferments had fallen to $79 million and $25 million, respectively, by September 30, from peaks of $1.2 billion and $108 million. Pending commercial deferment requests were $198.5 million. Management said future pandemic effects and economic conditions remained highly uncertain and further material credit provisions could be required if recovery underperformed expectations.
- PPP: Customers originated about $5.0 billion of PPP loans, directly or through fintech partners. The 1% loans are SBA-guaranteed; $4.8 billion was funded through the PPPLF. PPP activity materially increased reported assets and funding but contributed relatively low-yielding interest income.
- BankMobile transaction: Customers Bank agreed to merge BankMobile Technologies with Megalith Financial Acquisition Corp. The agreement was amended November 2, 2020 to provide for merger shares to be distributed directly to Customers Bancorp shareholders, subject to a 12-month resale restriction with stated exceptions. Closing was expected in Q4 2020, subject to shareholder, regulatory and other approvals. Related-party relationships were disclosed; an independent special committee reviewed the deal and obtained a fairness opinion. BMT’s deposits and loans were to remain at the Bank immediately after closing.
- Other unusual items: Customers sold interest-only GNMA securities acquired in 2019 for $15.4 million, recognizing a $1.0 million gain in Q3 2020. The 2019 acquisition had produced a $7.5 million loss. The ED dispute concerning student access fees was settled for $3.0 million; $1.0 million was expected to be funded from an acquisition escrow. A separate Lifestyle Healthcare matter was dismissed with prejudice in September 2020.
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected a low-rate environment to persist and emphasized uncertainty around COVID-19, credit quality, funding, market rates and the pending BankMobile transaction.
- Interest-rate risk: Modeled net interest income increased 3.2% under an immediate 100-basis-point rise and 1.1% under a 100-basis-point decline. Modeled economic value of equity fell 4.3% under a 100-basis-point rise and 1.4% under a 100-basis-point decline. Management cautioned that results depend on model assumptions.
Investor verification priorities
- Assess credit performance and reserve adequacy, particularly commercial real estate non-owner-occupied and fintech-originated installment loans; review subsequent charge-offs, delinquencies and deferment outcomes.
- Separate PPP-related balance-sheet growth and income from underlying recurring lending trends, and verify PPP forgiveness, fee recognition and PPPLF repayment timing.
- Evaluate the sustainability of earnings given securities-sale gains, margin compression, rising operating costs and the impact of interchange fee regulation.
- Confirm capital and liquidity measures after applying CECL/PPP regulatory adjustments, and review dependence on PPPLF, deposits and short-term borrowings.
- Track BankMobile merger approvals, final consideration, shareholder distribution and lock-up terms, related-party governance, and any continuing service or credit exposures.