Customers Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is a bank holding company operating through Customers Bank, with commercial, consumer, mortgage warehouse, equipment finance, and specialty lending businesses. BankMobile Technologies (BMT) was divested on January 4, 2021; its prior-period results are reported as discontinued operations.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $138.8 million | $92.0 million | $271.5 million | $173.3 million |
| Net interest margin | 2.98% | 2.65% | 2.99% | 2.80% |
| Provision for loan and lease credit losses | $3.3 million | $20.9 million | $0.4 million | $52.7 million |
| Net income from continuing operations | $61.3 million | $25.0 million | $136.0 million | $33.4 million |
| Net income (loss) | $61.3 million | $22.7 million | $97.9 million | $25.8 million |
| Net income available to common shareholders | $58.0 million | $19.1 million | $91.2 million | $18.6 million |
| Diluted EPS | $1.72 | $0.61 | $2.74 | $0.59 |
- Q2 net interest income rose 50.9%; net income available to common shareholders rose 203.3%. For the first half, those measures increased 56.7% and 390.0%, respectively. Higher average earning assets, lower funding costs, PPP fee recognition and lower credit-loss provisioning contributed to the improvement.
- Non-interest income was $16.8 million in Q2 and $35.3 million for the first half. First-half results included $25.4 million of realized securities gains, offset in part by a $24.5 million loss on cash flow hedge terminations and a $2.8 million loss on sale of foreign subsidiaries.
- Non-interest expense increased 42.2% year over year in Q2 to $70.8 million, including $19.6 million of technology, communications and bank operations expense and $8.2 million of professional services. The company attributed much of the technology expense increase to servicing and interchange fees paid to BM Technologies after the BMT divestiture; these fees were $14.3 million in Q2 and $27.9 million for the first half.
Financial position, liquidity and capital
- Total assets were $19.6 billion at June 30, 2021, up 6.5% from year-end 2020. Cash and cash equivalents were $430.5 million, down from $693.4 million. Investment securities were $1.53 billion.
- Total loans and leases, including PPP and mortgage warehouse loans, were $17.0 billion before allowance. PPP loans were $6.31 billion, up from $4.56 billion at year-end; mortgage warehouse loans were $2.86 billion, down from $3.62 billion. The loan and lease allowance was $125.4 million, down from $144.2 million.
- Deposits increased 22.7% to $13.87 billion. The company reported no short-term FHLB advances or federal funds purchased at quarter-end, compared with $1.10 billion combined at year-end. PPPLF borrowings were $3.87 billion, down from $4.42 billion; other borrowings were $124.2 million and subordinated debt was $181.5 million.
- Shareholders’ equity was $1.25 billion, up 12.0% from year-end. At June 30, the Bancorp’s CET1, Tier 1, total capital and Tier 1 leverage ratios were 9.56%, 11.48%, 13.27% and 8.39%, respectively; Customers Bank’s corresponding ratios were 12.40%, 12.40%, 13.77% and 9.07%. Both entities met applicable capital requirements.
- For the first half, continuing operating activities provided $289.3 million, investing activities used $1.47 billion and financing activities provided $940.4 million. Cash and cash equivalents decreased $262.9 million overall to $430.5 million.
Material changes, outlook and risks
- The allowance decline primarily reflected improving macroeconomic forecasts; installment-loan allowance increased with portfolio growth. Net charge-offs were $19.1 million for the first half, versus $29.0 million in the comparable 2020 period. Non-performing loans were $46.5 million, or 0.44% of loans excluding PPP, versus $70.5 million, or 0.45%, at year-end.
- COVID-19-related commercial and consumer payment deferments fell to $89.8 million and $8.4 million, respectively, from $202.1 million and $16.4 million at year-end. Management said the pandemic’s effects on the rest of 2021 remained highly uncertain and noted that weaker-than-expected recovery could require further credit-loss provisions.
- The company reported no specific earnings or financial guidance. It described its outlook as subject to economic, interest-rate, credit, regulatory and other uncertainties. Its adverse-scenario ACL sensitivity analysis indicated an approximately $49.7 million increase versus a 100% baseline scenario; management cautioned that this was illustrative, not a forecast.
- PPP lending ended May 31, 2021. PPP loans are fully SBA-guaranteed and excluded from the company’s loan allowance; their 1.00% contractual rate and deferred origination-fee recognition affect reported yields and margins. Q2 NIM excluding PPP was 3.30%, a non-GAAP measure, versus 2.97% a year earlier.
- On January 4, the company completed the BMT divestiture, receiving $23.1 million cash at closing and another $3.7 million in May, while distributing BM Technologies shares to eligible shareholders and certain BMT team members. The first-half discontinued-operations loss was $38.0 million, including tax and transaction-related effects.
- In July, the board approved redemption of all Series C and D preferred shares, totaling $82.5 million. On August 6, the company issued $100 million of 2.875% senior notes due 2031, intending to use net proceeds primarily for those redemptions. This occurred after quarter-end.
- Contingencies include a bankruptcy trustee’s claim seeking recovery of an $8.1 million PPP loan payment; the Bank intends to defend the case and could not estimate the likelihood or range of loss. A separate Department of Education matter was settled for $3.0 million, with the remaining $1.0 million expected to be funded from an acquisition-related escrow account.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase would raise twelve-month net interest income by 0.6%; the corresponding 200- and 300-basis-point scenarios indicated increases of 2.3% and 2.0%. Management cautioned that actual results depend on modeling assumptions and market conditions.
Most important facts for investors to verify
- How much reported earnings and NIM depend on PPP fee recognition, securities gains and other nonrecurring or market-sensitive items.
- Whether credit quality and allowance adequacy remain sound as deferments unwind and economic forecasts change, including consumer installment-loan performance.
- The sustainability and cost of deposit growth, liquidity levels, and reliance on PPPLF funding collateralized by PPP loans.
- The ongoing cost and terms of service arrangements with BM Technologies following the BMT divestiture, and the impact of the preferred-share redemption and new notes.
- Developments in the Specialty’s Café Bakery litigation and any resulting financial exposure.