Customers Bancorp, Inc. — 2020 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019. The company is a bank holding company operating Customers Bank and serving commercial, consumer, mortgage-lending, equipment-finance and digital-banking markets.
Financial performance and position
| Metric | Q2 2020 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $22.7 million; $19.1 million available to common shareholders; diluted EPS $0.61 | Q2 2019: $9.3 million; $5.7 million available to common; diluted EPS $0.18 |
| Six-month earnings | $25.8 million net income; $18.6 million available to common; diluted EPS $0.59 | Six months 2019: $24.7 million; $17.5 million available to common; diluted EPS $0.55 |
| Net interest income | Q2: $92.0 million; six months: $173.3 million | Q2 2019: $64.7 million; six months 2019: $124.0 million |
| Net interest margin | Tax-equivalent: Q2 2.65%; six months 2.80%. Excluding PPP, 2.97% and 2.98%, respectively | Tax-equivalent: Q2 2019 2.64%; six months 2019 2.62% |
| Credit provision | Q2: $20.9 million; six months: $52.7 million | Q2 2019: $5.3 million; six months 2019: $10.1 million |
| Assets and liquidity | Total assets $17.9 billion; cash and cash equivalents $1.07 billion | December 31, 2019: $11.5 billion and $212.5 million, respectively |
| Deposits and equity | Deposits $11.0 billion; shareholders’ equity $1.01 billion | December 31, 2019: $8.65 billion and $1.05 billion |
| Credit quality | Allowance for credit losses on loans and leases $159.9 million; 2.20% of loans excluding PPP. Nonperforming assets $86.4 million | Allowance $56.4 million at December 31, 2019 |
| Six-month cash flows | Operating +$39.6 million; investing −$5.38 billion; financing +$6.19 billion; ending cash $1.07 billion | 2019: operating +$3.1 million; investing −$1.21 billion; financing +$1.24 billion |
Q2 non-interest income was $22.2 million, including $4.4 million of securities-sale gains; non-interest expense was $63.5 million. For the six months, non-interest income was $44.2 million and non-interest expense was $130.0 million. All dollar amounts are U.S. dollars.
Material changes versus comparable periods
- Q2 net interest income rose 42.2% year over year, while six-month net interest income rose 39.8%. Management attributed the increase to a larger interest-earning asset base and lower funding costs; total cost of funds fell to 0.99% in Q2 from 2.04% a year earlier.
- PPP lending drove a substantial balance-sheet expansion: $4.76 billion of PPP loans were outstanding at June 30, funded in part by $4.42 billion borrowed through the Federal Reserve’s PPPLF. PPP loans are SBA-guaranteed and carry a 1% fixed rate.
- Credit costs increased sharply amid CECL adoption and COVID-19-related economic uncertainty. CECL adoption on January 1 reduced retained earnings by $61.5 million after tax; the allowance for loans and leases increased by $79.8 million on adoption. First-half net charge-offs were $29.0 million versus $1.7 million a year earlier.
- Non-interest income benefited from securities-sale gains and the absence of the $7.5 million 2019 loss on acquiring interest-only GNMA securities. Increases in commercial lease income and mortgage warehouse fees also contributed. Expense growth reflected compensation, technology, lease depreciation and loan workout costs.
- Deposits increased $2.32 billion from year-end, while federal funds purchased declined by $538 million. Shareholders’ equity declined $44.9 million, primarily reflecting CECL adoption, preferred dividends and accumulated other comprehensive loss.
Outlook, risks, contingencies and unusual items
- Management said the pandemic’s impact on the remainder of 2020 was highly uncertain. It reported COVID-related payment deferments at June 30 of $974 million for commercial borrowers and $81.1 million for consumers; by July 24, these had declined to less than $700 million and $60 million, respectively. The filing gives no earnings or revenue guidance.
- Management warned that a deeper recession or slower recovery than assumed could require further meaningful credit-loss provisions. The allowance estimate depends on economic forecasts and significant judgment. The filing also identifies potential pandemic-related effects on borrowers, securities values, demand, funding and operations.
- Reported regulatory capital ratios remained above applicable minimums. At June 30, the company’s common equity Tier 1 ratio was 7.765% and the Bank’s was 10.636%; the company’s total capital ratio was 11.928% and the Bank’s was 12.305%. Regulatory treatment excluded specified PPP effects and deferred certain CECL impacts.
- The company settled a Department of Education matter for $3.0 million, reduced from the $6.5 million initially assessed. A $2.0 million liability had been recorded, with the remaining $1.0 million expected to be funded from an acquisition-related escrow. A separate lawsuit remained unresolved; management could not estimate the likelihood or range of loss.
- After quarter-end, on August 6, 2020, BankMobile Technologies agreed to combine with Megalith Financial Acquisition Corp.; closing was expected in Q4 2020, subject to approvals and other conditions. Customers Bank would receive cash and stock and expected to own approximately 47% of the resulting company, subject to redemptions and transaction adjustments. The filing highlights completion, valuation, retained ownership, ongoing-service and related-party risks.
- The filing reports no material changes to previously disclosed risk factors other than pandemic and proposed BankMobile-transaction risks. Disclosure controls were assessed as effective at June 30, 2020.
Investor verification checklist
- Verify PPP balances, PPPLF funding, forgiveness and fee recognition, and the effect of this temporary program on reported growth and margins.
- Track allowance assumptions, charge-offs, delinquency and nonperforming trends, and COVID-related deferments as relief periods end.
- Reconcile reported and PPP-excluded net interest margins, and assess the sustainability of funding-cost reductions and securities-sale gains.
- Review liquidity and capital ratios, including the impact of regulatory CECL and PPP treatments and the amount of remaining borrowing capacity.
- Follow the BankMobile transaction’s approvals, final consideration, related-party governance, retained stake and any obligations or costs after closing.
- Monitor the DOE settlement funding and developments in the unresolved litigation.