Customers Bancorp, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Customers Bancorp is a bank holding company whose primary subsidiary is Customers Bank, with commercial, consumer, mortgage warehouse, equipment finance and digital banking activities.
Financial performance and condition
| Metric | FY 2020 / Dec. 31, 2020 | Comparable 2019 |
|---|---|---|
| Net interest income | $403.7 million | $277.3 million |
| Net interest margin, tax-equivalent | 2.71% | 2.75% |
| Net income | $132.6 million | $79.3 million |
| Net income available to common shareholders | $118.5 million; diluted EPS $3.74 | $64.9 million; diluted EPS $2.05 |
| Provision for credit losses on loans and leases | $62.8 million | $24.2 million |
| Net charge-offs | $54.8 million; 0.41% of average loans and leases | $7.8 million; 0.08% |
| Total assets / deposits | $18.4 billion / $11.3 billion | $11.5 billion / $8.6 billion |
| Shareholders’ equity | $1.12 billion | $1.05 billion |
| Cash flow from operating activities | $133.0 million | $78.3 million |
Fourth-quarter 2020 net interest income was $122.9 million, net income was $56.2 million, and net income available to common shareholders was $52.8 million (diluted EPS $1.65). The quarter included a $2.9 million provision benefit for credit losses.
At year-end, loans and leases totaled $15.8 billion, including $4.6 billion of PPP loans and $3.6 billion of mortgage warehouse loans carried at fair value. The allowance for credit losses (ACL) on loans and leases was $144.2 million, equal to 1.90% of loans held for investment excluding PPP and mortgage warehouse loans. Total borrowings were approximately $5.8 billion, including $4.4 billion of Federal Reserve PPP Liquidity Facility advances. Cash and cash equivalents were $693.4 million. Net cash used in investing activities was $6.4 billion, primarily reflecting loan growth and securities purchases; financing activities provided $6.8 billion.
Customers Bank’s year-end capital ratios included common equity Tier 1 of 10.62%, total risk-based capital of 12.06% and Tier 1 leverage of 9.21%. The company reported a 4.80% tangible common equity-to-tangible-assets ratio, down from 7.13% in 2019.
Material changes versus 2019
- Net income available to common shareholders rose 82.7%, supported by a $126.4 million increase in net interest income as average interest-earning assets grew. The tax-equivalent net interest margin edged down four basis points.
- Assets increased 60.1%, substantially reflecting PPP lending, mortgage warehouse growth, higher deposits and related PPPLF funding. Deposits rose 30.8%; non-time deposits increased while time deposits declined.
- Credit costs rose: net charge-offs increased largely due to partial write-offs on two commercial real estate loans and higher installment-loan losses. Non-performing assets were $71.2 million, or 0.39% of assets, versus $21.5 million, or 0.19%, in 2019.
- Non-interest income increased 25.7%, including $20.1 million of gains on investment-security sales. Interchange and card revenue fell $7.9 million, partly reflecting the loss of the small-issuer Durbin exemption beginning July 1, 2020.
- On January 1, 2020, adoption of CECL increased the opening ACL by $79.8 million and reduced retained earnings by $61.5 million, net of tax.
Outlook, commentary, risks and unusual items
Management gave no specific numerical earnings guidance. It described the effects of COVID-19 and the economic recovery as uncertain, while noting actions to increase liquidity and reserves and support customers. COVID-related commercial payment deferrals declined to $202.1 million and consumer deferrals to $16.4 million by year-end, excluding PPP loans. Management’s CECL sensitivity analysis indicated that a fully weighted adverse scenario could add approximately $60.8 million to the modeled allowance versus a fully weighted baseline; this was an illustrative sensitivity, not a forecast.
- PPP exposure: The $4.6 billion year-end portfolio is SBA-guaranteed and carries a 1% contractual rate. Origination fees contributed to reported PPP interest income; forgiveness timing, processing demands, eligibility and guarantee compliance remain relevant uncertainties.
- Credit and concentration: The bank plans to reduce lower-yielding multifamily lending and grow C&I and consumer lending. Risks include commercial real estate performance, New York rent regulation, installment-loan losses and mortgage warehouse fraud or operational exposure. Mortgage warehouse loans were current at year-end.
- Liquidity and funding: The gross loan-to-deposit ratio was 140.0%; excluding mortgage warehouse and PPP loans it was 67.3%. Wholesale deposits were 18.3% of deposits. The mix, cost and retention of deposits and access to borrowing capacity are key considerations.
- BankMobile divestiture: The sale of BankMobile Technologies closed January 4, 2021, after the reporting date. Customers received $23.1 million cash consideration, and eligible Customers Bancorp shareholders received BM Technologies shares as a special dividend. BankMobile’s serviced deposits, loans and related net interest income remain with Customers Bank; fee and interchange income are expected to decline, as are certain expenses. Long-term service, software, deposit-servicing and other agreements continue.
- Legal and accounting: A bankruptcy trustee seeks recovery of an $8.1 million PPP loan repayment; the company said it could not estimate the likelihood or range of loss. The Department of Education matter was settled for $3.0 million, and the Lifestyle litigation was dismissed with prejudice. The auditor issued unqualified opinions on the financial statements and internal controls; CECL estimation was identified as a critical audit matter.
- Other exposures: The filing highlights COVID-19, interest-rate and LIBOR transition risk, cybersecurity and third-party dependencies, heightened regulation after exceeding $10 billion in assets, and possible effects of the Durbin fee cap. The prior cash-flow classification material weakness was reported as remediated; management and the auditor assessed internal control over financial reporting as effective at year-end.
Investor facts to verify
- How much of 2020 earnings growth is sustainable after separating PPP fees and balances, security-sale gains, and post-divestiture BankMobile results?
- How quickly are PPP loans forgiven or repaid, and what are the actual servicing costs and guarantee outcomes?
- Are ACL adequacy and credit trends holding up, particularly for commercial real estate collateral-dependent loans and installment lending?
- How will the BankMobile transaction and continuing service agreements change recurring fee income, costs, deposits and capital?
- Can the company maintain low-cost deposit growth and liquidity while managing wholesale funding, capital ratios and interest-rate exposure?