Customers Bancorp, Inc. quarterly report, Q1 FY2020

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Customers Bancorp, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Customers Bancorp is a bank holding company operating through Customers Bank, including commercial and consumer banking, mortgage warehouse lending, equipment finance, and BankMobile digital banking.

Financial results and position

  • Revenue and earnings: Net interest income was $81.3 million, up 37.1% year over year. Non-interest income was $21.9 million, up 11.2%. Net income was $3.1 million, compared with $15.4 million a year earlier; after $3.6 million of preferred dividends, the common-share loss was $0.5 million, or $0.02 per diluted share, versus earnings of $11.8 million, or $0.38 per share.
  • Margins: Net interest margin was 2.99% on a tax-equivalent basis, up 40 basis points from 2.59%. Management attributed the improvement to asset mix, higher average interest-earning assets, and lower deposit funding costs.
  • Credit costs: Provision for loan and lease credit losses was $31.8 million, versus $4.8 million in Q1 2019. The allowance for credit losses on loans and leases was $149.3 million, or 2.03% of the applicable portfolio. Net charge-offs were $18.7 million, or 79 basis points of average loans and leases annualized.
  • Cash flow: Operating cash flow was negative $35.1 million and investing cash flow was negative $433.5 million; financing cash flow was positive $512.4 million. Cash and cash equivalents increased $43.7 million to $256.2 million.
  • Balance sheet and liquidity: Total assets were $12.0 billion, up 4.3% from year-end. Deposits were $8.4 billion, down 2.7%. FHLB advances were $1.26 billion, FRB advances $175 million, federal funds purchased $705 million, other borrowings $123.7 million, and subordinated debt $181.2 million. Total borrowings were approximately $2.4 billion, up 44.4%. FHLB borrowing capacity was $3.1 billion, of which $1.3 billion was borrowed and $1.0 billion was used to support municipal deposits.
  • Capital: Customers Bank’s CET1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 10.60%, 10.60%, 12.21%, and 9.99%, respectively. The company and bank reported meeting applicable capital requirements. The company elected regulatory relief allowing CECL effects on regulatory capital to be phased in.

Material changes versus comparable periods

  • Net income available to common shareholders fell from $11.8 million to a $0.5 million loss. Higher net interest income and non-interest income were more than offset by increased credit provision and operating expenses.
  • Non-interest expense rose 23.1% to $66.5 million, including increases in professional services, salaries, commercial lease depreciation, and other expenses. Non-interest income benefited from a $4.0 million gain on securities sales; interchange and card revenue declined $2.0 million.
  • Year-end-to-quarter-end nonperforming loans and leases rose to $50.4 million from $21.3 million. The allowance ratio increased substantially, reflecting CECL adoption, COVID-related reserve building, charge-offs, and portfolio growth.
  • Shareholders’ equity declined 8.4% to $964.6 million, primarily due to the $61.5 million after-tax CECL transition adjustment and a $28.9 million after-tax other comprehensive loss.

Outlook, risks, and unusual items

  • COVID-19: Management described substantial uncertainty and expected customer financial distress to increase. The Q1 allowance used a Moody’s March 27 baseline forecast assuming a deep Q2 recession followed by a strong recovery. Management warned that a weaker recession/recovery path could require further material credit provisions.
  • Borrower relief and PPP: By March 31, the company had granted temporary modifications on about 1,800 loans and leases totaling $64 million; through April 24 it had granted about 2,000 additional modifications totaling $490 million. As of May 2, it reported originating about $5 billion of PPP loans directly or through fintech partners. PPP activity and its effects were described as uncertain.
  • Portfolio strategy: Customers said it intended to continue reducing its lower-yielding multifamily portfolio and temper consumer-loan growth for the remainder of 2020. It provided no quantified earnings or margin guidance. The filing also identifies the timing and terms of a possible BankMobile divestiture as uncertain.
  • Important adjustment to reported results: The 10-Q includes an additional $9.6 million credit provision and charge-off related to a collateral-dependent northern New Jersey office loan, following a decision to sell it for an expected $19.1 million. This adjustment changed Q1 common-share results from previously reported income of $7.0 million, or $0.22 per share, to a $0.5 million loss, or $0.02 per share. The sale was expected in late Q2 or Q3, subject to closing conditions.
  • Accounting change: CECL adoption on January 1 reduced retained earnings by $61.5 million after tax and increased the loan allowance by $79.8 million and the off-balance-sheet allowance by $3.4 million at adoption.
  • Contingencies: A DOE settlement reduced assessed liabilities from $6.5 million to $3.0 million; $2.0 million had been accrued, with the remaining $1.0 million expected to come from an acquisition escrow. A separate lawsuit remained unresolved, and management could not estimate its outcome or potential loss. A Treasury check reclamation demand of approximately $5.4 million was abandoned by the government in January 2020.

Key facts for investors to verify

  • Reconcile the adjusted Q1 financial statements in this 10-Q with the earlier May 4, 2020 furnished results, especially the office-loan provision, charge-off, and revised EPS.
  • Track COVID-related borrower modifications, delinquencies, charge-offs, and allowance adequacy, including changes to economic forecasts and subsequent credit provisions.
  • Assess liquidity and funding composition as deposits declined while wholesale borrowings increased; verify available and actually usable borrowing capacity.
  • Monitor PPP loan volume, economics, servicing/forgiveness exposure, and whether the reported originations affect subsequent-period earnings or credit risk.
  • Follow the expected sale of the northern New Jersey office loan, the DOE settlement payment and escrow funding, and developments in the unresolved lawsuit.
  • Evaluate the implications of the BankMobile divestiture uncertainty and planned restraint in consumer lending for growth, costs, and profitability.