Customers Bancorp Reports Second Quarter 2021 Results

Customers Bancorp

WEST READING, PA — Customers Bancorp, Inc. (NYSE: CUBI) this week reported second quarter 2021 (“Q2 2021”) net income to common shareholders of $58.0 million, or $1.72 per diluted share, up from first quarter 2021 (“Q1 2021”) net income to common shareholders of $33.2 million, or $1.01 per diluted share.

Q1 2021 results included a net loss from discontinued operations of $38.0 million, which reduced GAAP earnings by $1.16 per diluted share, resulting from the divestiture of BankMobile Technologies, Inc. on January 4, 2021. Core earnings for Q2 2021 totaled $59.3 million, or $1.76 per diluted share compared to Q1 2021 core earnings of $70.3 million, or $2.14 per diluted share (non-GAAP measures). Adjusted pre-tax pre-provision net income was $86.5 million for Q2 2021 compared to $86.8 million for Q1 2021 (non-GAAP measures). Net interest margin, tax equivalent (“NIM”) remained stable at 3% for Q2 2021 and Q1 2021. Excluding PPP loans, NIM expanded 31 basis points in Q2 2021 as compared to Q1 2021, largely benefiting from the balance sheet restructuring that occurred in Q1 2021, further reductions in deposit costs and disciplined pricing strategy (non-GAAP measures).

“As the Paycheck Protection Program (“PPP”) comes to a close, we couldn’t be happier with our overall execution and results in this program,” remarked Customers Bancorp Chairman and CEO, Jay Sidhu. “Not only have we supported hundreds of thousands of small businesses, not-for-profits, and the communities we serve, we leveraged our technology expertise to build valuable fintech partnerships, established hundreds of thousands of new customer accounts ripe for in-house analytics and cross-selling and significantly improved our capital position and tangible book value at the same time. All of this was achieved while decreasing the risk profile of Customers Bank. At June 30, 2021, we have strong capital and reserves, exceptional asset quality and expect to report the highest full year earnings in our company’s history. This leaves us very well positioned to support future growth and to redeem a portion of our preferred stock later this year, an EPS enhancing action which was approved by our Board earlier today. We remain optimistic about our future.” Mr. Sidhu concluded.

Key Balance Sheet Trends

Total loans and leases increased $1.7 billion, or 11.0%, to $17.0 billion at June 30, 2021 compared to the year-ago period. PPP loans were $6.3 billion at June 30, 2021, an increase of $1.5 billion compared to the year-ago period, driven by $4.1 billion and $0.2 billion in originations from the new round and earlier rounds of PPP loans, respectively. This increase in PPP loans was offset by $2.8 billion in forgiveness from the earlier rounds of PPP loans. Additionally, the loan mix improved year-over-year as commercial and industrial loans and leases increased $233.2 million to $2.3 billion, commercial real estate owner occupied loans increased $108.9 million to $653.6 million, commercial loans to mortgage companies increased $90.1 million to $2.9 billion, and consumer installment loans increased $319.8 million to $1.6 billion. These increases in loans and leases were partially offset by decreases in multi-family loans of $526.1 million to $1.5 billion, commercial real estate non-owner occupied loans of $55.7 million to $1.2 billion and residential mortgages of $79.4 million to $273.5 million. “Looking ahead, we see continued growth in core C&I and consumer loans offsetting some of the expected decreases in loans to mortgage companies in the second half of this year,” stated Sidhu.

Total deposits increased $2.9 billion, or 26.5%, to $13.9 billion at June 30, 2021 compared to the year-ago period. Total demand deposits increased $2.4 billion, or 51.9%, to $6.9 billion, money market deposits increased $1.5 billion, or 44.2%, to $4.9 billion, and savings deposits increased $287.0 million, or 25.1%, to $1.4 billion. These increases were offset, in part, by a decrease in time deposits of $1.2 billion, or 66.5%, to $627.2 million. The total cost of deposits declined by 44 basis points to 0.47% in Q2 2021 from 0.91% in the year-ago quarter. At July 15, 2021, the spot cost of deposits was 0.44%. “We expect our deposit costs to be at or below 40 basis points by September 30, 2021,” stated Sidhu.

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Very Strong Growth in Tangible Common Equity and Tangible Book Value Per Share

Customers experienced significant improvements in regulatory capital ratios in Q2 2021 as compared to a year ago. Customers Bancorp’s tangible common equity (a non-GAAP measure) increased by $253.6 million to $1.0 billion at June 30, 2021 from $775.8 million at June 30, 2020, and the tangible book value per common share (a non-GAAP measure) increased to $31.82 at June 30, 2021 from $24.62 at June 30, 2020, an increase of 29.2%. Customers remains well capitalized by all regulatory measures, leaving us well positioned to redeem a portion of the preferred stock prior to year end subject to routine and customary regulatory approval. At the Customers Bancorp level, the total risk based capital ratio (estimate) and tangible common equity to tangible assets ratio (“TCE ratio”), excluding PPP loans (a non-GAAP measure), were 13.2% and 7.7%, respectively, at June 30, 2021. At March 31, 2021, Customers Bancorp’s total risk based capital ratio and TCE ratio, excluding PPP loans (a non-GAAP measure), were 12.4% and 7.1%, respectively.” As a consequence of PPP related income and a potential cyclical decline in mortgage warehouse loans, we expect our capital levels to increase sharply in the second half of 2021 with the TCE ratio excluding PPP loans to be close to 9% by December 31, 2021,” commented Customers Bancorp CFO, Carla Leibold.

Loan Portfolio Management During the COVID-19 Crisis

Over the last decade, Customers has developed a suite of commercial and retail loan products with one particularly important common denominator: relatively low credit risk assumption. The Bank’s C&I, mortgage warehouse, specialty finance lines of business, and multi-family loans for example, are characterized by conservative underwriting standards and low loss rates. Because of this emphasis, the Bank’s credit quality to-date has been healthy despite a highly adverse economic environment. Maintaining strong asset quality also requires a highly active portfolio monitoring process. In addition to frequent client outreach and monitoring at the individual loan level, Customers employs a bottom-up data driven approach to analyze its commercial portfolio.

Strong commercial loan portfolio with very low concentration in COVID-19 impacted industries and CRE

  • Total commercial deferments declined to $89.8 million, or 0.8% of total loans and leases, excluding PPP loans (a non-GAAP measure), at June 30, 2021, down from $176.1 million, or 1.6% of total loans and leases, excluding PPP loans, at March 31, 2021. Customers’ commercial deferments peaked at about $1.2 billion in July 2020.
  • Exposure to industry segments significantly impacted by COVID-19 is not substantial. At June 30, 2021, Customers had $82.8 million in energy and utilities exposure (with no deferments); $62.0 million in colleges and universities (with no deferments); $62.2 million in CRE retail sales exposure (mostly auto sales; with no deferments); $29.9 million in franchise restaurants and dining (with no deferments); and $26.1 million in entertainment only businesses (with no deferments).
  • At June 30, 2021, the hospitality portfolio was $399.3 million, or 3.8% of total loans and leases, excluding PPP loans, with $59.2 million in deferment. Approximately 79.5% ($317.4 million) represents “flagged” facilities, with the majority of the non-flagged being high-end destination hotels in Cape May (NJ), Avalon (NJ), and Long Island (NY). The Company believes the majority of the hotels have sufficient cash resources to get through the COVID-19 crisis.
  • At June 30, 2021, the healthcare portfolio was approximately $460 million, comprised predominantly of skilled nursing, which has been deemed an essential business and through a number of federal and state actions has been provided immunity from liability for COVID-19 related deaths. No deferments have been requested and there are no delinquencies.
  • The multi-family portfolio is highly seasoned, with a weighted average loan to value of 61.7% as of quarter-end. 55.77% of the portfolio was in New York City, of which 70.53% was in rent controlled/regulated properties. As of June 30, 2021, no deferments have been requested.
  • At June 30, 2021, investment CRE had a weighted average loan to value of 63.2%, with approximately 52% of the portfolio housed in New York, Philadelphia and surrounding markets. As of June 30, 2021, $4.4 million of the portfolio was on deferment, with minimal exposure to the office market.
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Consumer installment, mortgage and home equity loan portfolios continue to perform well

  • Total consumer-related deferments declined to $8.4 million, or 0.1% of total loans and leases, excluding PPP loans (a non-GAAP measure), at June 30, 2021, down from $13.0 million at March 31, 2021.
  • The $1.6 billion consumer installment loan portfolio outperformed industry peers with deferments dropping to 0.31% and 30+ day delinquency at only 0.66%. Strong credit quality (avg. FICO at origination: 740), low concentration in at-risk job segments, and outstanding performance of CB Direct originations have resulted in solid results through the end of Q2 2021.
  • The consumer installment portfolio has been managed to moderate growth and strengthening credit quality, by replacing run-off with CB Direct originations with higher FICO scores.

Key Profitability Trends

Net Interest Income

Net interest income totaled $138.8 million in Q2 2021, an increase of $6.0 million from Q1 2021, primarily due to a $755.1 million net increase in average interest-earning assets and a decrease in the cost of interest-bearing liabilities. Interest-earning asset growth was driven by increases in consumer loans and the latest round of PPP loans, offset in part by PPP loan forgiveness from the first two rounds, which accelerated the recognition of net deferred loan origination fees, and decreases in commercial loans to mortgage companies and multi-family loans. Compared to Q1 2021, total loan yields decreased 28 basis points to 3.74%. The decrease is attributable to lower yields on commercial and industrial loans and leases, increased originations of PPP loans in the latest round and lower forgiveness of PPP loans from the first two rounds, offset in part by higher yields on consumer loans. Total borrowing costs decreased by 23 basis points to 0.77% primarily due to the balance sheet restructuring completed in Q1 2021 and lower utilization of the FRB PPP Liquidity Facility, costing 0.35%, due to the PPP loan forgiveness from the first two rounds and excess cash available to fund additional PPP round 3 originations. FHLB advances and federal funds purchased were also paid off during Q2 2021 due to sufficient liquidity. “It is difficult to predict net interest income in future periods because the timing of PPP forgiveness results in the accelerated recognition of net deferred fees and also affects the amount of net interest income expected to be earned while the PPP loans are held on our balance sheet,” commented Mr. Sidhu.

Provision for Credit Losses

The provision for credit losses on loans and leases in Q2 2021 was $3.3 million, compared to a $2.9 million benefit (release) in Q1 2021. The provision in Q2 2021 primarily resulted from an increase in provision for consumer installment loans from continued growth, offset in part by the benefit (release) to the provision for commercial loans resulting from continuing improvement in forecasts of macroeconomic conditions since Q4 2020. The allowance for credit losses on loans and leases represented 1.6% of total loans and leases receivable, excluding PPP loans (a non-GAAP measure) at June 30, 2021, compared to 1.7% at March 31, 2021, and 2.2% at June 30, 2020. Customers’ non-performing loans at June 30, 2021 were only 0.27% of total loans and leases, a significant improvement from 0.56% at June 30, 2020.

Non-Interest Income

Non-interest income totaled $16.8 million for Q2 2021, a decrease of $1.6 million compared to Q1 2021. The decrease in non-interest income primarily resulted from decreases of $21.8 million in gain on sale of investment securities and $3.0 million in unrealized gain on derivatives, offset in part by a $24.5 million decrease in loss on cash flow hedge derivative terminations recorded in Q1 2021. In Q2 2021, the change in the fair value of foreign equity securities and the sale of the foreign subsidiaries that held those securities resulted in a net loss of $1.1 million.

Non-Interest Expense

Non-interest expense totaled $70.8 million for Q2 2021, an increase of $8.9 million compared to Q1 2021. The increase was primarily due to approximately $2.5 million of compensation expense associated with an executive’s retirement and other one-time benefits, $2.4 million of increased PPP-related costs primarily due to outside professional services used to support the PPP forgiveness process and the Company’s participation in the latest round of PPP, increased consumer installment servicing expense of $1.0 million, increased stock-based compensation of $0.9 million related to new awards, and a benefit (release) to credit losses for unfunded commitments of $1.3 million recorded in Q1 2021. “Looking ahead, we expect non-interest expenses to be lower in Q3 2021,” stated Ms. Leibold.

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Taxes

Income tax expense from continuing operations increased by $2.5 million to $20.1 million in Q2 2021 from $17.6 million in Q1 2021 primarily due to an increase in compensation expense associated with an executive’s retirement that exceeded the limit for tax deduction purposes, along with an increase in projected pre-tax income from continuing operations. Customers expects the full-year 2021 effective tax rate from continuing operations to be approximately 23% to 25%, which is comparable to previous years.

Net Loss From Discontinued Operations

The divestiture of BankMobile Technologies, Inc. was completed on January 4, 2021, and its historical financial results are presented as discontinued operations.

Outlook

“Looking ahead, we are very optimistic about the prospects of our company. The best-in-class tech agility of Customers Bancorp has allowed us to be a major participant in the third round of PPP and to incubate new lines of businesses that leverage our fintech relationships. We expect to launch a private real-time, blockchain-based B2B payments platform with integration of digital and legacy payment rails. The platform will deliver enhanced payments functionality for our business clients and is expected to generate additional deposit growth in targeted niches, such as real estate, monetary and currency exchanges and institutional investments. We also expect our tangible common equity and regulatory capital levels to achieve targeted levels within the next 12 months and our credit quality to remain in line with or better than peers. The financial benefits of PPP aside, we project our recurring earnings power to expand to at least the $4.00 level during 2021 and 2022 and expect to achieve $6.00 in core EPS in 2025 rather than 2026,” concluded Mr. Sidhu.

The Company’s updated financial guidance is as follows:

  • Loan growth, excluding PPP and mortgage warehouse balances, is expected to average in the mid-to-high single digits over the next several quarters.
  • The balance of commercial loans to mortgage companies is expected to decline to $1.6 billion – $2.4 billion at December 31, 2021.
  • The Total Capital Ratio is expected to be about 14.0% by year-end 2021. The TCE ratio excluding PPP loans is expected to be close to 9.0% by year-end 2021.
  • The Company projects the NIM, excluding PPP loans, to remain within the 3.25% – 3.50% range for the second half of 2021.
  • The Company projects an effective tax rate from continuing operations for 2021 of 23.0% – 25.0%.
  • The Company now expects to earn at least $6.00 in core EPS in 2021 and 2022. The Company’s core EPS guidance includes the net interest income expected to be earned on the PPP loans.
  • Excluding PPP loans, the Company expects to earn at least $4 in core EPS in 2021 and 2022 and expect to achieve $6 in core EPS by 2025 rather than 2026.

2021 NIM expansion is expected to be achieved by:

  • Remixing the loan portfolio away from commercial loans to mortgage companies toward other C&I categories and consumer installment loans.
  • Restructuring of the asset and liability side of the balance sheet that was completed in Q1 2021.
  • Bringing the Company’s total cost of deposits down to around 35 basis points by year-end 2021.

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