Net Income of $33.2 million, or $1.01 Per Diluted Share, Record Core Earnings of $70.3 million, or $2.14 Per Diluted Share
5th Largest PPP Lender (Round 3) in U.S. and #1 in Peer Group
~$200 million of Expected Deferred Origination Fees Earned In Just 2.5 Months of 2021
- Q1 2021 net income available to common shareholders was $33.2 million, or $1.01 per diluted share. Q1 2021 results were impacted by $38 million of one-time merger-related and tax expenses resulting from the divestiture of BankMobile Technologies, Inc. (“BMT”) on January 4, 2021. These items and BMT’s historical financial results for periods prior to the divestiture have been reflected in the consolidated financial statements as discontinued operations. Current and prior period core earnings exclude the impact of discontinued operations.
- Q1 2021 core earnings (a non-GAAP measure) were $70.3 million, or $2.14 per diluted share, up 29% over Q4 2020 and 1,282% over Q1 2020.
- Q1 2021 ROAA was 0.80% and Core ROAA (a non-GAAP measure) was 1.61%. Q4 2020 ROAA was 1.23% and Core ROAA (a non GAAP measure) was 1.26%.
- Q1 2021 ROCE was 14.66% and Core ROCE (a non-GAAP measure) was 31.03%. Q4 2020 ROCE was 24.26% and Core ROCE (a non-GAAP measure) was 25.06%.
- Adjusted pre-tax pre-provision net income (a non-GAAP measure) for Q1 2021 was $86.8 million, an increase of 11% over Q4 2020 and 96% over Q1 2020. Q1 2021 adjusted pre-tax pre-provision return on average assets (a non-GAAP measure) was 1.90% compared to 1.70% for Q4 2020 and 1.54% for Q1 2020.
- Q1 2021 results include a net benefit to (or release from) provision for credit losses on loans and leases of $2.9 million. At March 31, 2021, the coverage of credit loss reserves for loans and leases held for investment, excluding Paycheck Protection Program (“PPP”) loans (a non-GAAP measure), was 1.71% compared to 1.90% at December 31, 2020.
- Non-performing assets were 0.26% of total assets at March 31, 2021 compared to 0.39% at December 31, 2020. Allowance for credit losses equaled 264% of non-performing loans at March 31, 2021, up from 204% at December 31, 2020.
- Net interest income for Q1 2021 grew $9.8 million, or 8.0%, over Q4 2020 and $51.4 million, or 63.2% over Q1 2020.
- Q1 2021 net interest margin (a non-GAAP measure) increased 22 basis points from Q4 2020 to 3.00%, mostly due to PPP loans at an average yield of 3.41% due to the acceleration of deferred fee recognition upon loan forgiveness. Q1 2021 net interest margin, excluding the impact of PPP loans (a non-GAAP measure), was stable at about 3.0%.
- Q1 2021 balance sheet restructuring, which included terminating $850 million of cash flow hedges and selling $325 million of investment securities is expected to contribute to net interest margin expansion of about 15 basis points while neutral to Q1 2021 capital levels.
- Total loans and leases increased $5.8 billion, or 56.6% year-over-year, driven by PPP loans of $5.2 billion and strong growth in short-term commercial loans to mortgage companies of $890.1 million. Total loans and leases, excluding PPP loans (a non-GAAP measure), increased $668.8 million, or 6.5% year-over-year.
- Total deposits increased $4.1 billion, or 48.2% year-over-year, which included a $2.9 billion or 96.4% increase in demand deposits. The total cost of deposits dropped to 0.53% in Q1 2021, a decline of 98 basis points from 1.51% in the year-ago quarter.
- Total deferments declined to $189.1 million, or 1.7% of total loans and leases excluding PPP loans (a non-GAAP measure) at March 31, 2021, down from $750.5 million, or 7.3% of total loans and leases excluding PPP loans (a non-GAAP measure) at July 24, 2020.
- Q1 2021 efficiency ratio was 48.89% compared to 54.48% for Q1 2020. Q1 2021 core efficiency ratio was 41.13% compared to 52.97% in Q1 2020 (non-GAAP measures).
- We expect to launch a private real-time, blockchain-based B2B payments platform with integration of digital and legacy payment rails. The platform will deliver enhanced payments functionality for our business clients and is expected to generate additional deposit growth in targeted niches, such as real estate, monetary and currency exchanges and institutional investments.
WEST READING, Pa.–(BUSINESS WIRE)–$CUBI #earnings–Customers Bancorp, Inc. (NYSE: CUBI), the parent company of Customers Bank (collectively “Customers” or “CUBI”), today reported first quarter 2021 (“Q1 2021”) net income to common shareholders of $33.2 million, or $1.01 per diluted share, down from fourth quarter 2020 (“Q4 2020”) net income to common shareholders of $52.8 million, or $1.65 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. Core earnings for Q1 2021 totaled $70.3 million, or $2.14 per diluted share, up from Q4 2020 core earnings of $54.6 million, or $1.71 per diluted share (non-GAAP measures). Net interest margin, tax equivalent (“NIM”) expanded 22 basis points during Q1 2021 to 3.00% from 2.78% in Q4 2020 (non-GAAP measures).
“We are extremely pleased with our financial results for the first quarter and are excited that 2021 is off to a great start,” remarked Customers Bancorp Chairman and CEO, Jay Sidhu. “At this time, we have close to 200,000 of loans approved by the SBA in Round 3 of the Paycheck Protection Program (“PPP”) as we continue to support small businesses, not-for-profits, and the communities we serve while improving the financial position of Customers Bank at the same time. In total, we expect to generate approximately $400 million of pre-tax revenues from our participation in this program, placing us in the Top 5 in the U.S., all because of our entrepreneurial style, effective risk management and technology-based execution. We also continue to make great strides in improving our core profitability while maintaining superior asset quality. The restructuring of our balance sheet in Q1 2021 combined with the on-going efforts to reduce total deposit costs is expected to drive further net interest margin expansion in future quarters. Our tremendously successful execution on these initiatives will result in significant capital accretion, leaving us well positioned to support future growth and to possibly consider adopting a common stock repurchase program or redeeming all or a portion of our preferred stock in 2021 or 2022,” Mr. Sidhu concluded.
Key Balance Sheet Trends
Total loans and leases increased $5.8 billion, or 56.6%, to $16.2 billion at March 31, 2021 compared to the year-ago period. PPP loans were $5.2 billion at March 31, 2021. Additionally, the loan mix improved year-over-year as commercial loans to mortgage companies increased $0.9 billion to $3.5 billion, commercial and industrial loans and leases increased $147.2 million to $2.2 billion, consumer installment loans increased $89.9 million to $1.4 billion, commercial real estate owner occupied loans increased $46.1 million to $590.1 million and construction loans increased $41.4 million to $156.8 million. The commercial loans to mortgage companies trend has been a function of greater refinance activity due to sharply lower interest rates, an increase in home purchase volumes, and market share gains from other banks. These increases in loans and leases were partially offset by decreases in multi-family loans of $409.5 million to $1.7 billion, residential mortgages of $69.1 million to $295.7 million and commercial real estate non-owner occupied loans of $58.0 million to $1.2 billion. “Looking ahead, we see continued growth in core C&I loans offsetting some of the expected decreases in loans to mortgage companies in the second half of this year,” stated Sidhu.
Total deposits increased $4.1 billion, or 48.2%, to $12.5 billion at March 31, 2021 compared to the year-ago period. Total demand deposits increased $2.9 billion, or 96.4%, to $5.9 billion, money market deposits increased $1.6 billion, or 55.5%, to $4.4 billion, and savings deposits increased $315.4 million, or 27.0%, to $1.5 billion. These increases were offset, in part, by a decrease in time deposits of $0.7 billion, or 52.4%, to $665.9 million. The total cost of deposits declined by 98 basis points to 0.53% in Q1 2021 from 1.51% in the year-ago quarter.
Very Strong Growth in Tangible Common Equity and Tangible Book Value Per Share
Customers experienced significant improvements in regulatory capital ratios in Q1 2021 as compared to a year ago. Customers Bancorp’s tangible common equity (a non-GAAP measure) increased by $235.0 million to $967.3 million at March 31, 2021 from $732.3 million at March 31, 2020, and the tangible book value per common share (a non-GAAP measure) increased to $30.01 at March 31, 2021 from $23.27 at March 31, 2020, an increase of 29%. “This increase in tangible common equity and tangible book value per common share was achieved in spite of a decrease in retained earnings of $61 million recorded on January 1, 2020 upon the adoption of CECL,” commented Mr. Sidhu. Customers remains well capitalized by all regulatory measures. 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 12.5% and 7.1%, respectively, at March 31, 2021. At December 31, 2020, Customers Bancorp’s total risk based capital ratio and TCE ratio, excluding PPP loans (a non-GAAP measure), were 11.9% and 6.4%, 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 by the second half of 2021 with the TCE ratio excluding PPP loans to be about 8.5% 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 multifamily, mortgage warehouse, and specialty finance lines of business, 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 $176.1 million, or 1.6% of total loans and leases, excluding PPP loans (a non-GAAP measure), at March 31, 2021, down from $202.1 million, or 1.8% of total loans and leases, excluding PPP loans, at December 31, 2020. Of the $176.1 million in total commercial deferments, $83.1 million, or 47.2%, were principal only deferments. 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 March 31, 2021, Customers had $84.6 million in energy and utilities exposure (with no deferments); $62.0 million in colleges and universities (no deferments requested); $66.2 million in CRE retail sales exposure (mostly auto sales; with no deferments); $30.4 million in franchise restaurants and dining (with no deferments); and $26.9 million in entertainment only businesses (with no deferments).
- At March 31, 2021, the hospitality portfolio was $400.6 million, or 3.6% of total loans and leases, excluding PPP loans, with $125.9 million in deferment. Approximately 79.7% ($318.8 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 majority of the hotels, based on our recent assessment, have sufficient cash resources to get through the COVID-19 crisis and, for those who may need assistance, the Bank is working with them to bridge any potential cash flow gaps.
- At March 31, 2021, the healthcare portfolio was approximately $385 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 62% as of quarter-end. 55% of the portfolio was in New York City, of which 71% was in rent controlled/regulated properties. As of March 31, 2021, $9.3 million of the portfolio was on deferment.
- At March 31, 2021, investment CRE had a weighted average loan to value of 64%, with approximately 53% of the portfolio housed in the New York and Philadelphia and surrounding markets. As of March 31, 2021, $4.4 million of the portfolio was on deferment, with minimal exposure to the office market.
Consumer installment, mortgage and home equity loan portfolios continue to perform well
- Total consumer-related deferments declined to $13.0 million, or 0.1% of total loans and leases, excluding PPP loans (a non-GAAP measure), at March 31, 2021, down from $16.4 million at December 31, 2020.
- The $1.4 billion consumer installment loan portfolio outperformed industry peers with deferments dropping to 0.5% and 30+ DPD delinquency at only 0.8%. 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 Q1 2021.
- The consumer installment portfolio has been managed to moderate growth and strengthening credit quality, by replacing run-off with CB Direct originations with strong FICO scores.
Key Profitability Trends
Net Interest Income
Net interest income totaled $132.7 million in Q1 2021, an increase of $9.8 million from Q4 2020, primarily due to a $341.9 million net increase in average interest-earning assets. Earning assets were driven by increases in consumer and commercial and industrial loans, investment securities and the new 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. The benefit of this net growth resulted in a 22 basis point linked-quarter increase in NIM (a non-GAAP measure) to 3.00%. Compared to Q4 2020, total loan yields increased 40 basis points to 4.02%. The increase is attributable to increased originations of consumer installment loans and PPP loan forgiveness from the first two rounds. The cost of interest-bearing deposits in Q1 2021 decreased by 7 basis points to 0.69% due to the on-going efforts to reduce the total cost of deposits and strategic decisions to reallocate deposit funding to lower cost deposits. Total borrowing costs increased by 6 basis points to 1.00% primarily due to lower utilization of the FRB PPP Liquidity Facility, costing 0.35%, due to PPP loan forgiveness from the first two rounds and excess cash available to fund PPP round 3 originations.
Provision for Credit Losses
The provision for credit losses on loans and leases in Q1 2021 was a $2.9 million benefit to (or release from) the provision, compared to a $2.9 million benefit (release) in Q4 2020. The benefit (release) in Q1 2021 primarily resulted from a continuing improvement in forecasts of macroeconomic conditions since Q4 2020. The allowance for credit losses on loans and leases represented 1.7% of total loans and leases receivable, excluding PPP loans (a non-GAAP measure) at March 31, 2021, compared to 1.9% at December 31, 2020, 2.0% at March 31, 2020, and 0.8% at December 31, 2019. Customers’ non-performing loans at March 31, 2021 were only 0.3% of total loans and leases.
Non-interest income totaled $18.5 million for Q1 2021, an increase of $2.4 million compared to Q4 2020. The increase in non-interest income primarily resulted from increases of $23.5 million in gain on sale of investment securities, $1.7 million in unrealized gain on derivatives, $1.1 million in other non-interest income, $0.6 million in mortgage warehouse transactional fees and $0.4 million in commercial lease income, partially offset by a $24.5 million increase in loss on cash flow hedge derivative terminations and $0.4 million decrease in unrealized gains on equity securities issued by a foreign entity.
The increase in gain on sale of investment securities primarily resulted from the sales of approximately $325 million of investment securities in Q1 2021, compared to sales of $10 million during Q4 2020. The increase in other non-interest income was driven by an unrealized loss on a loan held for sale of $1.1 million related to one commercial credit in Q4 2020. The increase in unrealized gain on derivatives was primarily due to an increased credit valuation adjustment of $0.9 million resulting from changes in market interest rates and increased interest rate swap fees of $0.8 million driven by higher volumes. The increase in mortgage warehouse transactional fees primarily resulted from a utilization surcharge, partially offset by a decrease in volume from lower seasonal demand. The increase in commercial lease income was driven by continued organic growth. The increase in losses realized from terminations of derivatives designated in cash flow hedging relationships resulted from the restructuring of the liability side of the balance sheet to improve overall funding mix and utilize excess cash on the balance sheet. The decrease in unrealized gain on equity securities resulted from a smaller improvement in fair value of equity securities issued by a foreign entity in Q1 2021 compared to Q4 2020.
Non-interest expense totaled $61.9 million for Q1 2021, an increase of $2.0 million compared to Q4 2020. The increase in non-interest expense primarily resulted from increases of $4.0 million in technology, communication and bank operations, $0.8 million in professional services, $0.6 million in advertising and promotion and $0.3 million in commercial lease depreciation, partially offset by decreases of $1.6 million in salaries and employee benefits, $1.3 million in other non-interest expense, $0.4 million in loan workout expenses and $0.3 million in merger and acquisition related expenses.
The increase in technology, communication and bank operations resulted from higher deposit servicing fees and interchange maintenance fees paid to BM Technologies, Inc., the successor entity of BMT that was divested on January 4, 2021, due to increased deposit balances and debit card transactions. The increase in professional services was primarily due to outside professional services used to support the PPP forgiveness process and our participation in PPP round 3. The increase in advertising and promotion was due to lower spend and credits from advertising agencies in 2020. The increase in commercial lease depreciation was driven by continued organic growth. The decrease in salaries and employee benefits was primarily due to lower incentives, sales commissions, and stock based compensation expense, partially offset by higher employee benefits and payroll taxes in Q1 2021. The decrease in loan workout expenses primarily resulted from a recovery from a commercial relationship. The decrease in merger and acquisition related expenses primarily resulted from a decrease in the Bank’s direct costs incurred as the divestiture of BMT was completed on January 4, 2021.
Income tax expense from continuing operations decreased by $5.8 million to $17.6 million in Q1 2021 from $23.4 million in Q4 2020 primarily due to an increase in investment tax credits in 2021 and the recording of net discrete tax benefits associated with the divestiture of BMT and the recognition of a deferred tax asset related to the outside basis difference of its foreign subsidiaries. Customers expects the full-year 2021 effective tax rate from continuing operations to be approximately 23% to 24%, which is comparable to previous years.
Net Loss From Discontinued Operations
The divestiture of BMT was completed on January 4, 2021, and BMT’s historical financial results are presented as discontinued operations. The net loss from discontinued operations of $38.0 million, net of income tax expense of $17.7 million in Q1 2021 primarily resulted from previously reported restricted stock awards granted to certain team members of BMT and the effect of the divestiture being treated as a taxable asset sale for tax purposes, offset in part by a tax benefit related to the restricted stock awards. BMT’s historical financial results for periods prior to the divestiture have been reflected in Customers’ consolidated financial statements as discontinued operations.
“Looking ahead, we are very optimistic about the prospects of our company. The ongoing digital transformation 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 about the $4.00 level during 2021 and 2022 and remain on track to achieve $6.00 in core EPS in 2026,” concluded Mr. Sidhu.
Our 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-$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 about 8.5% by year-end 2021.
- We project the NIM excluding PPP loans to expand into the 3.10%-3.30% range by Q4 2021.
- We project an effective tax rate from continuing operations for 2021 of 23.0%-24.0%.
- We expect to earn at least $5.00 in core EPS in 2021 and 2022 and remain on track to earn $6.00 in core EPS in 2026. Our core EPS guidance includes the net interest income expected to be earned on the PPP loans.
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 loans.
- Restructuring of the asset and liability side of the balance sheet that was completed in Q1 2021.
- Bringing our total cost of deposits down to around 40 basis points by Q2 2021.
BankMobile Technologies, Inc.:
- On January 4, 2021, Customers completed the previously announced divestiture of BMT, the technology arm of the BankMobile segment, to Megalith Financial Acquisition Corp., a Delaware corporation (“Megalith”). In connection with the closing of the divestiture, Megalith changed its name to “BM Technologies, Inc.
Jay Sidhu, Chairman & CEO 610-935-8693
Richard Ehst, President & COO 610-917-3263
Carla Leibold, CFO 484-923-8802
Sam Sidhu, Head of Corporate Development 212-843-2485