Net Income of $52.8 million, or $1.65 Per Diluted Share, up 121% over Fourth Quarter 2019
Record Full Year 2020 Net Income of $118.5 million or $3.74 Per Diluted Share, up 83% over Full Year 2019
Q4 2020: ROAA of 1.23%, ROCE of 24.26%, and Adjusted PTPP ROAA of 1.63%
- BankMobile divestiture completed on January 4, 2021. Holders of Customers Bancorp’s common stock as of December 18, 2020 received an aggregate of 4.9 million shares of BM Technologies, Inc. common stock as special distribution valued at $14.87 per share at the closing date of the transaction, or having a market value of approximately $73 million.
- Q4 2020 core earnings (a non-GAAP measure) were $52.6 million or $1.65 per diluted share, up 121% over Q4 2019.
- Adjusted pre-tax pre-provision net income (a non-GAAP measure) for Q4 2020 was $74.9 million, an increase of 67.6% over Q4 2019. Q4 2020 adjusted pre-tax pre-provision return on average assets (a non-GAAP measure) was 1.63%.
- Q4 2020 results include a net benefit to (or release from) provision for credit losses on loans and leases of $2.9 million. At December 31, 2020, the coverage of credit loss reserves for loans and leases held for investment, excluding Paycheck Protection Program (“PPP”) loans (a non-GAAP measure), was 1.90%, up from 0.77% at December 31, 2019.
- Non-performing assets were 0.39% of total assets at December 31, 2020 compared to 0.34% at September 30, 2020. Our allowance for credit losses equaled 204% of non-performing loans at December 31, 2020, down from 245% at September 30, 2020.
- Total revenues in Q4 2020 were up 3.9% linked-quarter and 41.9% on a year-over-year basis. Strong revenue growth was driven by an expansion in the net interest margin (excluding the impact of PPP loans (a non-GAAP measure), and the recognition of deferred origination fees and interest income on PPP loans).
- Net interest income for Q4 2020 grew $15.5 million or 14.4% over the prior quarter and $45.4 million or 58.4% over Q4 2019. Net interest income, excluding the impact of PPP loans (a non-GAAP measure), increased by $10.3 million or 11.7% over Q3 2020 and $20.1 million or 25.9% over Q4 2019.
- Q4 2020 net interest margin (a non-GAAP measure) increased 28 basis points from Q3 2020 to 2.78%, mostly due to PPP loans at an average yield of 2.45%. Q4 2020 net interest margin, excluding the impact of PPP loans (a non-GAAP measure), was 3.04%, an 18 basis point increase from Q3 2020 and a 15 basis point increase from Q4 2019.
- Total loans and leases increased $5.8 billion or 57.5% year-over-year driven by PPP loans of $4.6 billion and strong growth in short-term commercial loans to mortgage companies of $1.4 billion. Total loans and leases, excluding PPP loans, increased $1.2 billion or 12.1% year-over-year.
- Total deposits increased $2.7 billion or 30.8% year-over-year, which included a $2.2 billion or 83.9% increase in demand deposits. The total cost of deposits dropped to 0.58% in Q4 2020, a decline of 107 basis points from 1.65% in the year-ago quarter.
- Total deferments declined to $218.5 million or 2.0% of total loans and leases excluding PPP loans (a non-GAAP measure) at December 31, 2020, down from $750.5 million or 7.3% of total loans and leases excluding PPP loans (a non-GAAP measure) at July 24, 2020.
- Commercial criticized loans as a percent of total loans and leases, excluding PPP loans (a non-GAAP measure), remained relatively low at 4.05% at December 31, 2020.
WEST READING, Pa.–(BUSINESS WIRE)–$CUBI #Earnings–Customers Bancorp, Inc. (NYSE: CUBI), the parent company of Customers Bank (collectively “Customers” or “CUBI”), today reported fourth quarter 2020 (“Q4 2020”) net income to common shareholders of $52.8 million or $1.65 per diluted share, up from third quarter 2020 (“Q3 2020”) net income to common shareholders of $47.1 million or $1.48 per diluted share. Core earnings for Q4 2020 totaled $52.6 million or $1.65 per diluted share, up from Q3 2020 core earnings of $38.2 million or $1.20 per diluted share (non-GAAP measures). Net interest margin, tax equivalent (“NIM”) expanded 28 basis points during Q4 2020 to 2.78% from 2.50% in Q3 2020 (non-GAAP measures). NIM excluding PPP loans expanded 18 basis points to 3.04% in Q4 2020 from 2.86% in Q3 2020 (non-GAAP measures). ROAA for Q4 2020 was 1.23%, up 11 basis points from Q3 2020 ROAA of 1.12%. ROCE for Q4 2020 was 24.26%, up 121 basis points from Q3 2020 ROCE of 23.05%.
Full year 2020 (“FY 2020”) net income to common shareholders was $118.5 million or $3.74 per diluted share, up from full year 2019 (“FY 2019”) net income to common shareholders of $64.9 million or $2.05 per diluted share. Core earnings for FY 2020 totaled $110.6 million or $3.49 per diluted share, compared to core earnings of $72.0 million or $2.28 per diluted share for FY 2019 (non-GAAP measures). FY 2020 NIM declined 4 basis points to 2.71% from FY 2019 NIM of 2.75% (non-GAAP measures). FY 2020 NIM excluding PPP loans expanded 21 basis points to 2.96% from FY 2019 NIM of 2.75% (non-GAAP measures). ROAA for FY 2020 was 0.85%, up 11 basis points from FY 2019 ROAA of 0.74%. ROCE for FY 2020 was 14.55%, up 625 basis points from FY 2019 ROCE of 8.30%.
“In a year of extraordinary circumstances, our institution rose to the challenge of supporting our team members and their families, our communities and our clients by providing outstanding customer service and responsiveness at a time when it was needed most,” remarked Customers Bancorp Chairman and CEO, Jay Sidhu. “In providing approximately 100,000 small businesses and nonprofits access to Paycheck Protection Program loans, we were able to help save thousands of jobs in the communities we serve and improve the financial position of Customers Bank at the same time. We generated record earnings in 2020, driven by expansion of NIM as well as PPP related income and expansion in our core net interest margin. We achieved these results while maintaining superior asset quality during the pandemic and significantly improving the quality of our funding mix. And in early January, as promised, we successfully completed the divestiture of BankMobile, and are pleased to provide a special distribution of BM Technologies, Inc. (BMTX) stock to our shareholders with current market value of about $75 million,” Mr. Sidhu concluded.
Key Balance Sheet Trends
Total loans and leases increased $5.8 billion, or 57.5%, to $15.8 billion at December 31, 2020 compared to the year-ago period. PPP loans originated directly or through fintech partnerships were $4.6 billion at December 31, 2020. Additionally, the loan mix improved year-over-year as commercial loans to mortgage companies increased $1.4 billion to $3.7 billion, commercial and industrial loans and leases increased $473.1 million to $2.3 billion, construction loans increased $23.3 million to $140.9 million, and commercial real estate owner occupied loans increased $20.4 million to $572.3 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 planned decreases in multi-family loans of $628.9 million to $1.8 billion and residential mortgages of $62.8 million to $323.3 million. “Looking ahead, we see continued growth in core C&I loans offsetting some of the expected decreases in loans to mortgage companies,” stated Sidhu.
Total deposits increased $2.7 billion, or 30.8%, to $11.3 billion at December 31, 2020 compared to the year-ago period. Total demand deposits increased $2.2 billion, or 83.9%, to $4.7 billion, money market deposits increased $1.1 billion, or 32.1%, to $4.6 billion, and savings deposits increased $395.6 million, or 43.0%, to $1.3 billion. These increases were offset, in part, by a decrease in time deposits of $1.0 billion, or 60.9%, to $651.9 million. The total cost of deposits declined by 107 basis points to 0.58% in Q4 2020 from 1.65% in the year-ago quarter.
Customers’ experienced moderate declines in regulatory capital ratios in 2020, driven by strong growth in commercial loans to mortgage companies of $1.4 billion. However, Customers Bancorp’s tangible common equity (a non-GAAP measure) increased by $65.2 million to $885 million at December 31, 2020 from $820 million at December 31, 2019, and the tangible book value per common share (a non-GAAP measure) increased to $27.92 at December 31, 2020 from $26.17 at December 31, 2019. “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 11.9% and 6.4%, respectively, at December 31, 2020. At September 30, 2020, Customers Bancorp’s total risk based capital ratio and TCE ratio, excluding PPP loans (a non-GAAP measure), were 11.3% and 5.9%, respectively. “As a consequence of PPP related income and a potential cyclical decline in residential mortgage activity, we expect our capital levels to increase sharply in 2021 and be in the 7.5% or higher range 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 $202.1 million or 1.8% of total loans and leases, excluding PPP loans (a non-GAAP measure), at December 31, 2020, down from $277 million, or 2.4% of total loans and leases, excluding PPP loans, at September 30, 2020. Of the $202.1 million in total commercial deferments, $107.4 million or 53.1% were principal only deferments. Customers’ commercial deferments peaked at about $1.2 billion earlier this year.
- Exposure to industry segments significantly impacted by COVID-19 is not substantial. At December 31, 2020, Customers had $87 million in energy and utilities exposure; $62 million in colleges and universities (no deferments requested); $72 million in CRE retail sales exposure (mostly auto sales; with no deferments); $30 million in franchise restaurants and dining (with no deferments); and $27 million in entertainment only businesses (with no deferments).
- At year-end, the hospitality portfolio was $406 million or 3.6% of total loans and leases excluding PPP loans, with $126 million in deferment. Approximately 79% ($318 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 December 31, 2020, the healthcare portfolio was approximately $359 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 an average loan to value of 61% as of quarter-end. 55% of the portfolio was in New York City, of which 69% was in rent controlled/regulated properties. As of December 31, 2020, $11 million of the portfolio was on deferment.
- At December 31, 2020, investment CRE had a loan to value of 64%, with approximately 30% of the portfolio housed in the New York, Philadelphia, and Boston metro and surrounding markets. As of December 31, 2020, $29 million of the portfolio was on deferment.
Consumer installment, mortgage and home equity loan portfolio continues to perform well
- Total consumer-related deferments declined to $16.4 million, or 0.1% of total loans and leases, excluding PPP loans (a non-GAAP measure), at December 31, 2020, down from $25 million, or 0.2% of total loans and leases, excluding PPP loans, at September 30, 2020.
- The $1.2 billion consumer installment loan portfolio outperformed industry peers with deferments dropping to 0.8% and 30+ DPD delinquency at only 1.1%. 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 Q4 2020.
- 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.
Aggressively addressing non-performing assets
- During January 2021, Customers sold a collateral dependent loan secured by a hotel property in Massachusetts. This loan made up approximately 24% of non-performing assets as of December 31, 2020. “We expect our credit quality to improve or stay unchanged over the next few quarters,” stated Sidhu.
Key Profitability Trends
Net Interest Income
Net interest income totaled $122.9 million in Q4 2020, an increase of $15.5 million from Q3 2020, primarily due to a $480.9 million increase in average interest-earning assets. Earning assets were driven by increases in commercial loans to mortgage companies, commercial and industrial loans and leases, and investment securities. The benefit of this growth resulted in a 28 basis point linked-quarter increase in NIM (a non-GAAP measure) to 2.78%. Compared to Q3 2020, total loan yields increased 21 basis points to 3.62%. The increase is attributable to increased originations of commercial loans to mortgage companies, commercial and industrial loans and leases, and PPP loan forgiveness which accelerated the recognition of net deferred loan origination fees. This increase is partially offset by lower market interest rates due to the Federal Reserve’s forecast of interest rates at zero through 2023. The cost of interest-bearing deposits in Q4 2020 decreased by 9 basis points to 0.76% due to the decline in market interest rates and strategic decisions to reallocate deposit funding to lower cost deposits. Borrowing costs decreased by 3 basis points to 0.94% primarily due to the utilization of the FRB PPP Liquidity Facility, costing 0.35%, to fund PPP loans.
Provision for Credit Losses
The provision for credit losses on loans and leases in Q4 2020, which was calculated under the CECL accounting standard effective January 1, 2020, was a $2.9 million benefit to (or release from) the provision, compared to a $13.0 million provision in Q3 2020. The decrease in Q4 2020 primarily resulted from an improvement in forecasts of macroeconomic conditions since Q3 2020. The allowance for credit losses on loans and leases represented 1.9% of total loans and leases receivable, excluding PPP loans (a non-GAAP measure) at December 31, 2020, compared to just over 2.0% at September 30, 2020, and 0.8% at December 31, 2019. Customers’ non-performing loans at December 31, 2020 were only 0.45% of total loans and leases. Our Q4 2020 non-performing loans were impacted by one commercial real estate credit, which was resolved during January 2021, reducing the non performing asset ratio to 0.30% of the assets (a non-GAAP measure).
Non-interest income totaled $23.8 million for Q4 2020, a decrease of $10.0 million compared to Q3 2020. The decrease in non-interest income primarily resulted from decreases of $11.7 million in gain on sale of investment securities, $0.7 million in mortgage banking income, $0.4 million in interchange and card revenue, and $0.7 million in other non-interest income, partially offset by increases of $1.4 million in gain on sale of SBA and other loans, a $1.1 million increase in unrealized gains on equity securities issued by a foreign entity, $0.4 million in mortgage warehouse transactional fees, and $0.3 million in commercial lease income.
The decrease in gain on sale of investment securities primarily resulted from the sale of $58.4 million of agency-guaranteed mortgage-backed securities and $70.0 million in corporate notes in Q3 2020, compared to sales of $10 million in corporate notes during Q4 2020. The decrease in mortgage banking income was mainly related to unrealized losses on derivatives. The decrease in interchange and card revenue primarily resulted from lower debit card spending volume. The decrease in other non-interest income was driven by an unrealized loss on a loan held for sale of $1.1 million during Q4 2020, partially offset by a net derivative valuation adjustment of $0.2 million due to changes in market interest rates and increased SERP income of $0.3 million. The increase in gain on sale of SBA and other loans was driven by increased sales volume. The increase in unrealized gains on equity securities issued by a foreign entity primarily resulted from an increase in the valuation of those securities. The increase in mortgage warehouse transactional fees primarily resulted from an increase in transaction volume due to continued low market interest rates. The increase in commercial lease income was driven by continued organic growth in volume.
Non-interest expense totaled $71.2 million for Q4 2020, an increase of $5.6 million compared to Q3 2020. The increase in non-interest expense primarily resulted from increases of $5.3 million in other non-interest expense, $1.1 million in salaries and employee benefits, $0.9 million in provision for operating losses, and $0.3 million in commercial lease depreciation, partially offset by decreases of $1.1 million in FDIC assessments, $0.7 million in loan workout expenses, and $0.4 million in occupancy expenses. The increase in other non-interest expense primarily resulted from a decrease in operating cost reimbursements from Customers’ white label partnership. The increase in salaries and employee benefits was primarily due to lower stock based compensation expense in Q3 2020. The increase in provision for operating losses primarily resulted from an increase in the estimate for fraud related losses. The increase in commercial lease depreciation was driven by continued organic growth in volume. The decrease in FDIC assessments, non-income taxes and regulatory fees was a function of an increase in FDIC assessment rates due to the temporary utilization of brokered deposits to fund PPP loans in Q3 2020. The decrease in loan workout expenses primarily resulted from lower costs related to the workout of two commercial relationships in Q3 2020. The decrease in occupancy expenses primarily resulted from a decrease in rent expense as we continue to reassess our office spaces and branches.
Income tax expense increased by $10 million to $22.2 million in Q4 2020 from $12.2 million in Q3 2020 due to higher pre-tax income and effective tax rate. The effective tax rate increased to 28.3% for Q4 2020 compared to 19.5% for Q3 2020 primarily due to a lower annual benefit from investment tax credits than what was estimated in Q3 2020. Customers expects the full-year 2021 effective tax rate to be approximately 21% to 22%.
“Looking ahead, we are very optimistic about the prospects of our company. The ongoing digital transformation of Customers Bancorp has positioned us well to be a major participant in the second round of PPP and to incubate new lines of businesses that leverage our fintech relationships. We expect our tangible common equity and regulatory capital levels to achieve targeted levels within the next 18 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 well above the $4.00 level during 2021 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 $2.8-$3.2 billion at March 31, 2021 and $1.6-$2.4 billion at December 31, 2021.
- The Total Capital Ratio is expected to exceed 13.0% by year-end 2021. The TCE-to-TA ratio excluding PPP loans is expected to be 7.5-8.0% by year-end 2021.
- We project the NIM excluding PPP loans to expand into the 3.10%-3.30% range by Q4 2021.
- Impacted by the divestiture of BankMobile, we project non-interest income of $9.0-11.0 million and operating expenses of $59.0-$61.0 million in Q1 2021 (excluding BankMobile related severance expense).
- We project an effective tax rate for 2021 of 21.0%-22.0%, down from 24.7% in 2020.
- Our earnings trend is likely to be volatile over the next several quarters owing to our participation in PPP. We expect to earn at least $4.00 in core EPS in 2021, at least $4.50 in core EPS in 2023, 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.
- Bringing our cost of deposits to around 40 basis points during 2021.
BankMobile Technologies, Inc.:
- On January 4, 2021, Customers completed the previously announced divestiture of BankMobile Technologies Inc. (“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.” (“BMTX”). Beginning in first quarter of 2021, BMT’s historical financial results for periods prior to the divestiture will be reflected in Customers consolidated financial statements as discontinued operations.
- All Customers Bancorp shareholders on record on December 18, 2020 received approximately $73 million in value of BMTX stock at closing date of the transaction in the form of special distribution.
Status Report on Main Strategic Priorities Articulated at Last Analysts Day
Goal #1: Top Quartile Profitability with 1.25% Core ROAA in 2-3 years.
Result: Achieved 1.22% in Core ROAA (a non-GAAP measure) in Q4 2020.
Goal #2: Achieve NIM expansion to 2.75% or greater by Q4 2019, with full year 2019 NIM above 2.70%, through an expected shift in asset and funding mix.
Result: Achieved NIM of 2.78% in Q4 2020. NIM, excluding PPP loans (a non-GAAP measure), was 3.04% in Q4 2020.
Goal #3: BankMobile growth and maturity was expected with profitability achieved by year end 2019.
Result: BankMobile was profitable, and BMT was divested on January 4, 2021 resulting in the special distribution of approximately 4.9 million shares of BMTX common stock to Customers Bancorp shareholders.
Goal #4: Efficiency improvement.
Result: Customers’ efficiency ratio was 48.98% in Q4 2020, down from 50.71% in Q3 2020 and 56.98% in Q4 2019.
Goal #5: Growth in core deposits.
Result: Demand Deposit Accounts (“DDAs”) grew 84% year-over-year.
Goal #6: Maintain strong credit quality and superior risk management.
Result: Non-performing loans (“NPLs”) were only 0.45% of total loans and leases at December 31, 2020. NPLs decreased by $17 million in January 2021. We remain very focused on a strong Risk Management culture throughout our company.
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