Customers Bancorp Reports Strong Second Quarter 2020 Results

GAAP Net Income of $19.1 million, or $0.61 Per Diluted Share, up 237% over Q2 2019

Adjusted Pre-tax Pre-provision Earnings of $50.8 million, up 94% over Q2 2019

Total Assets Grew by $5.9 billion to $17.9 billion, up 49% in Q2 2020

Originated $5.2 billion in PPP Loans

Ranking #6 in Nation With Approximately 100,000 loans to Small Businesses and Non-Profits

• Q2 2020 GAAP earnings of $19.1 million, or $0.61 per diluted share, and core earnings of $19.2 million, or $0.61 per diluted share (non-GAAP measures), up 51% over Q2 2019.
• Adjusted pre-tax pre-provision net income for Q2 2020 was $50.8 million, an increase of 94% over Q2 2019 pre-tax pre-provision net income of $26.1 million (non-GAAP measures).
• Q2 2020 results include a provision for credit losses on loans and leases of $20.9 million. At June 30, 2020, the coverage of credit loss reserves for loans and leases held for investment, excluding Paycheck Protection Program (“PPP”) loans (non-GAAP measure), was 2.2%, up from 2.0% at March 31, 2020 and 0.8% at December 31, 2019.
• Total revenues up 11% over Q1 2020 and 49% over Q2 2019.
• Net interest income increased by $10.7 million, or 13.1%, over Q1 2020 and $27.3 million, or 42.2%, over Q2 2019. Net interest income, excluding the impact of PPP loan originations ( non-GAAP measure) increased by $1.4 million, or 1.7%, over Q1 2020 and $18.0 million, or 27.8%, over Q2 2019.
• Q2 2020 net interest margin excluding the impact of PPP loan originations (non-GAAP measure) was 2.97%, a 2 basis point decline from Q1 2020 and a 33 basis point increase over Q2 2019. Q2 2020 net interest margin (a non-GAAP measure) declined 34 basis points from Q1 2020 to 2.65%, mostly due to the origination of $4.8 billion of PPP loans in Q2 2020 at an average yield of 1.71%.
• Total commercial deferments declined to less than $700 million, or down to about 8.0%, as of July 24, 2020, from a peak of $1.2 billion. Total consumer deferments declined to $60 million, or 3.7%, as of July 24, 2020, from a peak of $108 million.
• Total assets were $17.9 billion at June 30, 2020, compared to $11.2 billion at June 30, 2019 and $12.0 billion at March 31, 2020. Average assets were $14.7 billion for Q2 2020, compared to $10.4 billion for Q2 2019 and $11.6 billion for Q1 2020.
• Total loans and leases increased $5.6 billion, or 57%, year-over-year driven by PPP loans of $4.8 billion and strong growth in mortgage warehouse loans of $0.8 billion and commercial and industrial loans and leases of $0.5 billion. Total loans and leases, excluding PPP loans (a non-GAAP measure), increased by $808 million, or 8%, year-over-year.
• Total deposits increased $2.8 billion, or 34%, year-over-year, which included a $2.2 billion, or 97%, increase in demand deposits.
• Asset quality remains strong. Non-performing assets were only 0.48% of total assets at June 30, 2020 and reserves equaled 185% of non-performing loans. Net charge-offs were $10.3 million, or 32 basis points of average total loans and leases on an annualized basis.
• Helped approximately 100,000 small businesses and non-profits by originating about $5.2 billion in PPP loans directly or through fintech partnerships, which is expected to add about $100 million in origination revenues over the life of the PPP loans.


WEST READING, Pa.–(BUSINESS WIRE)–$CUBI #EPS–Customers Bancorp, Inc. (NYSE: CUBI) the parent company of Customers Bank and its operating division BankMobile (collectively “Customers” or “CUBI”), today reported second quarter 2020 (“Q2 2020”) net income to common shareholders of $19.1 million, or $0.61 per diluted share. Core earnings (a non-GAAP measure) for Q2 2020 totaled $19.2 million, or $0.61 per diluted share.

“We are very pleased with our financial and business results to date in a difficult environment,” said Customers Bancorp Chairman and CEO Jay Sidhu. “But foremost, I am so pleased and proud to partner with such talented and hard-working team members at a time like this. We did not miss a beat in delivering tremendous service to our clients. And, we overcame tremendous obstacles to give access to Paycheck Protection Program loans to approximately 100,000 small businesses and non-profits. Working nearly around the clock, team members from every department worked with clients to finish loan applications to preserve the jobs of about 1 million Americans. Customers is poised for continued short-term and long-term improvements.”

In light of the COVID-19 public health crisis, Customers immediately responded and implemented the following:

Support for Team Members:

• 85% of our team members are currently working remotely and are expected to continue working remotely until a vaccine is developed;
• Special pay considerations, bonuses, additional PTO for essential front line team members;
• No furloughs; team members are at 100% pay;
• Zero-interest loans up to $2,500 are available to assist team members and their families facing challenges due to COVID-19;
• A hotline is available for any team member to call for assistance of any kind; and
• Set up a $1 million education scholarship fund for children of our team members.

Support for Consumers and Businesses:

• Participated in the SBA Paycheck Protection Program resulting in approximately $5.2 billion in PPP loan originations to date;
• Implemented payment modification programs for COVID-19 impacted clients;
• Not reporting payment deferrals to credit bureaus; and waiving or reducing certain fees.

Support for Communities:

• Donations leading to more than $1 million to communities in our footprint for urgent basic needs;
• Additional re-targeting of existing sponsorship and grants to non-profit organizations to support COVID-19 related activities;
• Provided a webinar for the entire business community on how to survive and thrive during this pandemic crisis;
• Represented community bank perspectives on CNBC and social media; and
• Engaged with all team members and our communities in fighting biases, discrimination, and inequalities for all minorities.

Looking Ahead to the Remainder of 2020 and Beyond

Mr. Sidhu stated, “Before COVID-19, Customers was projecting core earnings per share of $3.00 for 2020 with continued improvement expected in all profitability metrics. However, rapid recent changes in economic activity introduce uncertainty to our near-term profitability. We have pivoted our strategy in this environment to building a stronger balance sheet and assisting our customers, team members and community to effectively deal with this crisis. Our provision will be higher, most customer activity will slow, and there will be disruptions, but we are also seeing positive trends in deposits and opportunities to serve customers through the SBA Paycheck Protection Program as well as other U.S. Treasury and Federal stimulus programs.” Mr. Sidhu continued, “Despite all of this, we still are hoping to achieve about $3.00 per share in core earnings for 2020, subject to the amount of PPP revenues that will be recognized in 2020 and the economic environment in 2020. Longer term, we remain confident in our ability to achieve a run rate of about $6.00 per share in annual core earnings by the end of 2026.”

6th Largest PPP Lender in U.S.; #1 Among Peers

Customers, directly or through fintech partnerships, originated approximately $5.2 billion in PPP loans to date, helping approximately 100,000 small businesses and non-profits across America and preserving about 1 million jobs. The expected revenue from this digital effort and fintech partnership resulted in Customers being the 6th largest PPP lender in the U.S., ranked by number of loans originated, and #1 position among its peer group. The average loan size disbursed by Customers was among the smallest by any bank, being approximately $50,000 per business, helping these small businesses across America save about 1 million jobs. This initiative is expected to result in Customers generating an estimated $100 million in origination fees to be recognized in interest income and an additional $10 million to $15 million in net interest income, materially boosting its tangible common equity to asset ratio. “This initiative is continuing,” stated Sidhu.

Loan Portfolio Management during COVID-19 Crisis

Management’s monitoring of the loan portfolio is the highest priority at Customers. In addition to very frequent client outreach and monitoring at the individual loan level, Customers has employed a bottoms up data driven approach to analyze its commercial portfolio. “Each borrower has been stressed for liquidity, debt capacity, and business profitability using forward looking views of their particular business sector, which sometimes reflect shock, reboot, and new normal scenarios. This data driven approach, completed with our traditional high touch approach with risk management processes best positions us to get out ahead of any deterioration in credit quality,” Sidhu stated.

Here are some details about the loan portfolio with ending balances as of June 30, 2020 and deferment data presented as of July 24, 2020:

Commercial loan portfolio positioned well moving into COVID-19

• Significant portions of the portfolio represent lending activity to industries that have not been significantly impacted, or not impacted at all, such as Customers’ mortgage warehouse and specialty finance lender finance portfolios, which represent 32% and 7%, respectively, of the total commercial loan portfolio, excluding PPP loans. Borrowers in these two segments have requested no deferrals and have no delinquencies.
• Exposure to industry segments significantly impacted by COVID-19 is not substantial. The energy and utilities exposure was only $79 million (77% are wind farms); $65 million in colleges and universities (with no deferments requested); $54 million in CRE retail sales exposure (mostly auto sales); $51 million in franchise restaurants and dining; and $24 million in entertainment only businesses.
• Hospitality portfolio is approximately $413 million (about 5% of total commercial loans, excluding PPP), with 73% requesting deferment. Approximately 20% of the portfolio is operating at 95%+ occupancy under government contracts for transitional housing. The portfolio has an average loan to value of 65% (generally based on appraised value at time of origination) with approximately 75% having full or partial recourse.
• Healthcare portfolio is approximately $290 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.
• Multi-family portfolio is highly seasoned, with an average vacancy rate of 3.4% and loan to value of 56% (generally based on appraised value at time of origination). 58% of the portfolio is in New York City, of which 69% is in rent controlled/regulated properties with a vacancy rate of only 1.8%. As of July 24, 2020, 10% of the portfolio was on 90-day deferment.
• Investment CRE has a DSCR of 2.22x and loan to value of 51% (generally based on appraised value at time of origination), with most of the portfolio housed in the New York, Philadelphia, and Boston metro and surrounding markets.

Steady decline in commercial deferment rates as COVID-19 has progressed

Customers’ deferments have declined from a peak of about $1.2 billion, or about 13% of the commercial loan portfolio, to approximately $690 million, or about 8% of the commercial loan portfolio as of July 24, 2020.

Strong other consumer loan performance

• $1.3 billion other consumer loan portfolio outperforms industry peers with deferments dropping below 2% and 30+ DPD delinquency below 1%. Strong credit quality (83% 750+ FICO), low concentration in at risk job segments, and outstanding performance of CB Direct originations have resulted in solid results through end of 2Q.
• Other consumer loan portfolio being managed to zero growth and strengthening credit quality, by replacing run-off with CB Direct originations 700 FICO and above.

Aggressively addressing non-performing assets

Customers has been proactively addressing two large loans, which make up approximately 53% of non-performing assets as of June 30, 2020. Both of these assets were showing some weakness pre-COVID and Customers opted to take a proactive strategy in identifying and aggressively acting to address these two assets and move them off our balance sheet.

Laser focused on communicating with our borrowers

Undergoing an intensive and continuous portfolio management program that is laser focused on communicating with our borrowers, assessing their future prospects, and incorporating therein industry trends is Customers Bank’s style. This program involves the entire senior management team and has been, and continues to be, performed from both a market and line of business perspective. This has enabled identification of problem credits early-on and allows us to accurately assess underlying borrower/portfolio risk and mitigate activities that will lead to increased exposure.

Stress testing

In addition to loan level stress testing, Customers also completed a thorough stress testing of its entire loan portfolio to base, moderate, and most severely adverse cases. “We are pleased to report that Customers remained well capitalized; with mitigating factors, under all those scenarios,” stated Sidhu.

Status Report on Strategic Priorities Articulated at Analyst Day in October 2018, with Subsequent Updates

Improve Profitability: Top Quartile Profitability with 1.25% Core ROAA in 2-3 years

As stated during our 2018 Analysts Day in October 2018, Customers expects to remain focused on growing its core businesses, while improving margins, capital and profitability. Through favorable mix shifts in both assets and liabilities, while maintaining its superior credit quality culture and extreme focus on productivity improvement, Customers improved the overall quality of its balance sheet and deposit franchise, expanded its net interest margin, enhanced liquidity and remains relatively neutral to interest rate changes. The strategies articulated at the 2018 Analysts Day in October 2018 and subsequent progress through Q2 2020 are summarized below:

• Target ROAA in top quartile of peer group, which we expect will equate to a ROAA of 1.25% or higher over the next 2-3 years. ROAA was 0.62% in Q2 2020, up from Q1 2020 ROAA of 0.11% due to the decreases in interest expense on deposits driven by the Federal Reserve interest rate cuts of 150 basis points in March 2020 and in provision for credit losses on loans and leases, mostly due to a reduction in net charge-offs. The pre-tax and pre-provision adjusted ROAA (a non-GAAP measure) was 1.39% for Q2 2020, up 38 basis points from 1.01% in Q2 2019.
• 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. Actual results for 2019 were materially better, with full year 2019 NIM of 2.75%. NIM in Q2 2020 was 2.65%, down from 2.99% in Q1 2020 and up from 2.64% in Q2 2019. Since Q3 2018, Customers effectively restructured its balance sheet resulting in NIM expansion of 18 basis points. Net interest margin, excluding PPP loans, expected to remain on average between 2.9% and 3.0% for 2020.
• BankMobile growth and maturity was expected with profitability achieved by year end 2019. BankMobile reached profitability in Q3 2019 and maintained profitability in Q4 2019 and Q2 2020, and was also profitable in Q1 2020 on an adjusted pre-tax pre-provision basis (a non-GAAP measure). BankMobile’s profitability in Q1 2020 was negatively impacted by increased CECL-related provision expense, the COVID-19 crisis, a legal reserve of $1 million related to the previously disclosed DOE matter, increased depreciation expense related to capitalized development costs for technology placed in service in 2019 and non-capitalizable technology-related expenses. Key strategic priorities for 2020 include keeping BankMobile profitable, and attempting to divest it by the end of 2020.
• Expense control. Customers’ efficiency ratio was 58.44% in Q2 2020, down from 66.03% in Q1 2020 and 77.32% in Q2 2019. Improving operating efficiency is a high priority.
• Growth in core deposits and good quality higher-yielding loans. Demand Deposit Accounts (“DDAs”) grew 97% year-over-year. Lower yielding multi-family loans decreased by $1.0 billion, or 33%, year-over-year and were replaced by higher yielding C&I loans and leases and other consumer loans, which had net growth of $515 million and $712 million year-over-year, respectively. Customers originated $4.8 billion of PPP loans during Q2 2020 and approximately $5.2 billion year to date.
• Maintain strong credit quality and superior risk management. Non-performing loans (“NPLs”) were negatively impacted by two commercial real estate loans in northern New Jersey and Massachusetts, respectively. In spite of this, NPLs were only 0.56% of total loans and leases at June 30, 2020. Customers expects to resolve both of these credits during Q3 or Q4 2020. Reserves to NPLs at June 30, 2020 were 185% and the coverage ratio was 2.2% of loans and leases receivable, excluding PPP loans (a non-GAAP measure). The Bank is relatively neutral to interest rate changes at June 30, 2020. We remain very focused on a strong Risk Management culture throughout our company.
• Evaluate opportunities to redeem our preferred stock as it becomes callable. Redeeming all of the preferred stock as it becomes callable would result in an increase to our diluted earnings per share by approximately $0.46 annually, if not replaced. Given the current economic uncertainty stemming from the COVID-19 crisis, Customers will not call for redemption any preferred stock in 2020 or 2021.

Focus on Capital Allocation

Customers remains well capitalized by all regulatory measures. At the Customers Bank level, CET 1 ratio was 10.64% and total capital to risk weighted assets was 12.30% at June 30, 2020. “We continue to target reaching about a 7.00% tangible common equity ratio (a non-GAAP measure) organically by the end of 2020 for Customers Bancorp, from strong earnings and controlled balance sheet growth. Customers intends to fund all PPP loans by borrowing from the Federal Reserve PPP Liquidity Facility and pledging the PPP loans as collateral, eliminating any capital needs for any of its PPP loans. Since the average PPP loan on the books is approximately $50,000, we expect about 90% of our loans to be forgiven by the SBA,” Sidhu commented. “As stated earlier, PPP initiatives by Customers Bank should result in over $100 million in origination revenues, adding materially to our tangible common equity to asset ratio,” concluded Sidhu.

Q2 2020 Overview

The following table presents a summary of key earnings and performance metrics for the quarter ended June 30, 2020 and the preceding four quarters:

(1) Metric is a spot balance for the last day of each quarter presented.

(2) Non-GAAP measures exclude unrealized gains (losses) on loans HFS, investment securities gains and losses, severance expense, merger and acquisition-related expenses, losses realized from the sale of non-QM residential mortgage loans, loss upon acquisition of interest-only GNMA securities, legal reserves, credit valuation adjustments on derivatives, risk participation agreement mark-to-market adjustments, and goodwill and intangible assets. These notable items are not included in Customers’ disclosures of core earnings and other core profitability metrics. Please note that not each of the aforementioned adjustments affected the reported amount in each of the periods presented. Customers’ reasons for the use of these non-GAAP measures and a detailed reconciliation between the non-GAAP measures and the comparable GAAP amounts are included at the end of this document.

(3) Regulatory capital ratios are estimated for Q2 2020 and actual for the remaining periods. In accordance with regulatory capital rules, Customers elected an option to delay the estimated impact of CECL on its regulatory capital over a five-year transition period ending January 1, 2025. As a result, capital ratios and amounts as of Q2 2020 exclude the impact of the increased allowance for credit losses on loans and leases and unfunded loan commitments attributed to the adoption of CECL and 25% of the quarterly provision for credit losses for subsequent quarters through Q4 2021.

Contacts

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

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