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Customers Bancorp Reports Record Net Income For Third Quarter 2019

Q3 2019 GAAP Earnings Up $21 million, and Core Earnings Up $3 million Over Q3 2018


Net Interest Margin Expands to 2.83% and BankMobile Reaches Profitability

WYOMISSING, Pa.–(BUSINESS WIRE)–$CUBI–Customers Bancorp, Inc. (NYSE: CUBI) the parent company of Customers Bank and its operating division BankMobile (collectively “Customers” or “CUBI”), today reported third quarter 2019 (“Q3 2019”) net income to common shareholders of $23.5 million, or $0.74 per diluted share, up from $5.7 million in second quarter 2019 (“Q2 2019”) and $2.4 million in third quarter 2018 (“Q3 2018”). Core earnings for Q3 2019 totaled $23.0 million, or $0.73 per diluted share (a non-GAAP measure), up from $12.1 million in Q2 2019 and $20.1 million in Q3 2018 (non-GAAP measures). Core Q3 2019 diluted earnings per share were up 18% over Q3 2018 core diluted earnings per share (non-GAAP measures). Net interest margin, tax equivalent (“NIM”) (a non-GAAP measure), expanded 19 basis points during Q3 2019 and average total loans and leases grew $825 million, or 9%, over Q2 2019.

(Dollars in thousands,
except per share amounts)

USD

 

Per Share

 

 

USD

 

Per Share

Q3 2019 Net Income to

Common Shareholders (GAAP)

 

 

 

 

YTD September 2019 Net

Income to Common

Shareholders (GAAP)

 

 

 

Customers Bank Business Banking

$

22,767

 

$

0.72

 

Customers Bank Business Banking

$

47,531

 

$

1.51

BankMobile

684

 

0.02

 

BankMobile

(6,574)

 

(0.21)

Consolidated

$

23,451

 

$

0.74

 

Consolidated

$

40,957

 

$

1.30

 

 

 

 

 

 

 

 

 

Q3 2019 Core Earnings
(Non-GAAP Measure)

 

 

 

 

YTD September 2019 Core Earnings
(Non-GAAP Measure)

 

 

 

Customers Bank Business Banking

$

21,580

 

$

0.68

 

Customers Bank Business Banking

$

52,730

 

$

1.67

BankMobile

1,444

 

0.05

 

BankMobile

(5,801)

 

(0.18)

Consolidated

$

23,024

 

$

0.73

 

Consolidated

$

46,930

 

$

1.49

  • Customers Bank Business Banking segment reported Q3 2019 GAAP earnings per diluted share of $0.72, an increase of $0.32 per diluted share from Q2 2019. Customers Bank Business Banking segment Q3 2019 core earnings per diluted share of $0.68 (a non-GAAP measure) increased $0.07 per diluted share from Q2 2019.
  • Customers Bank Business Banking segment core earnings in Q3 2019 were impacted by a $1.0 million legal reserve accrual ($0.02 per diluted share) and gains on investment securities of $2.3 million ($0.06 per diluted share).
  • The BankMobile segment reported Q3 2019 GAAP earnings per diluted share of $0.02, an increase of $0.20 from a loss per diluted share of $(0.18) in Q3 2018. BankMobile segment Q3 2019 core earnings per diluted share of $0.05 (a non-GAAP measure) increased $0.16 from a loss per diluted share of $(0.11) in Q3 2018.
  • BankMobile segment core earnings in Q3 2019 were impacted by a $1.0 million legal reserve accrual ($0.02 per diluted share).
  • NIM (a non-GAAP measure) expanded 19 basis points from Q2 2019 to 2.83% in Q3 2019 and up 36 basis points over Q3 2018; this marks our fourth consecutive quarter of NIM expansion from the trough of 2.47% reported in Q3 2018.
  • The return on average assets (“ROAA”) was 0.95% in Q3 2019, up significantly from 0.36% in Q2 2019 and 0.22% in Q3 2018. Core ROAA (a non-GAAP) measure was 0.94% in Q3 2019, up significantly from 0.61% in Q2 2019 and 0.88% in Q3 2018.
  • The return on average common equity (“ROCE”) was 11.81% in Q3 2019, up significantly from 2.96% in Q2 2019 and 1.31% in Q3 2018. Core ROCE (a non-GAAP) measure was 11.59% in Q3 2019, up significantly from 6.31% in Q2 2019 and 10.86% in Q3 2018.
  • Total assets were $11.7 billion at September 30, 2019, compared to $11.2 billion at June 30, 2019 and $10.6 billion at September 30, 2018. However, average assets for Q3 2019 were $11.2 billion. Total asset growth at September 30, 2019 reflected a stronger than expected seasonal increase in mortgage warehouse loans outstanding due to higher refinancing activity resulting from a decline in market interest rates on mortgages.
  • Total deposits increased $412 million, or 4.8%, year-over-year, which included a $538 million, or 24.8%, increase in demand deposits. BankMobile’s first White Label banking partnership deposit balances were approaching $70 million at September 30, 2019.
  • Loan mix improved year-over-year, as commercial and industrial (“C&I”) loans, excluding commercial loans to mortgage companies, increased $470 million, or 26%. As planned, multi-family loans decreased $705 million, or 20%, year-over-year and were replaced by about an equal amount of consumer loans. Commercial loans to mortgage companies increased $975 million, or 62%, year-over-year.
  • Asset quality remains strong. Non-performing loans were only 0.17% of total loans and leases at September 30, 2019 and reserves equaled 290% of non-performing loans. Net charge-offs were only $1.8 million, or 7 basis points of average total loans and leases on an annualized basis, during Q3 2019.
  • Reflecting growth in loans, the provision for loan losses was $4.4 million in Q3 2019, compared to $5.3 million in Q2 2019 and $2.9 million in Q3 2018.
  • Q3 2019 book value per common share was $25.66 and tangible book value per common share (a non-GAAP measure) was $25.16. Tangible book value per common share has increased at a compound annual growth rate of 10.2% over the past five years.
  • Based on the October 17, 2019 closing price of $20.89, Customers Bancorp common equity is trading at 0.83x tangible book value of $25.16 (a non-GAAP measure) and 7.5x the 2020 consensus EPS estimate of $2.78.
  • On September 25, 2019, Customers Bancorp, Inc. issued $25 million of 5-year senior notes at a rate of 4.5%, the net proceeds of which were contributed to the Bank as Tier 1 capital.

Jay Sidhu, CEO and Chairman of Customers Bank stated, “We are pleased with our strong earnings growth, superior asset quality, strong control in expenses, and net interest margin expansion this quarter, a reflection of improved loan mix, core deposit growth, disciplined pricing strategy and absolute focus on efficiency improvement and risk management. We are also excited that BankMobile reached profitability in the third quarter and its White Label banking strategy has generated nearly $70 million of very low-cost deposits to Customers, a number that is expected to grow over time.”

Looking Ahead to the Rest of 2019 and 2020

Mr. Sidhu continued, “Customers expects core earnings per share to exceed $2.20 in 2019, in line with our internal expectations and what we had previously disclosed. Customers is projecting core earnings per share of at least $3.00 for 2020 with continued improvement in all profitability metrics.”

In spite of low rates and the flat to inverted yield curve, Customers continues to expect a full-year 2019 net interest margin above 2.70%, with further expansion expected in the fourth quarter from the 2.83% reported this quarter. Average interest earning assets for 2019 are expected to be roughly equal to 2018 average interest earning assets with total assets under $10 billion by year-end. Customers’ balance sheet will naturally contract by December 31st given seasonality in the mortgage warehouse business and the planned sale and run-off of multi-family loans and some residential mortgage loans. Core non-interest income is expected to grow approximately 10% from 2018 and the core efficiency ratio for full-year 2019 is expected to be in the mid-60%s. C&I loans, excluding loans to mortgage companies, are expected to grow over $500 million in 2019. Including commercial loans to mortgage companies, C&I loans make up approximately 47% of total loans at September 30, 2019.

Strategic Priorities Articulated at Analyst Day in October 2018

Improve Profitability: Target a 2.75% NIM by Q4 2019 and a 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, 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 2019 progress are summarized below:

  • Target ROAA in top quartile of peer group, which we expect will equate to a ratio of 1.25% or higher over the next 2-3 years. ROAA was 0.95% in Q3 2019, up significantly from Q2 2019 and Q3 2018.
  • Achieve NIM expansion to 2.75% or greater by Q4 2019, with a full year 2019 NIM above 2.70%, through an expected shift in asset and funding mix. Actual results are materially better. NIM expanded to 2.83% in Q3 2019 and further expansion is expected in fourth quarter 2019 (“Q4 2019”). Since Q3 2018, Customers effectively restructured its balance sheet resulting in NIM expansion of 36 basis points in just one year.
  • BankMobile growth and maturity was expected with profitability achieved by year end 2019. BankMobile reached profitability in Q3 2019 and is expected to remain profitable in Q4 2019 and in 2020.
  • Expense control; we expect very modest growth in most Customers Bank Business Banking segment expenses during 2019, and incremental spend in other areas will be driven by revenue growth or new business or technology initiatives at BankMobile. Customers’ consolidated efficiency ratio was 61.58% in Q3 2019, down from 77.32% in Q2 2019 and 66.42% in Q3 2018. Q3 2019 total non-interest expense was up only 4% over Q3 2018 and was flat compared to Q2 2019.
  • Growth in core deposits and good quality higher-yielding loans. DDA’s grew 24.8% year over year. Customers currently has $1.8 billion of loans with yields below 3.75% at September 30, 2019, of which $1.5 billion are multi-family loans. Over the next two years, we expect to run-off some of these lower-yielding multi-family loans and will replace them with higher-yielding interest earning assets. During Q4 2019, we plan to sell approximately $500 million of multi-family loans and expect run-off of $300 million or more.
  • Maintain strong credit quality and superior risk management. We do not see any material deterioration on the asset quality front in the foreseeable future. Reserves to NPLs at September 30, 2019 were 290%. The Bank is relatively neutral to interest rate changes at September 30, 2019.
  • 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. Currently, the dividends paid to our preferred shareholders reduce diluted earnings per share by approximately $0.46 annually. Customers will continue to analyze the best ways to execute this over the next two years subject to liquidity and capital needs.

Focus on Capital Allocation

The tangible common equity to tangible assets ratio (a non-GAAP measure) was 6.7% at September 30, 2019, while the leverage ratio was 9.0%. Capital ratios declined in Q3 2019 largely due to the quarter-end spike in mortgage warehouse balances along with greater than expected seasonal balances but are expected to return to 2018 year-end levels by December 31st with the expected decline in total assets below $10 billion. “We anticipate having excess capital above our targeted minimum tangible common equity ratio of 7.0% at year-end, which gives us options,” Sidhu stated. “As capital builds, we will evaluate the best uses for our excess capital, which may include calling our preferred equity as it becomes callable, starting in 2020,” Sidhu continued. Customers raised $25 million in senior notes during Q3 2019, the net proceeds of which were contributed to the Bank as Tier 1 capital.

BankMobile Segment is Expected to Generate a Positive Earnings Contribution by Q4 2019

BankMobile, a division of Customers Bank, operates a branchless digital bank offering low cost banking services to over two million Americans, with over 1.0 million active deposit customers. Customers reported in Q4 2018 that it expects to retain BankMobile for a 2-3 year period, but will regularly evaluate the best options for BankMobile. “We expect to remain focused on this strategy in the foreseeable future,” stated Sidhu.

BankMobile deposits averaged $529 million in Q3 2019, with an average cost of just 0.19%. The Q3 2019 segment earnings increased to $0.7 million, or $0.02 per diluted share, compared to a net loss of $5.8 million, or ($0.18) per diluted share in Q3 2018, principally due to an increase in net interest income, partially offset by an increase in provision for loan losses and a legal reserve of $1.0 million in connection with the previously disclosed Department of Education matter. BankMobile Q3 2019 segment results also included $4.0 million of fraud related losses. The elevated level of fraud-related losses in Q3 2019 primarily resulted from an internet-based organized crime ring that was identified in Q3 2019 and ultimately mitigated through the implementation of “smart defenses” and other automated controls. BankMobile reached profitability one quarter earlier than expected and is expected to remain profitable in Q4 2019 and in 2020. “We are pleased to report that our college/student-related business is now profitable. We remain in the investment mode for our white label and other unique Banking as a Service (“BaaS”) strategic opportunities for BankMobile,” stated Luvleen Sidhu, President and Chief Strategy Officer of BankMobile.

On April 18, 2019, our White Label partner T-Mobile made a public announcement and began the first phase of launch of T-Mobile Money powered by BankMobile, a division of Customers Bank. The partnership has generated nearly $70 million in low cost deposits to date.

Q3 2019 Overview

The following table presents a summary of key earnings and performance metrics for the quarter ended September 30, 2019 and the preceding four quarters, respectively:

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

EARNINGS SUMMARY – UNAUDITED

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data and stock price data)

Q3

 

Q2

 

Q1

 

Q4

 

Q3

2019

 

2019

 

2019

 

2018

 

2018

 

 

 

 

 

 

GAAP Profitability Metrics:

 

 

 

 

 

Net income available to common shareholders

$

23,451

$

5,681

$

11,825

$

14,247

$

2,414

Per share amounts:

 

 

 

 

 

Earnings per share – basic

$

0.75

$

0.18

$

0.38

$

0.45

$

0.08

Earnings per share – diluted

$

0.74

$

0.18

$

0.38

$

0.44

$

0.07

Book value per common share (1)

$

25.66

$

24.80

$

24.44

$

23.85

$

23.27

CUBI stock price (1)

$

20.74

$

21.00

$

18.31

$

18.20

$

23.53

CUBI stock price as % of book value

 

81%

 

85%

 

75%

 

76%

 

101%

Average shares outstanding – basic

 

31,223,777

 

31,154,292

 

31,047,191

 

31,616,740

 

31,671,122

Average shares outstanding – diluted

 

31,644,728

 

31,625,741

 

31,482,867

 

32,051,030

 

32,277,590

Shares outstanding (1)

 

31,245,776

 

31,202,023

 

31,131,247

 

31,003,028

 

31,687,340

Return on average assets (“ROAA”)

 

0.95%

 

0.36%

 

0.64%

 

0.71%

 

0.22%

Return on average common equity (“ROCE”)

 

11.81%

 

2.96%

 

6.38%

 

7.58%

 

1.31%

Efficiency ratio

 

61.58%

 

77.32%

 

68.32%

 

69.99%

 

66.42%

Non-GAAP Profitability Metrics (2):

 

 

 

 

 

Core earnings

$

23,024

$

12,083

$

11,823

$

16,992

$

20,053

Per share amounts:

 

 

 

 

 

Core earnings per share – diluted

$

0.73

$

0.38

$

0.38

$

0.53

$

0.62

Tangible book value per common share (1)

$

25.16

$

24.30

$

23.92

$

23.32

$

22.74

CUBI stock price as % of tangible book value

 

82%

 

86%

 

77%

 

78%

 

103%

Net interest margin, tax equivalent

 

2.83%

 

2.64%

 

2.59%

 

2.57%

 

2.47%

Tangible common equity to tangible assets (1)

 

6.71%

 

6.79%

 

7.35%

 

7.36%

 

6.80%

Core ROAA

 

0.94%

 

0.61%

 

0.64%

 

0.82%

 

0.88%

Core ROCE

 

11.59%

 

6.31%

 

6.38%

 

9.05%

 

10.86%

Adjusted pre-tax pre-provision net income

$

39,178

$

25,446

$

25,036

$

27,957

$

31,821

Adjusted ROAA – pre-tax and pre-provision

 

1.38%

 

0.98%

 

1.04%

 

1.12%

 

1.18%

Adjusted ROCE – pre-tax and pre-provision

 

17.91%

 

11.39%

 

11.57%

 

12.96%

 

15.28%

Core efficiency ratio

 

59.51%

 

69.90%

 

68.32%

 

66.18%

 

62.99%

Asset Quality:

 

 

 

 

 

Net charge-offs

$

1,761

$

637

$

1,060

$

2,154

$

471

Annualized net charge-offs to average total loans and leases

 

0.07%

 

0.03%

 

0.05%

 

0.10%

 

0.02%

Non-performing loans (“NPLs”) to total loans and leases (1)

 

0.17%

 

0.15%

 

0.26%

 

0.32%

 

0.27%

Reserves to NPLs (1)

 

290.38%

 

330.36%

 

194.15%

 

147.16%

 

174.56%

Regulatory Ratios (3):

 

 

 

 

 

Common equity Tier 1 capital to risk-weighted assets

 

7.81%

 

8.04%

 

8.91%

 

8.96%

 

8.70%

Tier 1 capital to risk-weighted assets

 

9.95%

 

10.32%

 

11.47%

 

11.58%

 

11.26%

Total capital to risk-weighted assets

 

11.33%

 

11.76%

 

12.92%

 

13.00%

 

12.69%

Tier 1 capital to average assets (leverage ratio)

 

9.01%

 

9.51%

 

10.01%

 

9.66%

 

8.91%

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

(2) Non-GAAP measures exclude investment securities gains and losses, severance expense, merger and acquisition-related expenses, losses realized from the sale of lower-yielding multi-family loans, loss upon acquisition of interest-only GNMA securities, legal reserves, and certain 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 Q3 2019.

Net Interest Income

Net interest income totaled $75.7 million in Q3 2019, an increase of $11.1 million from Q2 2019, primarily due to a 19 basis point expansion of NIM and an $0.8 billion increase in average interest-earning assets. Compared to Q2 2019, total loan yields increased 17 basis points to 4.79%. The cost of interest-bearing deposits decreased by 3 basis points. Borrowing costs decreased 23 basis points to 2.86% due to two Federal Reserve interest rate cuts during Q3 2019.

Q3 2019 net interest income increased $11.7 million from Q3 2018, primarily due to 36 basis points of NIM expansion and a $0.3 billion increase in average interest-earning assets. Compared to Q3 2018, total loan yields increased 41 basis points to 4.79%. Total investment securities yields increased 30 basis points to 3.60%, mostly due to the sale of $495 million of lower-yielding securities in Q3 2018 and run-off of other lower-yielding securities. Given Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, which were partially offset by two Federal Reserve interest rate cuts in Q3 2019, the cost of deposits and borrowings increased 20 basis points to 2.33% for Q3 2019, up from 2.13% for Q3 2018. We expect these funding costs to gradually decrease.

Total loans increased $1.5 billion, or 17.4%, to $10.3 billion at September 30, 2019 compared to the year-ago period. Mortgage warehouse loans increased $975 million to $2.5 billion; C&I loans increased $470 million to $2.3 billion; other consumer loans increased $592 million to $644 million; residential mortgages increased $121 million to $632 million; and commercial real estate non-owner-occupied loans increased $111 million to $1.3 billion. These increases were offset in part by a planned decrease in multi-family loans of $705 million, or 20.1%, to $2.8 billion.

Total deposits increased $412 million, or 4.8%, to $8.9 billion at September 30, 2019 compared to the year-ago period. Total demand deposits increased $538 million, or 24.8%, to $2.7 billion, certificates of deposit accounts increased $29 million, or 1.2%, to $2.4 billion, and savings deposits increased $316 million to $591 million. In July 2018, Customers launched a new digital, on-line savings banking product with a goal of gathering retail deposits. As of September 30, 2019, this new product generated $534 million in retail deposits, an increase of $55 million since June 30, 2019. Higher cost money market deposits decreased $471 million, or 12.8%, to $3.2 billion at September 30, 2019 compared to the year-ago period.

Provision, Credit Quality and Risk Management

The provision for loan losses totaled $4.4 million in Q3 2019, compared to $5.3 million in Q2 2019 and $2.9 million in Q3 2018. The Q3 2019 provision expense included $2.0 million for net loan growth in the other non multi-family portfolios (primarily C&I), $2.3 million for net growth in the other consumer loan portfolio, $0.8 million for manufactured housing loans, and $1.7 million for specifically identified loans. These increases were offset in part by a $2.4 million release for multi-family loans due to runoff and the effect of $0.5 billion of multi-family loans transferred to held for sale as a result of Customers’ intent to sell these loans. Net charge-offs for Q3 2019 were $1.8 million, or 7 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $0.6 million, or 3 basis points in Q2 2019, and $0.5 million, or 2 basis points in Q3 2018.

Risk management is a critical component of how Customers creates long-term shareholder value, and Customers believes that asset quality is one of the most important risks in banking to be understood and managed. Customers believes that asset quality risks must be diligently addressed during good economic times with prudent underwriting standards so that when the economy deteriorates the bank’s capital is sufficient to absorb all losses without threatening its ability to operate and serve its community and other constituents. “Customers’ non-performing loans at September 30, 2019 were only 0.17% of total loans and leases, compared to our peer group non-performing loans of approximately 0.71% in the most recent period available, and industry average non-performing loans of 1.07% in the most recent period available. Our expectation is superior asset quality performance in good times and in difficult years,” said Mr. Sidhu.

Non-Interest Income

Non-interest income totaled $23.4 million in Q3 2019, an increase of $11.3 million compared to Q2 2019. The increase in non-interest income primarily reflected a $7.5 million loss recognized during Q2 2019 due to a shortfall in the fair value of interest-only GNMA securities acquired from a commercial mortgage warehouse customer that unexpectedly ceased operations in May 2019 and a $1.0 million gain realized from the sale of $95 million of corporate bonds during Q3 2019, along with increases of $1.7 million in unrealized gains from fair value adjustments on investment securities, $0.5 million in mortgage warehouse transactional fees, $0.4 million in commercial lease income, and $0.3 million in deposit fees. The increase in mortgage warehouse transaction fees primarily resulted from an increase in activity volumes coinciding with the decline in market interest rates for mortgages. The increase in commercial lease income primarily resulted from the continued growth of our Equipment Finance Group. The increase in interchange deposit fees primarily resulted from a seasonal increase in activity at BankMobile, coinciding with the beginning of the academic semester.

Non-Interest Expense

Non-interest expense totaled $59.6 million in both Q3 2019 and Q2 2019. The negligible increase in non-interest expense in Q3 2019 primarily resulted from increases in professional services of $2.6 million driven by costs incurred to support our White Label partnership and digital transformation efforts, provision for operating losses of $1.6 million stemming from an internet-based organized crime ring which targeted BankMobile checking accounts in Q3 2019, and legal reserve accruals totaling $2.0 million for Q3 2019 developments in the previously disclosed legal matters.

Contacts

Jay Sidhu, Chairman & CEO 610-935-8693
Carla Leibold, CFO 484-923-8802
Bob Ramsey, Director of Investor Relations 484-926-7118

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