Customers Bancorp(US:CUBI)2021-03-01 16:00PART I Business Customers Bancorp operates Customers Bank, a commercial and consumer lender, recently divested BankMobile, and is now under CFPB supervision - Customers Bancorp operates a diversified lending business through its subsidiary, Customers Bank, with a focus on commercial & industrial loans, commercial real estate, multi-family lending, SBA lending, and residential mortgages, also serving national specialty niches like mortgage warehouse lending and consumer loans via fintech partnerships29 Financial Snapshot as of December 31, 2020 | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $18.4 | | Total Loans and Leases, net | $15.7 | | - of which, PPP Loans | $4.6 | | Total Deposits | $11.3 | | Shareholders' Equity | $1.1 | - On January 4, 2021, the company completed the divestiture of BankMobile Technologies, Inc. (BMT); while BMT's historical financial results will be reclassified to discontinued operations in 2021, all of BankMobile's serviced deposits and loans, along with the related net interest income, will remain with Customers Bank303757 - The company's workforce totaled 830 team members at year-end 2020; following the BMT divestiture in January 2021, approximately 257 team members became employees of the new entity, BM Technologies85 - Having exceeded the $10 billion asset threshold, Customers Bank became subject to supervision by the CFPB in 2020 and lost its small issuer exemption under the Durbin Amendment, which limits debit card interchange income106 Risk Factors The company faces various risks inherent to its banking operations, strategic changes, and the broader economic and regulatory environment - The company's business is highly susceptible to credit risk; the adoption of the CECL accounting standard on January 1, 2020, resulted in a $79.8 million increase to the opening balance of the Allowance for Credit Losses (ACL), reflecting a shift to an 'expected loss' model187192 - A strategic shift to de-emphasize multi-family loans in favor of commercial and consumer loans may increase lending risks, as consumer loans are particularly sensitive to economic conditions like unemployment and interest rates195198 - The COVID-19 pandemic has negatively impacted the global economy and the company's business, creating significant uncertainty for future financial results308309 - Significant participation in the SBA's Paycheck Protection Program (PPP), with $4.6 billion in loans outstanding at year-end, presents risks of potential fraud, delays in loan forgiveness, and holding low-yield loans for an extended period313315 - The planned phase-out of LIBOR after 2021 creates uncertainty, as the transition to an alternative reference rate like SOFR is complex and could adversely affect LIBOR-based assets and liabilities234235 - Following the divestiture of BMT, the company will continue to face risks associated with BM Technologies through various service, license, and loan agreements for periods ranging from one to ten years302303 Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - None422 Properties The company leases all of its properties, including its corporate and bank headquarters, as well as all branch and administrative offices, which are deemed sufficient for current operations - Customers leases all of its corporate, bank headquarters, branch, and administrative office properties from third parties424 Legal Proceedings The company is involved in ordinary course legal proceedings, including a PPP loan-related adversary complaint, but does not expect material effects beyond accrued amounts - For information on legal proceedings, the report refers to NOTE 21 - LOSS CONTINGENCIES in the financial statements425 Mine Safety Disclosures This item is not applicable to the company - Not Applicable426 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Customers Bancorp's common stock trades on the NYSE under 'CUBI'; the company has not historically paid cash dividends and did not repurchase common stock in 2020, but issued a special dividend of BM Technologies, Inc. common stock - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol 'CUBI'429 - The company has not paid cash dividends on its common stock and does not anticipate doing so in the near future, citing needs for earnings retention to support growth and regulatory limitations430431 - A special dividend of BM Technologies, Inc. common stock was issued to Customers Bancorp shareholders following the divestiture of BankMobile, with shareholders receiving 0.15389 shares of BMTX for each share of CUBI held as of the record date434435 - No shares of common stock were repurchased during the year ended December 31, 2020436 Selected Financial Data The company presents five years of selected consolidated financial data, showing $118.5 million net income and $18.4 billion total assets in 2020, driven by PPP loan originations Selected Financial Data (2016-2020) | (in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Income Statement Data | | | | | | | Net interest income | $403,688 | $277,310 | $257,877 | $267,343 | $249,497 | | Net income available to common shareholders | $118,537 | $64,868 | $57,236 | $64,378 | $69,187 | | Diluted EPS | $3.74 | $2.05 | $1.78 | $1.97 | $2.31 | | Balance Sheet Data (at Period End) | | | | | | | Total assets | $18,439,248 | $11,520,717 | $9,833,425 | $9,839,555 | $9,382,736 | | Loans and leases receivable | $7,575,368 | $7,318,988 | $7,138,074 | $6,768,258 | $6,154,637 | | Deposits | $11,309,929 | $8,648,936 | $7,142,236 | $6,800,142 | $7,303,775 | | Shareholders' equity | $1,117,086 | $1,052,795 | $956,816 | $920,964 | $855,872 | | Key Ratios | | | | | | | Return on average assets | 0.85% | 0.74% | 0.69% | 0.77% | 0.86% | | Return on average common equity | 14.55% | 8.30% | 7.90% | 9.38% | 12.41% | | Tangible book value per common share (Non-GAAP) | $27.92 | $26.17 | $23.32 | $21.90 | $20.49 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant 2020 growth, with net income increasing to $118.5 million and total assets growing to $18.4 billion due to PPP loans, while maintaining strong capital ratios and managing COVID-19 impacts and the BankMobile divestiture - Net income available to common shareholders increased by 82.7% to $118.5 million in 2020 from $64.9 million in 2019, primarily driven by a 45.6% increase in net interest income484 - The COVID-19 pandemic significantly impacted operations, leading to $5.0 billion in PPP loan originations and loan modification programs, with total deferments declining to $218.5 million by year-end 2020 from a peak of $1.2 billion463464 - The Allowance for Credit Losses (ACL) is a critical accounting policy, with CECL adoption on January 1, 2020, and the economic impact of COVID-19 driving an increased provision for credit losses471477 - Total assets increased by $6.9 billion (60.1%) to $18.4 billion at year-end 2020, driven by PPP loan originations, funded by a $4.4 billion increase in PPPLF borrowings and a $2.7 billion increase in deposits536538 Results of Operations Net income available to common shareholders rose to $118.5 million in 2020, driven by a $126.4 million increase in net interest income from PPP lending, partially offset by higher provision for credit losses and non-interest expenses Condensed Statement of Income Comparison (2020 vs. 2019) | (in thousands) | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $403,688 | $277,310 | $126,378 | 45.6% | | Provision for credit losses | $62,774 | $24,227 | $38,547 | 159.1% | | Total non-interest income | $101,734 | $80,938 | $20,796 | 25.7% | | Total non-interest expense | $266,690 | $231,901 | $34,789 | 15.0% | | Net income available to common shareholders | $118,537 | $64,868 | $53,669 | 82.7% | - Net interest margin (tax equivalent) decreased slightly by 4 basis points to 2.71% in 2020, but would have been 2.96% excluding the impact of low-yielding PPP loans496502 - Net charge-offs increased significantly to $54.8 million (0.41% of average loans) in 2020 from $7.8 million (0.08%) in 2019, primarily due to partial charge-offs on two commercial real estate loans and increased installment loan charge-offs487507 Financial Condition Total assets grew 60.1% to $18.4 billion by year-end 2020, driven by PPP and mortgage warehouse loans, funded by increased deposits and PPPLF borrowings, while non-performing loans rose Balance Sheet Highlights (December 31, 2020 vs. 2019) | (in thousands) | 2020 | 2019 | | :--- | :--- | | Total Assets | $18,439,248 | $11,520,717 | | Loans receivable, PPP | $4,561,365 | $0 | | Loans and leases receivable, net | $15,608,989 | $9,508,367 | | Total Deposits | $11,309,929 | $8,648,936 | | FRB PPP Liquidity Facility | $4,415,016 | $0 | | Total Shareholders' Equity | $1,117,086 | $1,052,795 | - The investment securities portfolio grew to $1.2 billion from $595.9 million, with significant purchases of asset-backed securities, CLOs, and government agency securities543 - Total loans and leases reached $15.8 billion, with the portfolio (excluding PPP and mortgage warehouse loans) growing by $168 million to $7.4 billion, reflecting a strategic shift to higher-yielding commercial and industrial and installment loans572 - Non-performing loans (NPLs) increased to $70.5 million (0.45% of total loans) at year-end 2020, compared to $21.3 million (0.21%) at year-end 2019595 - Total deposits grew by $2.7 billion, with a strategic shift towards core deposits, as non-time deposits increased by $3.7 billion while higher-cost time deposits decreased by $1.0 billion619 Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk using income simulation and EVE models, indicating short-term liability sensitivity, with a 100 basis point rate increase projected to decrease net interest income by 0.8% and EVE by 6.1% Interest Rate Sensitivity Analysis (as of Dec 31, 2020) | Rate Shock | % Change in Net Interest Income (Next 12 Months) | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +300 bps | (2.7)% | (18.9)% | | +200 bps | (1.6)% | (12.2)% | | +100 bps | (0.8)% | (6.1)% | | -100 bps | 1.4% | (4.2)% | - The company uses income simulation modeling and EVE estimates to measure and manage interest rate sensitivity, providing a comprehensive view of exposure to changes in the interest rate environment672 - The balance sheet gap analysis at December 31, 2020, shows a positive cumulative gap within the next year, suggesting that rising rates may increase net interest income over that period681 Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2020, 2019, and 2018, along with detailed notes on accounting policies, segment information, and the BankMobile divestiture - The financial statements for 2020 and 2019 were audited by Deloitte & Touche LLP with an unqualified opinion, while the 2018 statements were audited by BDO USA, LLP686708 - A critical audit matter for the 2020 audit was the Allowance for Credit Losses (ACL), due to the subjective nature of the estimate, CECL adoption, and the economic impact of COVID-19691692697 - Note 26, Subsequent Events, details the completion of the BankMobile Technologies, Inc. (BMT) divestiture on January 4, 2021, with BMT's historical results to be presented as discontinued operations starting in Q1 2021107410751077 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None1083 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes due to remote work - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 20201084 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, an assessment also affirmed by Deloitte & Touche LLP's unqualified opinion10821085 - No changes in internal control over financial reporting occurred during the fourth quarter of 2020 that materially affected, or are reasonably likely to materially affect, these controls1087 Other Information The company reported no other information for this item - None1089 PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders1092 Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders1093 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders1094 Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders1095 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Shareholders Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders1096 PART IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, corporate governance documents, debt indentures, and BankMobile divestiture agreements - The consolidated financial statements are filed under Item 8 of this report1099 - A comprehensive list of exhibits is provided, including corporate governance documents, debt indentures, employment agreements, and key transaction documents like the merger agreement for the BankMobile divestiture109911011102 Form 10-K Summary No Form 10-K summary was provided - None1105