Customers Bancorp Reports First Quarter 2020 Net Income of $7.0 Million, or $0.22 Per Diluted Share

Customers Bancorp, Inc. (NYSE: CUBI) the parent company of Customers Bank and its operating division BankMobile (collectively “Customers” or "CUBI"), today reported first quarter 2020 ("Q1 2020") net income to common shareholders of $7.0 million, or $0.22 per diluted share. Core earnings for Q1 2020 totaled $8.1 million, or $0.26 per diluted share.

“We are very pleased with our financial success,” 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 thousands of small businesses and non-profits. Working nearly round the clock, team members from every department worked with clients to finish loan applications to save the jobs of tens of thousands of Americans. Customers Bank is poised for great things in the future.”

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;
• 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; and
• A hotline is available for any team member to call for assistance of any kind.

Support for Consumers and Businesses:

• Participated in the SBA Paycheck Protection Program (PPP) with the initial round resulting in $385 million in SBA-approved PPP loans;
• 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; and
• Represented community bank perspectives on CNBC.

Looking Ahead to 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, "Longer term, we remain confident in our ability to achieve a run rate of $6 per share in annual core earnings by the end of 2025 or 2026."

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 Q1 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 0.37% in Q1 2020, down from Q1 2019 ROAA of 0.64% due to the increase in the provision for credit losses resulting from the adoption of CECL and the impact of COVID-19. The pre-tax and pre-provision adjusted ROAA (a non-GAAP measure) was 1.34% for Q1 2020, up 29 basis points from 1.05% in Q1 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%. Further expansion was achieved in Q1 2020, with NIM of 2.99%, up from 2.89% in Q4 2019 and 2.59% in Q1 2019. Since Q3 2018, Customers effectively restructured its balance sheet resulting in NIM expansion of 52 basis points. For 2020, full year NIM is expected to be above 3.00% (non-GAAP measures).

• 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 was also profitable in Q1 2020 on an adjusted pre-tax pre-provision basis. 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 66.03% in Q1 2020, up from 56.98% in Q4 2019, but down from 68.32% in Q1 2019. Improving operating efficiency is a high priority.

• Growth in core deposits and good quality higher-yielding loans. Demand Deposit Accounts ("DDAs") grew 38% year-over-year. Lower yielding multi-family loans decreased by $1.1 billion, or 36%, year-over-year and were replaced by higher yielding C&I loans and leases and other consumer loans, which had net growth of $616 million and $1.2 billion year-over-year, respectively.

• Maintain strong credit quality and superior risk management. Non-performing loans ("NPLs") were negatively impacted by one commercial real estate loan collateralized by a Class A office building in northern New Jersey. The borrowers personally guaranteed a portion of the loan amount. Customers has received a letter of intent to sell this loan in the near future. In spite of this, NPLs were only 0.61% of total loans and leases at March 31, 2020. Reserves to NPLs at March 31, 2020 were 242%, compared to 265% at December 31, 2019. The Bank is relatively neutral to interest rate changes at March 31, 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 that becomes callable this year.

Focus on Capital Allocation

Customers remains well capitalized by all regulatory measures. The tangible common equity to tangible assets ratio (a non-GAAP measure) was 6.16% in Q1 2020, reflecting industry-wide strong levels of asset growth, as well as the impact of CECL on tangible common equity. We continue to target reaching a 7.0% tangible common equity ratio organically by the end of 2020, adjusted for the impact of CECL and SBA-approved PPP loans held on our balance sheet.

Q1 2020 Overview

The following table presents a summary of key earnings and performance metrics for the quarter ended March 31, 2020 and the preceding four quarters:

Net Interest Income

Net interest income totaled $81.3 million in Q1 2020, an increase of $3.7 million from Q4 2019, primarily due to 10 basis points of NIM expansion (a non-GAAP measure) and a $300.1 million increase in average interest-earning assets. Compared to Q4 2019, total loan yields increased 21 basis points to 4.89%. The cost of interest-bearing deposits in Q1 2020 decreased by 20 basis points due to two Federal Reserve interest rate cuts for 150 basis points during March 2020 due to COVID-19. Borrowing costs increased 25 basis points to 3.16% due to the issuance of $74.8 million in 15-year 5.375% subordinated notes in December 2019, partially offset by lower short-term borrowing costs due to the decline in interest rates.

Q1 2020 net interest income increased $22.0 million from Q1 2019, primarily due to 40 basis points of NIM expansion (a non-GAAP measure) and a $1.7 billion increase in average interest-earning assets. Compared to Q1 2019, total loan yields increased 41 basis points to 4.89%. Given the Federal Reserve interest rate cuts in the second half of 2019 and March 2020, the cost of interest-bearing liabilities decreased 30 basis points to 2.01%.

Total loans and leases increased $1.6 billion, or 18.2%, to $10.3 billion at March 31, 2020 compared to the year-ago period. Loan mix improved year-over-year as mortgage warehouse loans increased $1.0 billion to $2.6 billion, C&I loans and leases increased $616 million to $2.0 billion, commercial real estate non-owner occupied loans increased $159 million to $1.3 billion and other consumer loans increased $1.2 billion to $1.3 billion. These increases were offset in part by planned decreases in multi-family loans of $1.1 billion to $2.1 billion and residential mortgages of $269 million to $358 million.

Total deposits increased $1.0 billion, or 13%, to $8.4 billion at March 31, 2020 compared to the year-ago period. Total demand deposits increased $828 million, or 38%, to $3.0 billion and savings deposits increased $751 million, or 180%, to $1.2 billion. These increases were offset in part by decreases in money market deposits of $432 million, or 13%, to $2.8 billion and time deposits of $159 million, or 10%, to $1.4 billion. In July 2018, Customers launched a new digital, on-line savings banking product with a goal of gathering retail deposits. At March 31, 2020, this new product generated $1.1 billion in retail deposits, an increase of $237 million since December 31, 2019.

Risk Management, Provision and Credit Quality

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. Since mid-2019, Customers has been operating in a pre-recessionary environment assuming a recession was imminent in the foreseeable future. "Our Credit Administration Group and Market Presidents started analyzing their portfolios, in detail, and stressing them under adverse scenarios and either exiting or increasing the monitoring activities of higher risk credits. Customers' non-performing loans at March 31, 2020 were only 0.61% of total loans and leases, compared to the industry average non-performing loans of 0.98%, in the most recent period available. Our Q1 2020 non-performing loans were impacted by one commercial real estate credit which we expect to resolve in the near future, reducing our non-performing loans in future periods. Our expectation is superior asset quality performance in good times and in difficult years," said Mr. Sidhu.

The provision for credit losses on loans and leases in Q1 2020, which was calculated under CECL accounting standard effective January 1, 2020, was $22.3 million, compared to $9.7 million in Q4 2019 and $4.8 million in Q1 2019. The increase compared to the prior periods primarily resulted from the adoption of CECL and the impact of COVID-19. Net charge-offs for Q1 2020 were $5.9 million, or 25 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $4.4 million, or 18 basis points in Q4 2019, and $1.1 million, or 5 basis points in Q1 2019. The allowance for credit losses on loans and leases represented 2.1% of total loans and leases receivable at March 31, 2020, compared to 0.8% at December 31, 2019, and 0.6% at March 31, 2019. Upon adoption of the CECL standard on January 1, 2020, the allowance for credit losses for funded and unfunded loans increased by $79.8 million and $3.4 million, respectively. The allowance for credit losses for unfunded loan commitments is presented within accrued interest payable and other liabilities in the consolidated balance sheet. The Q1 2020 provision for credit losses for unfunded loan commitments was $0.8 million and is presented as part of other non-interest expense.

Non-Interest Income

Non-interest income totaled $21.9 million for Q1 2020 , a decrease of $3.9 million compared to Q4 2019. The decrease in non-interest income primarily resulted from a negative mark-to-market derivative credit value adjustment of $3.1 million, reduced gains realized from the sale of SBA loans of $2.8 million and fair value declines in equity securities issued by a foreign entity of $1.7 million, offset in part by $4.0 million of gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities in Q1 2020.

Non-interest income totaled $21.9 million in Q1 2020, an increase of $2.2 million compared to Q1 2019. The increase in non-interest income primarily resulted from $4.0 million of gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities in Q1 2020, increased commercial lease income of $1.9 million driven by organic growth in commercial operating leases, increased deposit fees of $1.3 million resulting from higher activity volumes at BankMobile and a change in the fee structure on certain deposit accounts late in Q1 2019, and increased mortgage warehouse transactional fees of $0.6 million resulting from increased refinancing activity driven by the decline in market interest rates. These increases were offset in part by a negative mark-to-market derivative credit valuation adjustment of $2.2 million, decreased interchange and card revenue of $2.0 million primarily driven by lower activity volumes at BankMobile and a decline in the fair value of equity securities issued by a foreign entity of $1.3 million.

Non-Interest Expense

Non-interest expense totaled $66.5 million for Q1 2020, an increase of $7.7 million compared to Q4 2019. The increase in non-interest expense primarily resulted from increases of $2.7 million in technology, communications, and bank operations, $2.6 million in other non-interest expenses, $1.2 million in professional services, $0.7 million in advertising and promotion, $0.6 million in salaries and employee benefits, and $0.6 million in commercial lease depreciation, partially offset in part by a decrease of $0.5 million in provision for operating losses. The increase in technology, communications, and bank operations was driven by BankMobile product costs and processing expenses to support its white label partnership. The increase in other non-interest expenses was driven by legal reserves of $1.0 million related to a partial settlement of the previously disclosed DOE matter, and an increase in the provision for credit losses for unfunded commitments of $0.8 million coinciding with the adoption of CECL and the impact of COVID-19. The increase in professional services was primarily driven by costs to support BankMobile and its white label partnership. The increase in advertising and promotion was driven by increases in promotional campaigns related to Customers' Digital Banking product and BankMobile and its white label partnership. The increase in salaries and employee benefits was primarily driven by an increase in full time equivalents needed for future growth. The increase in commercial lease depreciation was driven by the organic growth of the commercial operating lease portfolio.

Non-interest expense totaled $66.5 million in Q1 2020, an increase of $12.5 million compared to Q1 2019. The increase in non-interest expense primarily resulted from increases of $3.3 million in other non-interest expenses, $3.1 million in professional services, $2.5 million in salaries and employee benefits, $1.5 million in commercial lease depreciation, $1.1 million in technology, communications, and bank operations, $0.9 million in FDIC, non-income taxes, and regulatory fees, and $0.8 million in advertising and promotion, offset in part by a decrease of $0.9 million in provision for operating losses. The increase in other non-interest expense was primarily driven by legal reserves of $1.0 million related to the partial settlement of the previously disclosed DOE matter, certain product development costs related to our white label partnership, and an increase in the provision for credit losses for unfunded commitments of $0.8 million coinciding with the adoption of CECL and the impact of COVID-19. The increase in professional services was driven by costs incurred to support our white label partnership. The increase in salaries and employee benefits was primarily driven by annual salary increases and an increase in full time equivalents to support future growth. The increase in commercial lease depreciation was primarily driven by the organic growth of the commercial operating lease portfolio. The increase in technology, communications and bank operations primarily resulted from the continued investment in Customers' digital transformation initiatives. The increase in FDIC, non-income taxes, and regulatory fees was driven by higher fees resulting from management's decision to grow the balance sheet beyond $10 billion, as higher premiums become applicable. The increase in advertising and promotion was driven by increases in promotional campaigns related to Customers' Digital Banking product and BankMobile and its white label partnership.

Taxes

Customers' effective tax rate was 26.5% for Q1 2020, compared to 21.3% for Q4 2019 and 23.8% for Q1 2019. The increase in the effective tax rate from Q4 2019 was primarily driven by tax credits that were recorded in Q4 2019 and changes made to state taxes. The increase in the effective tax rate in Q1 2020 when compared to Q1 2019 is mainly driven by discrete provision items which increased income tax expense in Q1 2020.

BankMobile Segment Results

BankMobile, a division of Customers Bank, operates a branchless digital bank offering low cost banking services to over two million Americans, with approximately 0.9 million active deposit customers. Customers reported in Q4 2018 that it expects to retain BankMobile for up to a 2-3 year period, but will regularly evaluate the best options for BankMobile. Key strategic initiatives for 2020 include keeping BankMobile profitable and attempting to divest it by the end of 2020.

BankMobile deposits averaged $622 million in Q1 2020, with an average cost of just 0.22%, and Q1 2020 revenues were $23.1 million compared to Q1 2019 of $20.2 million. BankMobile reported Q1 2020 segment net loss of $3.2 million, or $(0.10) per diluted share, compared to a net loss of $0.2 million, or $(0.01) per diluted share in Q1 2019, principally due to an increase in provision for loan losses from the CECL adoption, the impact of COVID-19 and increased non-interest expense resulting from legal reserves of $1.0 million related to the partial settlement of the previously disclosed DOE matter and increased depreciation expense related to capitalized development costs for technology placed in service during 2019 and other non-capitalizable technology-related expenses. "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 Executive Officer of BankMobile. We are very optimistic about our longer term opportunities to supplement our profitability and growth with continued expansion of our BaaS business," Luvleen Sidhu concluded. "Since Customers Bancorp, Inc. decided to cross the $10 billion asset mark at December 31, 2019, Customers will explore all strategic options for BankMobile in 2020 and will attempt to divest it by the end of 2020," concluded Jay Sidhu, Customers Bancorp, Inc. CEO and Chairman.

Conference Call

Please dial in at least 10 minutes before the start of the call to ensure timely participation. Slides accompanying the presentation will be available on Customers' website at https://www.customersbank.com/investor-relations/ prior to the call.

Please submit any questions you have regarding the earnings in advance to rramsey@customersbank.com and the executives will address them on the call. Customers will also open the lines to questions following management's presentation of the first quarter results. A playback of the call will be available beginning May 4, 2020 at 2:00 PM EDT until 2:00 PM EDT on June 3, 2020. To listen, call within the United States +1 (888) 203-1112, or +1 (719) 457-0820 when calling internationally. Please use the replay passcode 9446078.

Institutional Background

Customers Bancorp, Inc. is a bank holding company located in Wyomissing, Pennsylvania engaged in banking and related businesses through its bank subsidiary, Customers Bank. Customers Bank is a community-based, full-service bank with assets of approximately $12.0 billion at March 31, 2020. A member of the Federal Reserve System with deposits insured by the Federal Deposit Insurance Corporation, Customers Bank is an equal opportunity lender that provides a range of banking services to small and medium-sized businesses, professionals, individuals and families through offices in Pennsylvania, Illinois, New York, Rhode Island, Massachusetts, New Hampshire and New Jersey. Committed to fostering customer loyalty, Customers Bank uses a High Tech/High Touch strategy that includes use of industry-leading technology to provide customers better access to their money, as well as Concierge Banking® by appointment at customers’ homes or offices 12 hours a day, seven days a week. Customers Bank offers a continually expanding portfolio of loans to small businesses, multi-family projects, mortgage companies and consumers.

Customers Bancorp, Inc.'s voting common shares are listed on the New York Stock Exchange under the symbol CUBI. Additional information about Customers Bancorp, Inc. can be found on the Company’s website, www.customersbank.com.

“Safe Harbor” Statement

In addition to historical information, this press release may contain ”forward-looking statements” within the meaning of the ”safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words ”may,” ”could,” ”should,” ”pro forma,” ”looking forward,” ”would,” ”believe,” ”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events and factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements, including: the adverse impact on the U.S. economy, including the markets in which we operate, of the coronavirus outbreak, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the demand for our products and services and the availability of sources of funding; the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that effect market interest rates and the money supply; actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships; the effects of changes in accounting standards or policies, including Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (CECL); and, our ability to divest BankMobile on terms and conditions acceptable to us, in the timeframe we currently intend, and the possible effects on our business and results of operations of a divestiture of BankMobile or if we are unable to divest BankMobile for an extended period of time. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2019, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank, except as may be required under applicable law.

The following tables present Customers' business segment results for the quarter ended March 31, 2020, the preceding four quarters, and the three months ended March 31, 2020 and 2019, respectively: