Customers Bancorp, Inc. — Q2 2023 Form 10-Q
Business context and period. Customers Bancorp is a bank holding company operating through Customers Bank, serving commercial and consumer customers across regional markets and nationally through specialty lending and deposit products. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are to 2022 unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Net interest income | $165.3 million, up 0.3% | $315.2 million, down 4.4% |
| Net interest margin, tax-equivalent | 3.15%, versus 3.39% | 3.06%, versus 3.49% |
| Net income | $47.6 million, down 18.9% | $101.3 million, down 25.2% |
| Net income available to common shareholders | $44.0 million, down 22.1%; diluted EPS $1.39 versus $1.68 | $94.3 million, down 28.3%; diluted EPS $2.95 versus $3.87 |
| Provision for credit losses | $23.6 million | $43.2 million, up 8.5% |
| Non-interest income / expense | $16.0 million / $89.3 million | $34.1 million / $169.4 million |
Balance sheet at June 30, 2023: Assets were $22.0 billion, up 5.4% from year-end 2022; cash and cash equivalents were $3.16 billion. Loans and leases receivable, net of allowance, were $13.69 billion. Deposits totaled $17.95 billion, down 1.1%; FHLB advances rose to $2.05 billion from $800 million. Shareholders’ equity was $1.46 billion, including $168.2 million of accumulated other comprehensive losses.
Cash flow, first half: Operating activities provided $107.0 million, investing activities provided $1.60 billion, and financing activities provided $992.3 million. Cash and cash equivalents increased $2.70 billion to $3.16 billion. Investing cash inflow primarily reflected loan repayments and sales, including PPP runoff; financing included $2.6 billion of long-term FHLB/FRB proceeds offset by repayments, deposit decline, and share repurchases.
Credit and capital: The loan-and-lease allowance was $139.7 million, 1.09% of loans and leases (1.11% excluding PPP); nonaccrual loans were $28.2 million. First-half net charge-offs were $34.2 million, or 46 basis points annualized, versus $20.7 million, or 29 basis points, in 2022, driven mainly by consumer installment loans. The Bank’s CET1 ratio was 11.96% and total capital ratio 13.38%; the Bancorp’s were 10.31% and 13.17%, respectively. Both reported meeting applicable capital requirements.
Material changes and unusual items
- Higher market rates lifted asset yields, but interest-bearing liability costs rose sharply: Q2 cost of interest-bearing liabilities was 4.22% versus 0.91% a year earlier. Higher funding costs and lower PPP fee recognition contributed to lower margins and first-half net interest income.
- Deposits shifted substantially in mix: non-interest-bearing demand deposits increased $2.61 billion from year-end, while interest-bearing demand and savings/MMDA balances declined. Estimated uninsured deposits were $4.4 billion, about 24% of deposits; management estimated FDIC-insured deposits at approximately 76%.
- Liquidity was strengthened amid banking-sector stress. Management reported $5.9 billion of immediately available FRB/FHLB liquidity plus $3.2 billion cash at quarter-end. The Bank reported no discount-window or BTFP advances outstanding at June 30, while $1.5 billion fair value of AFS securities and $426.8 million of HTM securities were pledged for liquidity and other purposes.
- On June 15, the Bank acquired a $631 million Venture Banking loan portfolio from the FDIC at a discount. The acquired portfolio included $228.7 million of purchased-credit-deteriorated loans; $8.7 million of related allowance was recorded, net of $6.2 million in acquisition-related charge-offs.
- On June 30, the Bank sold $556.7 million of consumer installment loans to third-party-sponsored VIEs, receiving $115.1 million cash and $436.8 million in asset-backed securities, and recognized a $1.2 million loss. It also exited $670 million of short-term syndicated capital-call lines, recognizing a $5.0 million loss.
- Q2 non-interest expense increased 17.2%, including higher salaries and FDIC assessments/regulatory fees; technology and occupancy expense declined. First-half share repurchases totaled 1.38 million shares for $39.8 million.
- AFS securities had $175.6 million of gross unrealized losses on securities without an allowance at quarter-end, principally attributed to interest-rate changes; HTM securities had $46.3 million of gross unrealized losses and a fair value of $1.21 billion versus $1.26 billion carrying value.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management described the outlook as highly uncertain, citing persistent inflation and elevated rates, possible further rate increases, regional-bank liquidity concerns, geopolitical conflict, and potential effects on borrowers, deposit behavior, funding costs, securities values, and loan demand. Management said it is maintaining higher liquidity, credit reserves, and capital, and prioritizing non-interest-bearing and lower-cost deposits. It also described a strategy favoring lower-credit-risk commercial lending with floating or adjustable rates and shorter-duration, variable-rate AFS securities.
Management’s adverse-scenario sensitivity analysis estimated that a 100% adverse-scenario weighting, rather than a 100% baseline weighting, would increase modeled ACL by approximately $64 million. Management cautioned this is illustrative, not an expected reserve increase. The ACL depends on uncertain economic forecasts and subjective qualitative adjustments. Interest-rate models estimated net interest income would change +4.2% under an immediate +100-basis-point shock and -5.0% under -100 basis points; modeled EVE changes were +4.4% and -10.1%, respectively. These are scenario estimates, not forecasts.
Other exposures include the anticipated transfer of approximately $413 million of BM Technologies-serviced higher-education deposits by no later than June 30, 2024; approximately $434 million of serviced deposits tied to a renewed white-label relationship are expected to remain. Legal contingencies are described as not currently expected to materially affect the financial statements, though outcomes could adversely affect a particular period. The company reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification points
- Track deposit retention, uninsured-deposit composition, CBIT-related balances, funding mix, and the timing and impact of the BM Technologies deposit transfer.
- Monitor NIM and deposit costs as rates change, along with FHLB borrowing levels, available borrowing capacity, pledged collateral, and actual use of FRB/BTFP facilities.
- Review consumer installment delinquencies, charge-offs, acquired Venture Banking credit performance, and changes to the ACL and management’s macroeconomic assumptions.
- Assess the performance and valuation of the $436.8 million VIE-backed asset securities, related servicing arrangements, and any continuing exposure to the sold loans.
- Verify whether higher FDIC assessments, compensation, and other expenses persist, and whether the reported capital ratios and share repurchases remain consistent with regulatory and liquidity needs.