Customers Bancorp, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023, compared primarily with FY2022. This annual filing does not provide a standalone Q4 income statement or a complete Q4-versus-Q4 comparison.
Business context
Customers Bancorp operates through Customers Bank, a branch-light commercial and consumer bank with regional lending and nationwide specialty lending, mortgage warehouse, digital banking and payment services. Its strategy emphasizes core loan and deposit growth, specialty lending, technology-enabled service and selective acquisitions or team lift-outs.
Financial performance and position
| Metric | FY2023 / December 31, 2023 | FY2022 / December 31, 2022 |
|---|---|---|
| Net interest income | $687.4 million | $623.7 million |
| Net income | $250.1 million | $228.0 million |
| Net income available to common shareholders | $235.4 million | $218.4 million |
| Diluted EPS | $7.32 | $6.51 |
| Net interest margin, tax-equivalent | 3.29% | 3.19% |
| Provision for credit losses | $74.6 million | $60.1 million |
| Net charge-offs | $69.0 million; 0.48% of average loans and leases | $66.4 million; 0.45% |
| Total assets | $21.3 billion | $20.9 billion |
| Total deposits | $17.9 billion | $18.2 billion |
| Shareholders’ equity | $1.64 billion | $1.40 billion |
Net interest income rose 10.2%, reflecting higher yields on variable-rate loans, investments and interest-bearing deposits and higher average earning assets. Funding costs also rose: total deposit cost increased to 3.27% from 1.31%, and total cost of funds to 3.45% from 1.42%. Management reported approximately $27 million of higher-than-expected discount accretion on the FDIC-acquired venture portfolio; it said this benefit is unlikely to recur at a similar level.
Non-interest income was $70.6 million, up from $32.3 million, partly because FY2022 included a $23.5 million consumer-loan sale loss and $23.2 million of securities sale losses. Non-interest expense increased 15.8% to $352.7 million, including higher regulatory and FDIC costs, compensation and professional services; technology and bank operations expense declined. FY2023 included a $3.7 million FDIC special assessment and $4.1 million legal-settlement expense. The effective tax rate was 24.4%, versus 21.7%.
Cash provided by operating activities was $124.7 million, versus cash used of $20.8 million in FY2022. Investing activities provided $3.16 billion, mainly reflecting loan balance reductions, PPP repayments and mortgage warehouse repayments; financing activities provided $108.1 million. Cash and cash equivalents ended the year at $3.85 billion, up from $455.8 million.
Liquidity indicators included $8.5 billion of immediately available liquidity (cash plus available FRB/FHLB capacity), a 74% loan-to-deposit ratio and $5.4 billion of estimated uninsured deposits. Management estimated FDIC-insured deposits at 70.1% of deposits, or 77.0% when collateralized and affiliate deposits were included. Brokered deposits were 37% of total deposits. The company reported no advances outstanding under the FRB discount window or Bank Term Funding Program at year-end.
At year-end, the allowance for credit losses on loans and leases was $135.3 million, or 1.13% of loans and leases held for investment, compared with $130.9 million, or 0.93%. Non-performing loans were $27.1 million, or 0.21% of the loan portfolio, versus $30.7 million, or 0.19%. Regulatory capital ratios were above stated Basel III requirements: Bancorp common equity Tier 1 was 12.23% and total capital was 15.29%; Bank ratios were 13.77% and 15.28%, respectively.
Material changes and notable transactions
- Total deposits declined 1.3%. Non-interest-bearing demand deposits grew to $4.42 billion from $1.89 billion, while interest-bearing demand deposits and time deposits declined. The filing attributes deposit mix changes in part to pricing and funding actions.
- Cash and cash equivalents rose substantially, while loans and leases receivable, net of allowance, declined to $12.73 billion from $15.34 billion. Management said it moderated loan growth, exited non-strategic relationships, pursued consumer-loan sales and de-risked held-for-investment lending.
- Customers acquired a $631 million venture banking loan portfolio from the FDIC at a discount and recruited its originating team. The acquisition generated approximately $27 million of unusually high discount accretion.
- Customers sold $670 million of short-term syndicated capital-call lines, including unfunded commitments, exiting relationships that did not provide deposits; the sale resulted in a $5.0 million loss.
- Customers sold $556.7 million of consumer installment loans to two sponsored entities, receiving $115.1 million in cash and $436.8 million in asset-backed securities. It also continued shifting consumer installment loans toward a held-for-sale strategy.
- The share repurchase authorization expired September 27, 2023. During FY2023, the company repurchased 1.38 million shares for $39.8 million.
Outlook, risks and contingencies
The filing gives no quantified earnings, revenue, margin or loan-growth guidance. Management said the 2024 effects of inflation, interest rates, banking-sector conditions, geopolitical conflicts and commercial real estate uncertainty could not be reliably predicted. It described actions including maintaining elevated liquidity, reserves and capital, focusing on lower-cost deposits, and increasing variable-rate, shorter-duration assets. Management noted the Federal Reserve had indicated rates could decline in 2024, but timing and extent remained uncertain.
- Funding and liquidity: Deposit competition, uninsured balances, brokered funding and maturing time deposits may increase funding costs or pressure liquidity. Approximately $2.5 billion, or 75.3% of year-end time deposits, was scheduled to mature during 2024.
- Credit and concentrations: Commercial lending represented approximately 86.8% of the total loan portfolio. Risks include commercial real estate values and refinancing, consumer installment losses, and geographic concentration. New York State multifamily exposure was approximately $1.2 billion; about $631.4 million related to properties with at least 50% rent-regulated units.
- Credit estimate sensitivity: Management’s illustrative 100%-adverse-scenario sensitivity indicated an approximately $56.8 million higher modeled ACL than a 100%-baseline scenario; management cautioned this is not a forecast of required reserves.
- CBIT deposits: Customers Bank held $2.8 billion of deposits from CBIT participants, many associated with the digital-currency industry. Deposit outflows, competition from alternatives such as FedNow, higher customer rate demands, technology issues or sector disruption could affect funding costs and net interest income.
- Securities and rates: Available-for-sale securities had $145.1 million of gross unrealized losses at year-end; held-to-maturity securities had $56.9 million. Rate movements can affect securities values, earnings and liquidity.
- Other risks: The filing highlights regulatory and compliance obligations, third-party and cybersecurity risks, litigation, operating-system resilience and execution risks from growth. The FDIC special assessment may be adjusted, and the final future cost is uncertain.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The filing identifies the allowance for credit losses as a critical audit matter because of the judgment involved in forecasts, modeling and qualitative adjustments.
Key facts investors should verify
- Whether deposit mix, brokered funding and the 2024 time-deposit maturities maintain liquidity without materially increasing funding costs.
- How much FY2023 earnings and margin benefited from the approximately $27 million venture-loan discount accretion, and how results develop without that item.
- Trends in consumer installment charge-offs, criticized and special-mention loans, the ACL and commercial real estate performance, particularly rent-regulated multifamily exposures.
- The stability and concentration of CBIT-related deposits, including whether balances remain low-cost and whether payment-service competition affects them.
- Realized versus unrealized securities losses, available borrowing capacity and any subsequent changes to liquidity or capital ratios.
- Final FDIC assessment expense, settlement and other legal developments, and execution of the consumer-loan held-for-sale strategy.