Business context and reporting period
Customers Bancorp, Inc. is a bank holding company operating through Customers Bank. This Form 10-K covers the fiscal year ended December 31, 2022; quarterly figures below are for Q4 2022. The bank’s digital-forward, branch-light business focuses on commercial and specialty lending, mortgage warehouse financing, consumer lending, deposits and payment services. The filing reports one operating segment. Deloitte issued an unqualified opinion on the financial statements and internal controls.
Financial performance and position
| Metric | FY 2022 / year-end | Comparison |
|---|---|---|
| Net interest income | $623.7 million | Down 9.0% from $685.1 million |
| Net interest margin, tax-equivalent | 3.19% | 3.70% in 2021; excluding PPP loans, 3.16% in both years |
| Provision for credit losses | $60.1 million | Up from $27.4 million |
| Net income from continuing operations | $228.0 million | Down 35.6% from $354.3 million |
| Net income available to common shareholders; diluted EPS | $218.4 million; $6.51 | Down 27.2% from $300.1 million; diluted EPS was $8.91 |
| Non-interest income / expense | $32.3 million / $304.6 million | Income down 58.6%; expense up 3.5% |
| Assets; deposits; shareholders’ equity | $20.9 billion; $18.2 billion; $1.4 billion | Assets up 6.7%; deposits up 8.2%; equity up 2.7% |
| Loans and leases | $15.8 billion total portfolio; $15.3 billion net of allowance on balance sheet | Total portfolio up from $14.6 billion |
| Cash flows from continuing operations | Operating: $(20.8) million; investing: $(1.30) billion; financing: $1.26 billion | Net cash decrease of $62.2 million |
Q4 2022 net income was $28.7 million, or $25.6 million available to common shareholders; diluted EPS was $0.77. Quarterly net interest income was $135.1 million, down from $159.0 million in Q3, and the Q4 provision for credit losses was $28.2 million.
Credit, liquidity and capital
- Net charge-offs were $66.4 million, or 45 basis points of average loans and leases, versus $33.8 million, or 22 basis points, in 2021. The $130.9 million loan-and-lease allowance was 0.93% of loans, or 1.00% excluding PPP loans.
- Non-performing loans were $30.7 million, or 0.19% of the total loan portfolio, compared with $49.6 million, or 0.34%, in 2021.
- Deposit costs rose: total cost of deposits was 1.31% versus 0.44%. Non-interest-bearing deposits fell $2.6 billion, while time deposits rose $3.7 billion; brokered time deposits totaled $4.0 billion at year-end. Wholesale deposits, including brokered and municipal deposits, were 28.2% of total deposits.
- Year-end borrowings included $800 million of FHLB advances, $123.6 million of other borrowings and $182.0 million of subordinated debt. The Bank reported CET1 capital of 11.21%, total risk-based capital of 12.40% and a Tier 1 leverage ratio of 8.15%; management said the Bank and Bancorp met applicable capital requirements.
- Cash and cash equivalents were $455.8 million. Reported FHLB borrowing capacity was $3.24 billion, with $800 million borrowed and $175.6 million of capacity used to collateralize municipal deposits; FRB borrowing capacity was $2.51 billion.
Material changes versus the prior year
- Earnings declined as deposit and borrowing costs rose faster than asset yields, PPP-related interest and fee recognition diminished, and credit-loss provisions increased. The tax-equivalent NIM fell 51 basis points.
- Loan growth was concentrated in specialty commercial lending and multifamily lending, while PPP balances fell to $1.0 billion from $3.3 billion and mortgage warehouse balances fell to $1.3 billion from $2.3 billion.
- Customers sold $521.8 million of consumer installment loans to a third-party-sponsored VIE, recording a $23.5 million loss and retaining $400 million of asset-backed securities issued by the VIE. It also realized $23.2 million of losses from AFS securities sales. A $7.5 million legal-settlement gain partially offset non-interest-income declines.
- Unrealized losses on AFS securities reduced accumulated other comprehensive income by $158.1 million, primarily reflecting rising interest rates. Customers also transferred $500.2 million of securities from AFS to held-to-maturity classification.
- BM Technologies-serviced deposits declined to $1.1 billion from $1.8 billion. Customers paid BM Technologies $57.0 million in deposit-servicing fees in 2022 and expected approximately half of the serviced deposits to leave by the earlier of transfer to a new sponsor bank or June 30, 2023.
Outlook, commentary, risks and unusual items
Management described substantial uncertainty around inflation, interest rates, economic growth, supply chains and geopolitical developments. It said the bank was maintaining liquidity and credit reserves, growing lower-cost deposits and shifting toward floating- or adjustable-rate commercial loans. The filing provides no specific earnings or balance-sheet guidance. Management noted that further rate increases were expected at the time of filing, while warning actual results could differ materially from forward-looking statements.
- CBIT-participating customers held $2.3 billion of deposits, up from $1.9 billion. These customers are concentrated in the digital-currency industry; disruption, competing payment systems or demands for higher deposit rates could reduce balances or margins. The filing says Customers had no loans to digital-currency-industry customers and no deposit relationship with FTX or its related companies.
- Funding and liquidity warrant attention: $3.4 billion of time deposits were scheduled to mature during 2023, and the filing cites deposit competition, uninsured balances and dependence on wholesale funding as risks.
- Credit risks include commercial, multifamily and mortgage warehouse concentrations, consumer-loan performance, and potential deterioration in economic forecasts. New York State multifamily exposure was approximately $1.2 billion, including $693.1 million in rent-regulated properties.
- Unusual credit items included $11.0 million of PPP-originated loans found ineligible for SBA forgiveness and guarantees and charged off, and a $7.9 million partial charge-off on a performing commercial real estate loan the bank chose to exit. Management estimated that a hypothetical fully weighted adverse economic scenario would add approximately $42.2 million to modeled allowance requirements; it cautioned this was not a forecast.
- The bank remains subject to BM Technologies agreements, regulatory and litigation risks, cybersecurity and third-party service-provider risks, and the LIBOR transition. The filing says management did not believe any unaccrued loss contingency would materially affect the financial statements; a PPP service-provider settlement generated the $7.5 million gain.
- Customers historically did not pay common-stock cash dividends and did not expect to do so in the foreseeable future. It repurchased 830,145 common shares for $33.2 million in 2022; the repurchase authorization runs through September 27, 2023 unless ended earlier.
Important facts for investors to verify
- Deposit composition, pricing and retention, including brokered funding, 2023 time-deposit maturities, CBIT-related balances and the expected BM Technologies-serviced deposit runoff.
- Quarterly net interest margin and deposit beta trends as rates and funding competition change.
- Credit performance and allowance adequacy, especially specialty lending, multifamily, consumer installment loans, PPP eligibility, and New York rent-regulated properties.
- The performance, valuation and risk exposure of the VIE asset-backed securities retained after the installment-loan sale, and the effect of securities losses on capital and equity.
- Current liquidity and regulatory capital, including available borrowing capacity, uninsured deposit trends and the remaining CECL capital-transition benefit.