Customers Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; comparisons are with Q1 2021 unless otherwise noted. Customers Bancorp is a bank holding company operating through Customers Bank.
Financial results and key metrics
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior date |
|---|---|---|
| Net interest income | $164.7 million | $132.7 million, Q1 2021 (+24.1%) |
| Net interest margin | 3.59% GAAP; 3.60% tax-equivalent | 3.00% tax-equivalent, Q1 2021 |
| Tax-equivalent NIM excluding PPP loans (non-GAAP) | 3.32% | 2.99%, Q1 2021 |
| Provision for credit losses | $16.0 million total; $15.3 million for loans and leases | $2.9 million benefit, Q1 2021 |
| Net income from continuing operations | $76.8 million | $74.6 million, Q1 2021 (+2.9%) |
| Net income available to common shareholders | $74.9 million; diluted EPS $2.18 | $33.2 million; diluted EPS $1.01, Q1 2021 |
| Total assets | $19.2 billion | $19.6 billion at December 31, 2021 |
| Total deposits | $16.4 billion | $16.8 billion at December 31, 2021 |
| Loans and leases, net of allowance | $13.9 billion | $14.4 billion at December 31, 2021 |
| Cash and cash equivalents | $274.6 million | $518.0 million at December 31, 2021 |
| Shareholders’ equity | $1.38 billion | $1.37 billion at December 31, 2021 |
Net interest income benefited from higher average interest-earning assets and margin expansion. Lower-cost deposit funding and PPP fee recognition contributed to the margin increase. Non-interest expense rose 19.2% to $73.8 million, led by technology and bank operations, salaries, and loan servicing. Net charge-offs were $7.2 million, or 21 basis points of average loans and leases annualized, versus $12.5 million, or 33 basis points, in Q1 2021.
Continuing operating, investing, and financing activities provided $116.9 million, $88.7 million, and used $449.0 million of cash, respectively. Cash and cash equivalents decreased by $243.4 million during the quarter.
Balance sheet, credit, liquidity, and capital
- Loans and leases receivable before allowance increased 12.2% from year-end to $10.1 billion. Growth included commercial and industrial, multi-family, and consumer installment lending. PPP loans declined 32.4% to $2.2 billion, while mortgage warehouse loans declined 23.1% to $1.8 billion.
- The allowance for credit losses on loans and leases was $145.8 million, up from $137.8 million at year-end; coverage was 1.44% of loans and leases excluding PPP loans (non-GAAP). Non-performing loans and leases were $43.3 million, compared with $49.1 million at year-end.
- Deposits declined $362.4 million. Non-interest-bearing demand deposits increased $134.6 million, while interest-bearing demand deposits fell $896.9 million. Estimated uninsured deposits were $11.4 billion.
- Short-term borrowings included $700 million of federal funds purchased; no FHLB advances remained at quarter-end. The Bank reported $3.3 billion of FHLB borrowing capacity and $214.9 million of FRB capacity. Long-term senior and subordinated debt totaled approximately $405 million.
- Regulatory capital ratios remained above stated minimums. Bancorp and Bank common equity Tier 1 ratios were 9.89% and 11.60%; total capital ratios were 12.87% and 13.03%, respectively. The company reported that both entities met applicable capital requirements.
- Available-for-sale securities increased to $4.14 billion in fair value. Rising market rates contributed to a $57.6 million after-tax decline in accumulated other comprehensive income during the quarter. Four asset-backed securities received a $0.7 million credit-loss allowance.
Material changes, outlook, risks, and unusual items
- Reported net income available to common shareholders increased 125.6% year over year, but the comparison includes a $38.0 million discontinued-operations loss in Q1 2021 following the BankMobile Technologies divestiture. Continuing-operations net income increased 2.9%.
- The divestiture-related transition services agreement expired March 31, 2022. The deposit servicing agreement with BM Technologies is scheduled to end December 31, 2022 and will not be renewed. The filing says $2.2 billion of deposits serviced by BM Technologies are expected to leave Customers Bank by that date.
- Customers held $1.8 billion of deposits associated with its CBIT instant B2B payments platform at March 31, 2022. Management identified continued platform acceptance and customer demand as uncertainties.
- Management cited inflation, supply-chain disruption, higher commodity prices, Russia’s invasion of Ukraine, COVID-19 uncertainty, and Federal Reserve policy changes as risks to borrowers, securities values, funding, and results. Management’s March baseline credit forecast assumed four 25-basis-point Fed rate increases in 2022; this is an allowance-model assumption, not company earnings guidance.
- A hypothetical 100%-weighted adverse credit scenario would add about $37.2 million to modeled allowance needs versus a 100%-weighted baseline. Management stated this is a sensitivity illustration, not an expected increase.
- For an immediate 100-basis-point rate increase, the company modeled a 2.9% increase in net interest income over the following 12 months; modeled increases were 5.1% and 7.1% for 200- and 300-basis-point shocks. Results depend on assumptions, and downward-rate scenarios were not presented.
- No specific earnings or financial guidance is provided. Management cautioned that the effects of macroeconomic and geopolitical developments during the remainder of 2022 were highly uncertain. Risk factors were reported as unchanged from the 2021 Form 10-K.
- The bankruptcy trustee’s claim seeking recovery of an $8.1 million PPP loan payment was resolved in the Bank’s favor; the trustee did not appeal and the case was closed in February 2022. Management said it did not believe other unaccrued legal matters would materially affect the financial statements, while noting outcomes remain uncertain.
Investor facts to verify
- Whether the anticipated $2.2 billion BM Technologies-serviced deposit runoff by December 31, 2022 occurs, and how it affects funding costs, liquidity, and customer relationships.
- Whether loan growth, credit quality, charge-offs, and allowance levels remain consistent with management’s assumptions as economic conditions evolve.
- How rising rates and market movements affect net interest margin, deposit pricing, securities fair values, and accumulated other comprehensive income.
- The durability of earnings excluding PPP-related fee recognition and the prior-year discontinued-operations loss.
- Progress in replacing or transitioning deposit servicing after the BM Technologies agreement ends, and the scale and stability of CBIT-related deposits.