Customers Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with Q1 2023 for operating results and December 31, 2023 for balance-sheet changes. Customers Bancorp is a bank holding company operating through Customers Bank, with commercial, specialized, mortgage-finance, equipment-finance and consumer lending and deposit businesses.
Key financial results
| Metric | Q1 2024 | Comparable period / change |
|---|---|---|
| Net interest income | $160.4 million | $149.9 million; up 7.0% |
| Net interest margin | 3.10% tax-equivalent | 2.96%; up 14 basis points |
| Provision for credit losses | $17.1 million | $19.6 million |
| Non-interest income | $21.2 million | $18.1 million; up 17.2% |
| Non-interest expense | $99.2 million | $80.1 million; up 23.8% |
| Net income | $49.7 million | $53.7 million; down 7.4% |
| Net income available to common shareholders | $45.9 million | $50.3 million; down 8.6% |
| Basic / diluted EPS | $1.46 / $1.40 | $1.58 / $1.55 |
| Operating cash flow | $(18.8) million | $17.5 million |
Net interest income benefited from higher yields on variable-rate specialized lending, interest-earning deposits and investments, and lower average borrowings. Deposit pricing pressure partly offset these gains: the cost of interest-bearing liabilities rose 75 basis points year over year, and total cost of funds including non-interest-bearing deposits was 3.55%, versus 3.45%. The filing also reports a 3.09% GAAP net interest margin; its 3.10% figure is tax-equivalent.
Expense growth included $10.7 million more in FDIC assessments, taxes and regulatory fees and $5.3 million more in technology, communications and bank operations. The expense increase included $4.2 million of FDIC premiums relating to periods before 2024, a $0.5 million FDIC special-assessment adjustment, and $7.1 million of deposit-servicing fees relating to prior periods. The higher costs more than offset increased net interest income and lower loan-loss provision.
Financial position, liquidity and capital
- Assets and loans: Total assets were $21.35 billion, essentially unchanged from year-end. Loans and leases receivable, before allowance, were $11.94 billion; mortgage-finance loans at fair value were $962.6 million. Total loans held for sale were $357.6 million.
- Deposits and funding: Deposits were $17.96 billion, up $41.1 million. Non-interest-bearing demand deposits rose 6.0% and savings/MMDA rose 17.3%, while time deposits fell 33.6%. FHLB advances were $1.20 billion; other borrowings were $123.9 million and subordinated debt was $182.3 million. No short-term debt was outstanding.
- Liquidity: Cash and cash equivalents were $3.70 billion. Management reported $8.9 billion of immediately available liquidity, including cash and available FHLB and FRB capacity; this covered approximately 171% of uninsured deposits. The loan-to-deposit ratio was 74%. Estimated uninsured deposits were $5.2 billion.
- Capital: Shareholders’ equity was $1.69 billion, up 3.2% from year-end. At March 31, the Bancorp’s CET1, Tier 1 and total capital ratios were 12.622%, 13.648% and 15.854%; the Bank’s were 14.155%, 14.155% and 15.822%. Both met applicable capital requirements. Ratios include a $15.4 million benefit from the CECL capital transition.
- Cash flow: Cash declined $145.2 million during the quarter. Investing cash use was $163.2 million, principally reflecting $328.9 million of AFS securities purchases, partly offset by security maturities and repayments. Financing cash provided $36.8 million, mainly from deposit growth.
Credit quality and material changes
- The loan-and-lease allowance was $133.3 million at quarter-end, down from $135.3 million at year-end; the allowance was 1.12% of loans and leases. Including the $3.3 million allowance for unfunded commitments, total ACL was $136.6 million.
- Net charge-offs were $18.0 million, or 55 basis points of average loans annualized, compared with $18.7 million, or 49 basis points, in Q1 2023. The quarter included $3.4 million of charge-offs on PPP loans deemed ineligible for SBA forgiveness and guarantee.
- Non-performing loans and leases were $35.1 million, compared with $26.6 million at year-end; the filing’s broader portfolio measure reports $35.7 million of non-performing assets including loans held for sale and repossessed assets, or 0.27% of the portfolio, versus 0.21% at year-end.
- Consumer installment loans held for investment continued to decline as the Bank shifted toward originating and accumulating consumer loans for sale. Management described this as part of its de-risking strategy.
- Unrealized losses on AFS securities remained significant: gross unrealized losses were $140.2 million at March 31. Management said losses were principally related to rates and credit spreads, did not intend to sell the securities, and did not expect to be required to sell them before recovery or maturity. A $5.1 million credit-loss allowance was recorded on certain AFS securities.
Outlook, commentary and risks
The filing provides no formal earnings or financial guidance. Management said the duration and effects of inflation, interest rates, economic conditions, banking-sector liquidity, regulatory actions and geopolitical conflicts remain uncertain. Its ACL baseline assumptions included gradual rate cuts beginning in June 2024, CPI inflation of 2.8% in 2024 and unemployment of 3.9% in 2024. A hypothetical 100% adverse-scenario weighting would increase modeled ACL by approximately $57 million versus a 100% baseline weighting; management cautioned this is a sensitivity illustration, not an expected reserve increase.
Management highlighted $5.2 billion of immediate liquidity from the FRB and FHLB, in addition to cash, and said office-sector commercial real estate exposure was approximately 1% of the loan portfolio. Key risks include deposit pricing and retention, interest-rate changes, credit deterioration, commercial real estate and broader economic weakness, dependence on fintech and servicing relationships, and the uncertain impact of regulatory measures and FDIC assessments. CBIT-related customer deposits totaled $2.9 billion, including a $1.1 billion omnibus account; substantially all CBIT-related accounts were non-interest-bearing at quarter-end.
Management stated that no legal matters were expected to have a material effect beyond amounts accrued, while noting that outcomes could still materially affect results in a particular period. Disclosure controls were concluded to be effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether recurring operating expenses normalize after the quarter’s prior-period FDIC and deposit-servicing charges, and how FDIC costs evolve.
- Subsequent deposit trends, including the mix and stability of non-interest-bearing, time, uninsured and CBIT-related deposits.
- Credit performance, especially consumer installment charge-offs, non-performing loans, PPP guarantee recoveries and the adequacy of the ACL under changing economic forecasts.
- Liquidity availability and collateral encumbrance, including the timing of the $250 million FHLB advance maturing in June 2024.
- Realized or unrealized securities losses and the assumptions supporting management’s ability and intent to hold securities to recovery or maturity.
- Potential sensitivity of earnings and economic value to rates: modeled 12-month net interest income increased 4.0% under a 100-basis-point rise and declined 4.2% under a 100-basis-point fall; modeled EVE declined 6.4% under a 100-basis-point fall.