Customers Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited consolidated results. Customers Bancorp is a bank holding company operating primarily through Customers Bank, with commercial, specialty, mortgage warehouse, equipment finance and consumer lending businesses.
Financial performance and position
| Metric | Q3 2023 | Comparable period / balance-sheet context |
|---|---|---|
| Net interest income | $199.8 million | Up 25.6% from Q3 2022 |
| Net interest margin | 3.70% | 3.16% in Q3 2022; 9-month NIM was 3.28% versus 3.38% in 2022 |
| Net income | $86.8 million; diluted EPS $2.58 | Net income rose 35.7% year over year; diluted EPS was $1.85 in Q3 2022 |
| Net income available to common shareholders | $83.0 million | For the first nine months, $177.2 million, down 8.1% from $192.8 million |
| Provision for credit losses | $17.9 million | $61.1 million for the first nine months, versus $31.9 million in 2022 |
| Non-interest income / expense | $17.8 million / $89.5 million | Q3 2022 non-interest income was negative $9.0 million; expense increased 17.4% |
For the first nine months, operating cash flow was $243.1 million, investing cash flow was $2.0 billion, and financing cash flow was $723.9 million. Cash and cash equivalents increased $3.0 billion to $3.42 billion. Investing cash inflow largely reflected loan and PPP runoff and repayments, rather than recurring operating earnings.
At September 30, 2023, total assets were $21.86 billion, deposits $18.20 billion, total liabilities $20.30 billion, and shareholders’ equity $1.56 billion. Loans and leases receivable were $12.46 billion before the $139.2 million allowance; total loans and leases, including PPP, mortgage warehouse and loans held for sale, were $13.71 billion. FHLB advances were $1.53 billion; other borrowings were $123.8 million and subordinated debt was $182.2 million.
The loan allowance was 1.10% of loans and leases receivable. Non-performing loans and leases were $29.9 million; nine-month net charge-offs were $51.7 million, or 47 basis points of average loans and leases on an annualized basis. Regulatory capital ratios remained above stated minimums: the Bank’s CET1 ratio was 12.97%, total capital ratio 14.46%, and Tier 1 leverage ratio 8.25%.
Material changes versus prior periods
- Q3 net interest margin improved year over year as higher rates lifted yields on variable-rate loans, investments and interest-earning deposits. The nine-month margin declined as deposit and borrowing costs rose; total cost of funds including non-interest-bearing deposits was 3.42% for the first nine months versus 0.93% in 2022.
- Q3 and nine-month net interest income included approximately $27 million of higher-than-expected purchase-discount accretion on the Venture Banking portfolio acquired from the FDIC in June. Management said this benefit is unlikely to recur at a similar level.
- Deposits were nearly flat from year-end, but mix shifted substantially: non-interest-bearing demand deposits rose to $4.76 billion from $1.89 billion, while interest-bearing demand deposits declined to $5.82 billion from $8.48 billion. FHLB advances increased $729.8 million.
- Cash and cash equivalents rose to $3.42 billion, while loans and leases receivable, PPP loans and mortgage warehouse loans declined from year-end. Consumer installment lending continued to be reduced as part of the company’s de-risking strategy.
- Q3 non-interest expense included a $4.1 million legal settlement with a third-party PPP service provider. Higher FDIC assessments, personnel, professional services and commercial lease depreciation also contributed to expense growth.
- The company acquired $631 million of Venture Banking loans from the FDIC and sold $670 million of non-strategic syndicated capital-call lines, recognizing a $5.0 million loss on that sale. It also sold $556.7 million of consumer installment loans to sponsored VIEs, receiving $436.8 million in asset-backed securities and $115.1 million in cash, and recognized a $1.2 million loss including transaction costs.
Outlook, commentary and risks
The filing provides no formal earnings or financial guidance. Management described continued uncertainty from inflation, interest rates, regional-bank liquidity conditions, geopolitical conflicts and economic forecasts. It said the Bank was maintaining elevated liquidity, credit reserves and capital, and shifting lending toward lower-credit-risk commercial loans with floating or adjustable rates.
- Management reported $3.4 billion of cash and $6.3 billion of immediately available liquidity from the FRB and FHLB at quarter-end. No advances were outstanding under the FRB discount window or Bank Term Funding Program. Securities and other eligible assets were pledged or available as collateral, subject to stated borrowing capacity and existing uses.
- Estimated FDIC-insured deposits were approximately 74% of deposits; estimated uninsured deposits were $4.7 billion. CBIT-related deposits totaled $2.6 billion, including a $1.2 billion omnibus account, and are deposit liabilities.
- Approximately $637 million of BM Technologies-serviced Higher Education deposits held at quarter-end were expected to leave the Bank in Q4 2023. The remaining approximately $352.8 million serviced deposits were expected to stay under the relationship.
- Management’s adverse-scenario sensitivity analysis indicated an approximately $62 million incremental modeled allowance compared with a 100% baseline weighting. The company cautioned this is illustrative, not an expected reserve increase; actual credit losses and reserve needs may differ materially.
- Available-for-sale securities had $162.3 million of gross unrealized losses at quarter-end, primarily attributed to interest rates and credit spreads. Held-to-maturity securities had fair value of $1.12 billion versus $1.18 billion carrying value. The company said it did not intend, and was not more likely than not required, to sell the securities in unrealized-loss positions before recovery or maturity.
- Management reported no material change to the risk factors from its prior filings. It noted that legal matters may ultimately affect results, although management did not believe unaccrued matters would materially affect the consolidated financial statements.
Important facts for investors to verify
- How earnings and margin develop after the approximately $27 million FDIC-loan discount accretion, and as deposit and borrowing costs change.
- Deposit stability and funding costs, including the expected departure of BM Technologies Higher Education deposits and the scale and behavior of CBIT-related deposits.
- Credit performance, especially consumer installment charge-offs, acquired Venture Banking loans, commercial real estate exposures, and whether the allowance remains adequate under changing economic conditions.
- Liquidity availability after considering collateral already pledged, borrowings outstanding, and the company’s reported unused FRB and FHLB capacity.
- Realized values and potential earnings or capital effects from securities losses, loan sales, VIE-related asset-backed securities, and legal or regulatory matters.