Customers Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Customers Bancorp is a bank holding company operating through Customers Bank; the figures below are consolidated. Amounts are in U.S. dollars unless noted. The filing is unaudited.
Key financial metrics
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior balance |
|---|---|---|
| Net interest income | $159.0 million | $219.9 million in Q3 2021 |
| Net income from continuing operations | $63.9 million; diluted EPS $1.85 | $116.0 million; diluted EPS $3.25 in Q3 2021 |
| Net income available to common shareholders | $61.4 million in Q3; $192.8 million for nine months | $110.2 million in Q3 2021; $201.5 million for nine months 2021 |
| Net interest margin | 3.16% in Q3; 3.38% for nine months (tax-equivalent basis) | 4.59% in Q3 2021; 3.55% for nine months 2021 |
| Total assets / deposits | $20.37 billion / $17.52 billion | $19.58 billion / $16.78 billion at December 31, 2021 |
| Cash and cash equivalents | $404.5 million | $518.0 million at December 31, 2021 |
| Loans and leases, net of allowance | $15.20 billion | $14.41 billion at December 31, 2021 |
| Allowance for credit losses on loans and leases | $130.2 million | $137.8 million at December 31, 2021 |
| Shareholders’ equity | $1.39 billion | $1.37 billion at December 31, 2021 |
- Margins and earnings: Q3 net interest income fell 27.7% year over year. Management cited sharply lower PPP loan income and higher funding costs as rates rose. Interest-bearing deposit costs increased, and total cost of funds including non-interest-bearing deposits rose to 1.62% from 0.50% in Q3 2021.
- Credit and asset quality: Q3 reported a $8.0 million benefit for provision for credit losses, while the nine-month provision was $31.9 million. Net charge-offs were $18.5 million in Q3 and $39.2 million year to date, higher than in the comparable 2021 periods. Nonperforming loans were $27.9 million, or 0.18% of total loans and leases, versus $49.6 million, or 0.34%, at year-end 2021. The ACL was 1.03% of loans and leases excluding PPP loans, a non-GAAP measure.
- Cash flow: For the first nine months, operating activities provided $275.0 million, investing activities used $1.09 billion, and financing activities provided $696.5 million. Cash and cash equivalents declined $113.6 million.
- Debt and liquidity: At quarter-end, borrowings included $365 million of federal funds purchased, $500 million of FHLB advances, $123.5 million of other borrowings and $181.9 million of subordinated debt. The Bank had reported FHLB and FRB borrowing capacities of $3.56 billion and $2.56 billion, respectively; these are borrowing capacities, not cash on hand.
- Capital: Bancorp CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 9.845%, 10.782%, 12.499% and 7.650%, respectively. The Bank and Bancorp met applicable capital requirements. Ratios include a benefit from the regulatory CECL transition.
Material changes and unusual items
- Loans and leases receivable increased 39.8% from year-end 2021, largely reflecting growth in specialty commercial lending; specialty lending balances rose to $5.10 billion from $2.40 billion. PPP loans fell to $1.15 billion from $3.25 billion, and mortgage warehouse loans declined to $1.57 billion from $2.28 billion.
- On September 30, Customers sold $521.8 million of consumer installment loans to a third-party-sponsored entity, recording a $23.5 million loss. It retained $400 million of asset-backed securities backed by the sold loans and received $100.7 million in cash proceeds. The company concluded it was not required to consolidate the entity.
- Investment securities at fair value declined to $2.94 billion from $3.82 billion. The portfolio experienced $213.5 million in nine-month unrealized AFS debt-security losses, primarily from rising market rates; accumulated other comprehensive loss was $156.1 million at quarter-end. The company transferred $500.2 million of securities from available-for-sale to held-to-maturity.
- Deposits rose 4.4% overall, but non-interest-bearing demand deposits fell 32.9% to $2.99 billion. Time deposits increased to $1.90 billion from $507.3 million, including $1.6 billion of brokered time deposits. Estimated uninsured deposits were $12.5 billion.
- Customers had $1.6 billion of deposits serviced by BM Technologies. A November 7, 2022 amendment extended the servicing arrangement to the earlier of transfer to a new sponsor bank or June 30, 2023; it also removed Customers’ obligation to pay an interchange maintenance fee. These deposits are expected to leave Customers Bank by that deadline or earlier.
- The company repurchased 664,145 common shares for $27.8 million during the first nine months of 2022. It reported no repurchases in Q3.
Outlook, management commentary and risks
- The filing provides no formal earnings or financial guidance. Management described significant uncertainty from inflation, higher interest rates, supply-chain disruptions, the Russia-Ukraine conflict and the continuing effects of COVID-19. It said it was maintaining liquidity, credit reserves and capital, and shifting toward floating- or adjustable-rate commercial lending.
- Management’s adverse-scenario sensitivity analysis estimated an approximately $50.9 million higher modeled ACL than under its baseline scenario. This is an illustration, not management’s forecast or an expected reserve increase.
- Interest-rate modeling estimated that a 300-basis-point upward rate shock would increase projected 12-month net interest income by 8.1%, while a 300-basis-point downward shock would reduce it by 13.3%. Estimated economic value of equity was particularly sensitive to falling rates, declining 61.1% under the 300-basis-point downward shock. These are model estimates dependent on assumptions.
- Risks include potential deposit outflows, notably the BM Technologies-serviced deposits; changing funding costs; credit deterioration and higher charge-offs; unrealized securities losses; mortgage-market weakness; reliance on third-party technology and servicing providers; cybersecurity and operational disruptions; and sensitivity to economic and interest-rate developments.
- Management stated that disclosure controls and procedures were effective as of September 30, 2022 and that no material change in internal control over financial reporting occurred during the quarter. The filing reports no material change to the risk factors in the 2021 Form 10-K except for expanded third-party service-provider risks.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and how the expected transfer of $1.6 billion in BM Technologies-serviced deposits affects liquidity and funding costs.
- The performance and credit quality of rapidly growing specialty lending and consumer installment portfolios, including charge-offs and reserve adequacy under changing economic conditions.
- The economics and ongoing credit exposure of the consumer-loan sale and the retained $400 million of related asset-backed securities.
- The implications of the $156.1 million accumulated other comprehensive loss and the securities portfolio’s interest-rate sensitivity for capital, liquidity and earnings.
- Future regulatory capital ratios, including the phase-in of CECL transition benefits, and the company’s capacity for dividends or repurchases.