Customers Bancorp, Inc. quarterly report, Q1 FY2023

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Customers Bancorp, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Customers Bancorp is a bank holding company operating through Customers Bank, serving commercial and consumer customers, including specialty lending, equipment finance, mortgage warehouse lending and digital-payment relationships.

Financial performance and position

  • Earnings: Net income was $53.7 million, down 30.0% from $76.8 million. Net income available to common shareholders was $50.3 million, down 32.9%; diluted EPS was $1.55 versus $2.18.
  • Net interest and margins: Net interest income declined 9.0% to $149.9 million. Tax-equivalent net interest margin was 2.96%, compared with 3.60%; management cited a 331-basis-point rise in the cost of interest-bearing liabilities, partly offset by higher asset yields. Total cost of funds, including non-interest-bearing deposits, rose to 3.45% from 0.43%.
  • Credit costs: Provision for credit losses was $19.6 million, versus $16.0 million. Loan-and-lease provision was $18.0 million; the filing also reports $1.6 million for certain available-for-sale securities. Net charge-offs were $18.7 million, or 49 basis points of average loans and leases annualized, versus $7.2 million and 21 basis points. The loan-and-lease allowance was $130.3 million; nonperforming loans and leases were $26.1 million, excluding loans held for sale.
  • Other income and expenses: Non-interest income decreased 14.5% to $18.1 million, mainly reflecting lower bank-owned life insurance income and no loan-sale gains. Non-interest expense rose 8.6% to $80.1 million; higher compensation, lease depreciation and loan servicing costs were partly offset by lower technology and bank-operation expenses.
  • Assets and funding: Total assets were $21.8 billion, up 4.1% from year-end. Cash and cash equivalents were $2.05 billion. Loans and leases receivable were $13.15 billion before allowance; total deposits were $17.72 billion, down 2.4%. FHLB advances increased to $2.05 billion from $800 million. Shareholders’ equity was $1.42 billion.
  • Cash flows: Operating cash flow was $17.5 million; investing cash flow was $804.6 million and financing cash flow was $768.7 million. Cash and cash equivalents increased $1.59 billion to $2.05 billion, reflecting loan repayments and funding/liquidity movements, not solely operating earnings.
  • Capital: Customers Bank’s CET1, Tier 1, total risk-based capital and Tier 1 leverage ratios were 11.31%, 11.31%, 12.64% and 8.09%, respectively. The company and bank reported meeting applicable capital requirements.

Material changes and developments

  • Higher funding costs and reduced PPP-related fee recognition outweighed increased yields and growth in specialty commercial lending, lowering net interest income and margin year over year.
  • Deposits shifted materially: non-interest-bearing demand deposits rose $1.60 billion, while interest-bearing demand and savings/MMDA balances fell; time deposits increased $1.25 billion. Management reported estimated uninsured deposits of $3.9 billion, down from $6.4 billion at year-end.
  • Cash and cash equivalents increased substantially as the bank maintained higher liquidity amid banking-sector stress. Customers reported $7.4 billion of immediate available liquidity from FRB and FHLB sources, in addition to $2.0 billion cash on hand, and stated it had no discount-window or BTFP advances outstanding at March 31.
  • The company repurchased 1.38 million common shares for $39.8 million during the quarter. The repurchase authorization was scheduled to expire September 27, 2023, unless earlier terminated.

Outlook, risks and contingencies

  • The filing gives no specific earnings, revenue or margin guidance. Management said the effects of inflation, interest rates, economic conditions and banking-sector developments on the remainder of 2023 were highly uncertain.
  • Management highlighted regional-bank liquidity and deposit risks, higher funding costs, possible further rate changes, weakening economic conditions, credit deterioration, securities valuation risk and potential changes in regulation or deposit-insurance assessments. The filing states that an adverse economic scenario would raise modeled allowance estimates by approximately $38 million versus the baseline; this is a sensitivity illustration, not management’s expected reserve increase.
  • Management reported that approximately 78% of deposits, including accrued interest, were FDIC-insured; insured, collateralized and affiliate deposits together represented approximately 81%. CBIT digital-payment customers held $1.9 billion in deposits at quarter-end.
  • Approximately $514 million of BM Technologies-serviced higher-education deposits were expected to transfer to another sponsor bank by the earlier of completion of the transfer or June 30, 2024; about $569 million in another serviced relationship was expected to remain. The servicing agreement was extended in March 2023.
  • Legal claims and proceedings arise in the ordinary course. Management did not believe unaccrued matters would materially affect the financial statements, but noted outcomes could adversely affect results in a particular period.
  • Customers disclosed interest-rate sensitivity: modeled 12-month net interest income changes ranged from +14.2% under an immediate 300-basis-point increase to −16.8% under a 300-basis-point decrease. The filing cautions that actual outcomes depend on assumptions and customer behavior.

Most important facts for investors to verify

  1. Whether deposit balances and composition remain stable, including uninsured, brokered, CBIT-related and BM Technologies-serviced deposits and the planned $514 million transfer.
  2. Whether deposit pricing and other funding costs continue to pressure net interest margin and earnings.
  3. Whether consumer installment charge-offs, broader credit quality and the allowance evolve as expected, particularly under weaker economic conditions.
  4. Whether reported liquidity and borrowing capacity remain accessible and sufficient, and how reliance on FHLB funding develops.
  5. How securities’ unrealized losses, interest-rate exposure and modeled sensitivity compare with subsequent results.