Customers Bancorp, Inc. — Q2 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2022. Customers Bancorp operates through Customers Bank, serving commercial and consumer customers, including specialty lending, mortgage warehouse finance, equipment finance, SBA lending and digital B2B payments. BankMobile Technologies was divested in January 2021; its prior-period results are presented as discontinued operations.
Financial performance and condition
- Q2 earnings: Net interest income was $164.9 million, up 18.8% year over year. Net income was $58.7 million, down 4.4%; net income available to common shareholders was $56.5 million, down 2.6%. Diluted EPS was $1.68 versus $1.72.
- First-half earnings: Net interest income was $329.6 million, up 21.4%. Net income from continuing operations was $135.4 million, compared with $136.0 million. Common-shareholder income was $131.4 million versus $91.2 million, reflecting the prior-year $38.0 million discontinued-operations loss. Diluted EPS from continuing operations was $3.87 versus $3.88.
- Margin: Tax-equivalent net interest margin was 3.39% in Q2, up from 2.98% a year earlier; first-half margin was 3.49%, versus 2.99%. Management attributed improvement to PPP loan forgiveness and fee recognition, asset mix and rising rates. Excluding PPP loans, tax-equivalent margin was 3.32% in Q2 versus 3.30%, and 3.32% for the first half versus 3.14%.
- Non-interest items and expenses: Q2 non-interest income declined 24.2% to $12.7 million, including a $3.0 million loss on securities sales. Non-interest expense rose 7.6% to $76.2 million, including higher technology, servicing and occupancy costs. First-half non-interest income was $33.9 million, down 3.8%; expense was $150.0 million, up 13.0%.
- Credit: Q2 provision for credit losses was $23.8 million versus $3.3 million; first-half provision was $39.8 million versus $0.4 million. Management primarily attributed the increase to loan growth. Q2 annualized net charge-offs were 36 basis points of average loans, versus 16 basis points; first-half charge-offs were 29 basis points versus 24 basis points. The loan-and-lease allowance was $156.5 million; nonperforming loans and leases were $28.1 million, or 0.18% of the total portfolio.
- Balance sheet and funding: Total assets were $20.3 billion at June 30, up 3.5% from year-end; loans and leases receivable were $12.2 billion, up 35.4%. Deposits were $16.9 billion, up 1.0%. Cash and cash equivalents fell to $245.2 million from $518.0 million. Borrowings included $770 million of federal funds purchased, $635 million of FHLB advances, $123.5 million of other borrowings and $181.8 million of subordinated debt. Estimated uninsured deposits were $11.3 billion.
- Capital and comprehensive income: Shareholders’ equity was $1.35 billion, down from $1.37 billion at year-end, principally due to a $119.9 million after-tax decline in AOCI and $27.8 million of share repurchases. Q2 other comprehensive loss was $62.3 million. At June 30, the Bank’s CET1, total risk-based capital and Tier 1 leverage ratios were 11.46%, 12.91% and 8.09%, respectively; the Bancorp’s were 9.69%, 12.61% and 7.52%. Both met applicable capital requirements.
- Cash flow: For the first half, continuing operating activities provided $166.0 million, investing activities used $1.10 billion and financing activities provided $661.2 million. Cash and cash equivalents declined $272.9 million.
Material changes and notable items
- Commercial and industrial loans and leases grew to $5.74 billion from $3.42 billion at year-end; multifamily loans rose to $2.01 billion from $1.49 billion. PPP loans fell to $1.57 billion from $3.25 billion, and mortgage warehouse balances declined to $1.87 billion from $2.28 billion.
- Higher market rates drove substantial unrealized securities losses: AFS securities had $122.2 million of gross unrealized losses at quarter-end. The company transferred $500.2 million of securities from available-for-sale to held-to-maturity to manage interest-rate exposure; those securities had $50.0 million of unrealized losses at transfer, to be amortized into yield rather than recognized immediately in earnings.
- The company repurchased 664,145 common shares for $27.8 million during the first half. Five Southeastern Pennsylvania branches were slated for consolidation in late 2022.
Outlook, risks and contingencies
- No formal earnings guidance is provided in the supplied filing text. Management said the remainder-of-2022 effects of inflation, rate increases, supply-chain pressures, the Russia-Ukraine conflict and COVID-19 developments were highly uncertain. It cited efforts to maintain liquidity, reserves and capital and to position the balance sheet for higher rates.
- Management’s rate-shock model estimated net interest income changes over 12 months of +2.2% for an immediate 100-basis-point increase, +5.0% for 200 basis points, +6.8% for 300 basis points, and -5.9% for a 100-basis-point decrease. Actual outcomes may differ with assumptions and customer behavior.
- Approximately $1.8 billion of deposits serviced by BM Technologies were expected to leave the Bank by December 31, 2022, when the servicing agreement was scheduled to end and would not be renewed. Customers incurred $15.9 million of related servicing expense in Q2 and $33.7 million in the first half.
- A mortgage warehouse borrower filed for Chapter 11 on June 30. Its reported exposure included a $90.2 million mortgage warehouse balance and a $31.0 million working-capital loan. After quarter-end, $38.2 million of mortgages were sold and $25.0 million was received from a guarantor; the remaining $6.0 million working-capital balance was described as cash-collateralized and still guaranteed.
- Management identified the allowance for credit losses as a critical estimate. Its adverse-scenario sensitivity indicated approximately $47 million of incremental modeled allowance versus the baseline; management cautioned this was illustrative, not an expected reserve increase. The filing also describes ordinary-course legal contingencies; management did not expect unaccrued matters to have a material financial-statement effect, while noting outcomes remain uncertain. A disclosed PPP-related bankruptcy matter was resolved in the Bank’s favor and closed without appeal.
Important facts for investors to verify
- Whether the expected departure of $1.8 billion in BM Technologies-serviced deposits affects funding costs, liquidity or customer relationships, and what transition costs follow.
- Loan growth, consumer installment charge-offs, allowance adequacy and sensitivity to weaker economic forecasts.
- Interest-rate exposure, deposit repricing and retention, and the market-value impact of securities losses and the AFS-to-HTM transfer.
- Progress and final exposure recovery in the mortgage warehouse borrower bankruptcy.
- Capital ratios and liquidity after continued balance-sheet growth, share repurchases and the scheduled deposit outflows.