Customers Bancorp, Inc. (NYSE:CUBI)

Full Year 2022 Highlights

• 2022 net income available to common shareholders was $218.4 million, or $6.51 per diluted share; ROAA was 1.13% and ROCE was 17.40%.
• 2022 core earnings* were $256.4 million, or $7.63 per diluted share; Core ROAA* was 1.32% and Core ROCE* was 20.43%.
• 2022 core earnings excluding Paycheck Protection Program* ("PPP") were $218.7 million, or $6.51 per diluted share, up 46.2% over 2021. This included a pre-tax provision release of $36.8 million, or $0.86 per diluted share, from the sale of $500.0 million of consumer installment loans in Q3 2022, and other full year 2022 core earnings (excluding PPP)* of $5.65.
• 2022 adjusted pre-tax pre-provision net income* was $400.7 million; adjusted pre-tax pre-provision ROAA* was 1.99%; adjusted pre-tax pre-provision ROCE* was 31.16%.
• Year-over-year loan growth was $1.2 billion, or 8.4%. Year-over-year loan growth excluding PPP* was $3.5 billion, or 30.7%, led by our low-risk variable rate corporate and specialty lending verticals.
• Year-over-year deposit growth was $1.4 billion, up 8.2%.
• 2022 net interest margin, tax equivalent was 3.19%. 2022 net interest margin, tax equivalent, excluding the impact of PPP loans* was 3.16%.
• 2022 provision for credit losses on loans and leases of $59.5 million was largely driven by the impact of loan growth, net of the sale of consumer installment loans in Q3 2022, the recognition of weaker macroeconomic forecasts, and certain one-time charge-offs.
• Non-performing assets were $30.8 million, or 0.15% of total assets, at December 31, 2022 compared to $49.8 million, or 0.25% of total assets, at December 31, 2021. Allowance for credit losses on loans and leases equaled 426% of non-performing loans at December 31, 2022, compared to 278% at December 31, 2021.
• Book value per share and tangible book value per share* grew year over year by $1.76 or 4.7%, despite increased AOCI losses of $158.1 million over the same time period. Tangible book value per share* has grown by 77.9% over the past 5 years, significantly higher than the industry average of 2% for mid-cap banks ⁽¹⁾.
• Repurchased 830,145 common shares for $33.2 million in 2022, leaving 1.9 million of common shares authorized to be repurchased by September 2023.

Fourth Quarter 2022 Highlights

• Q4 2022 net income available to common shareholders was $25.6 million, or $0.77 per diluted share; ROAA was 0.55% and ROCE was 8.05%.
• Q4 2022 core earnings* were $39.4 million, or $1.19 per diluted share; Core ROAA* was 0.81% and Core ROCE* was 12.36%.
• Q4 2022 core earnings (excluding PPP)* were $45.3 million, or $1.37 per diluted share, up 22.9% over Q4 2021.
• Q4 2022 adjusted pre-tax pre-provision net income* was $81.4 million; adjusted pre-tax pre-provision ROAA* was 1.56%; adjusted pre-tax pre-provision ROCE* was 24.59%.
• Q4 2022 loan growth was $458.0 million, or 3.0%. Q4 2022 loan growth excluding PPP* was $614.5 million, or 4.3%, led by our low-risk variable rate corporate and specialty lending verticals.
• Q4 2022 deposit growth was $634.5 million, or 3.6%.
• Q4 2022 net interest margin, tax equivalent was 2.67%. Q4 2022 net interest margin, tax equivalent, excluding the impact of PPP loans* was 2.87%.
• Q4 2022 provision for credit losses on loans and leases of $27.9 million was largely driven by the impact of loan growth, the recognition of weaker macroeconomic forecasts, and one-time charge-offs of $11.0 million for loans originated pursuant to the PPP program.
• Non-performing assets were $30.8 million, or 0.15% of total assets, at December 31, 2022 compared to $28.0 million, or 0.14% of total assets, at September 30, 2022. Allowance for credit losses on loans and leases equaled 426% of non-performing loans at December 31, 2022, compared to 466% at September 30, 2022.
• Q4 2022 book value per share and tangible book value per share* grew by $0.62 or 1.6%, despite increased AOCI losses of $7.0 million over the same time period.
• Repurchased 166,000 common shares for $5.3 million in Q4 2022.

CEO Commentary

“We delivered another solid quarter and are extremely pleased with our 2022 results despite the challenging interest rate and economic environment,” said Customers Bancorp Chairman and CEO, Jay Sidhu. “Our Q4 2022 GAAP earnings were negatively impacted by after-tax securities net losses of $13.5 million, or $0.41 per diluted share, which will benefit net interest margin in the short-term and has an earn back of roughly one year as well as after-tax net losses on PPP loans of $6.0 million, or $0.18 per diluted share. However, we are very pleased to report that Q4 2022 earnings from the core bank* were $1.37 per diluted share, beating internal targets and estimates, and bringing full year 2022 core earnings (excluding PPP)* per share to $6.51. Our responsible organic growth strategy is laser focused on credit quality with 90% of our growth in low credit risk verticals. We have taken prudent risk management strategic actions over the past several quarters to ensure we are well positioned from a capital, credit, liquidity and earnings perspective especially as we head into a highly uncertain 2023. We are also pleased to report that we beat the upper end of our 2022 core earnings per share, excluding PPP* target of $4.75 - $5.00 by 13%, even before considering the Q3 2022 pre-tax provision release of $36.8 million. Core loan* growth in 2022 was led by increases in low-risk variable rate specialty lending verticals of $3.0 billion. Asset quality remains exceptional and credit reserves are extremely robust at 426% of total non-performing loans. Our loan and deposit pipelines remain strong and we are very focused on improving our margins, moderating our growth, controlling our expenses, actively buying back common shares to the extent we are trading below book value, and creating exceptional value for our shareholders. We remain very optimistic about our future,” Mr. Jay Sidhu continued.

Core earnings excluding PPP* for Q4 2022 were $45.3 million, or $1.37 per diluted share, calculated as shown below.

Financial Highlights

Paycheck Protection Program (PPP)

We funded, either directly or indirectly, about 358,000 loans totaling $10.3 billion. Through the program, we earned close to $350 million of deferred origination fees from the SBA, which was significantly accretive to our earnings and capital levels as these loans were forgiven by the government. In Q4 2022, we recognized only $4 million of these fees in earnings as forgiveness levels were slower than expected, bringing total fees recognized to date to $322 million, and $26 million remaining to be recognized in 2023. "As we've stated previously, it is difficult to predict the timing of PPP forgiveness. We expect most of the fees to be recognized over the next two quarters; however, because we fully paid off the FRB PPP liquidity facility in third quarter 2021, these loans are currently being funded with higher cost funding, reducing their short-term profitability. This was particularly evident in Q4 2022 as higher PPP-related expenses resulted in a total negative impact to Q4 2022 earnings of $0.18 per diluted share. This included negative net interest income of $2.8 million resulting from higher funding costs, $11.0 million of one-time charge-offs increasing provision expense, and a $7.5 million gain resulting from a legal settlement with one of our third party PPP service providers. These one-time charge-offs are before the impact of any contractual indemnities or recoveries we may receive in future periods," commented Customers Bancorp CFO, Carla Leibold.

Key Balance Sheet Trends

Loans and Leases

The following table presents the composition of total loans and leases as of the dates indicated:

Commercial and industrial ("C&I") loans and leases, including specialty lending, increased $3.2 billion, or 95.7% year-over-year, to $6.5 billion. Practically all of the increases in outstanding balances were in the low-risk variable rate secured categories of Capital Call Lines and Lender Finance (collectively referred to as Fund Finance). Multifamily loans increased $730.8 million, or 49.2%, to $2.2 billion, commercial real estate owner occupied loans increased $230.4 million, or 35.2%, to $885.3 million, commercial real estate non-owner occupied loans increased $169.5 million, or 15.1% to $1.3 billion and residential loans increased $147.8 million, or 42.1%, to $498.8 million year-over-year. These increases in loans and leases were partially offset by a decrease in total consumer installment loans of $43.1 million, or 2.5%, to $1.7 billion primarily due to the sale of $500.0 million of consumer installment loans in Q3 2022 offsetting new originations and originations and purchases of certain consumer installment loans with the intent to sell and a decrease in construction loans of $37.0 million, or 18.6%, to $162.0 million.

Allowance for Credit Losses on Loans and Leases

The following table presents allowance for credit losses on loans and leases (information as of the dates and periods indicated):

The increase in net charge-offs in Q4 2022 compared to Q3 2022 was primarily due to one-time charge-offs of $11.0 million for certain loans originated under the PPP program that were subsequently determined to be ineligible for SBA forgiveness and guarantee and were deemed uncollectible.

Provision (Benefit) for Credit Losses

The provision for credit losses on loans and leases in Q4 2022 was $27.9 million, compared to a benefit to provision of $7.8 million in Q3 2022. The provision in Q4 2022 was primarily due to loan growth, one-time charge-offs of $11.0 million for certain loans originated under the PPP program that were subsequently determined to be ineligible for SBA forgiveness and guarantee and ultimately deemed uncollectible and our recognition of weaker macroeconomic forecasts, as compared to a benefit to provision in Q3 2022 primarily from the sale of $500.0 million of consumer installment loans in connection with the Company's balance sheet optimization initiatives. The sale transaction resulted in approximately $36.8 million of release in allowance for credit losses in Q3 2022, which was included in core earnings* and contributed approximately $0.86 per diluted share. The provision for credit losses on available for sale investment securities in Q4 2022 was $0.3 million compared to a benefit to provision of $0.2 million in Q3 2022.

The provision for credit losses on loans and leases in Q4 2022 was $27.9 million, compared to a provision of $13.9 million in Q4 2021. The provision in Q4 2022 was primarily due to loan growth, one-time charge-offs of $11.0 million for certain loans originated under the PPP program that were subsequently determined to be ineligible for SBA forgiveness and guarantee and ultimately deemed uncollectible and our recognition of weaker macroeconomic forecasts. The provision for credit losses on available for sale investment securities in Q4 2022 was $0.3 million compared to no provision in Q4 2021.

Asset Quality

The following table presents asset quality metrics as of the dates indicated:

(1) Excludes loan receivable, PPP, as eligible PPP loans are fully guaranteed by the Small Business Administration.

Over the last decade, we have developed a suite of commercial loan products with one particularly important common denominator: relatively low credit risk assumption. The Bank’s C&I, loans to mortgage companies, corporate and specialty lending lines of business, and multifamily loans for example, are characterized by conservative underwriting standards and low loss rates. Because of this emphasis, the Bank’s credit quality to date has been incredibly healthy despite an adverse economic environment. Maintaining strong asset quality also requires a highly active portfolio monitoring process. In addition to frequent client outreach and monitoring at the individual loan level, we employ a bottom-up data driven approach to analyze the commercial portfolio. Exposure to industry segments and CRE significantly impacted by COVID-19 initially is not substantial.

Total consumer installment loans were approximately 8.1% of total assets at December 31, 2022, 10.8% of total loans and leases and 11.5% of core loans*, and were supported by an allowance for credit losses of $68.7 million. At December 31, 2022, our consumer installment portfolio had the following characteristics: average original FICO score of 740, average debt-to-income of 19.0% and average borrower income of $107 thousand.

Non-performing loans at December 31, 2022 were essentially flat at 0.19% of total loans and leases, compared to 0.18% at September 30, 2022 and 0.34% at December 31, 2021.

Deposits

The following table presents the composition of our deposit portfolio as of the dates indicated:

Total deposits increased $1.4 billion, or 8.2%, to $18.2 billion at December 31, 2022 as compared to a year ago. Time deposits increased $3.7 billion, or 737.7%, to $4.2 billion. This increase was offset partially by decreases in money market deposits of $1.6 billion, or 37.1%, to $2.7 billion, total demand deposits of $587.1 million, or 5.4%, to $10.4 billion and savings deposits of $161.5 million, or 16.6%, to $811.8 million. The total cost of deposits increased by 237 basis points to 2.73% in Q4 2022 from 0.36% in the prior year primarily due to higher market interest rates and a shift in deposit mix.

Capital

The following table presents certain capital amounts and ratios as of the dates indicated:

Customers Bancorp's common equity increased $36.7 million to $1.3 billion, and tangible common equity* increased $36.9 million to $1.3 billion at December 31, 2022 compared to a year ago, respectively, as earnings of $218.4 million more than offset a negative impact to accumulated other comprehensive income ("AOCI") from increased unrealized losses on investment securities of $158.1 million (net of taxes). Similarly, book value per common share increased to $39.08 from $37.32, and tangible book value per common share* increased to $38.97 at December 31, 2022 from $37.21 at December 31, 2021, respectively. Customers remains well capitalized by all regulatory measures.

At the Customers Bancorp level, the total risk based capital ratio (estimate), common equity to total assets ratio and tangible common equity to tangible assets ratio ("TCE ratio"), excluding PPP loans*, were 12.0%, 6.05% and 6.34%, respectively, at December 31, 2022.

At the Customers Bank level, capital levels remained strong and well above regulatory minimums. At December 31, 2022, estimated Tier 1 capital and total risk-based capital were 11.1% and 12.2%, respectively.

Key Profitability Trends

Net Interest Income

Net interest income totaled $135.1 million in Q4 2022, a decrease of $23.9 million from Q3 2022, primarily due to lower PPP net interest income of $12.4 million resulting from reduced recognition of deferred fees of $7.0 million driven by lower loan forgiveness in Q4 2022 and increased funding costs of $5.0 million, reflecting increases in funding rates. Net interest income earned by the core bank* decreased $11.5 million over Q3 2022, reflecting the $500.0 million consumer loan sale in Q3 2022, higher funding costs, and shift in funding mix. The increase in interest income on investment securities and core loans* of $12.4 million and $25.7 million, respectively, mostly due to higher interest rates on variable loans in specialty lending, were offset by higher expenses paid on deposits, fed funds, FHLB advances and other borrowings of $57.6 million from a shift in deposit mix and higher interest rates during Q4 2022. Excluding PPP loans, average interest-earning assets increased $0.5 billion. Interest-earning asset growth was primarily driven by increases in C&I loans and leases, mostly in specialty lending, investment securities and interest earning deposits, partially offset by decreases in commercial loans to mortgage companies and consumer installment loans. Compared to Q3 2022, total loan yields increased 56 basis points to 5.64% primarily due to higher interest rates on variable rate loans in specialty lending. Excluding PPP loans, the Q4 2022 total loan yield* was 71 basis points higher than Q3 2022 reflecting increased interest rates and the variable rate nature of the loan portfolio.

Net interest income totaled $135.1 million in Q4 2022, a decrease of $58.6 million from Q4 2021, primarily due to lower PPP interest income of $74.8 million resulting from reduced recognition of deferred fees of $68.0 million driven by lower loan forgiveness in Q4 2022. This decrease was offset in part by increased net interest income earned by the core bank of $22.9 million, up 20% over Q4 2021, including increased interest income on investment securities and core loans* of $27.8 million and $95.6 million, respectively, mostly due to higher average balances and interest rates on variable loans in specialty lending. In addition, higher expenses paid on deposits, fed funds, FHLB advances and other borrowings of $114.2 million resulted mainly from a shift in deposit mix and higher interest rates during Q4 2022. Excluding PPP loans, average interest-earning assets increased $4.5 billion. Interest-earning asset growth was primarily driven by increases in C&I loans and leases, mostly in specialty lending, investment securities, multifamily loans and residential mortgages, offset in part by decreases in commercial loans to mortgage companies and interest earning deposits. Compared to Q4 2021, total loan yields increased 16 basis points to 5.64% primarily due to higher interest rates on variable rate loans in specialty lending, partially offset by lower PPP yields driven by lower deferred fee recognition. Excluding PPP loans, the Q4 2022 total loan yield* was 145 basis points higher than Q4 2021 reflecting increased interest rates and the variable rate nature of the loan portfolio.

Non-Interest Income

The following table presents details of non-interest income for the periods indicated:

Non-interest income totaled $7.3 million for Q4 2022, an increase of $16.4 million compared to Q3 2022. The increase was primarily due to $23.5 million of loss realized from the sale of $500 million of consumer installment loans as part of our balance sheet optimization initiatives in Q3 2022, which included the write-off of deferred origination costs and other transaction-related expenses, a $7.5 million gain from a court-approved settlement with a third party PPP service provider in Q4 2022 and higher commercial lease income and loan fees from continued growth. These increases were partially offset by higher losses realized from the sale of investment securities of $14.8 million to rebalance the investment portfolio with higher interest-earning securities and lower bank-owned life insurance income primarily due to death benefits received in Q3 2022.

Non-interest income totaled $7.3 million for Q4 2022, a decrease of $9.6 million compared to Q4 2021. The decrease was primarily due to lower gains realized from the sales of SBA and other loans, higher losses realized from the sale of investment securities of $16.9 million to rebalance the investment portfolio with higher interest-earning securities and lower mortgage warehouse transactional fees in Q4 2022 compared to Q4 2021 from lower housing activity due to rising interest rates, offset partially by $7.5 million of the gain from a court-approved settlement with a third party PPP service provider in Q4 2022 and higher commercial lease income and loan fees from continued growth.

Non-Interest Expense

The following table presents details of non-interest expense for the periods indicated:

The management of non-interest expenses remains a priority for us. However, this will not be at the expense of not making adequate investments with new technologies to support efficient and responsible growth.

Non-interest expenses totaled $78.4 million in Q4 2022, $2.2 million higher than Q3 2022. The increase was primarily attributable to increases of $1.1 million in occupancy mostly due to increased lease related expenses, $0.6 million in loan servicing for consumer installment loans, $0.6 million in professional fees primarily for legal fees associated with a settlement with a third party SBA service provider, $0.6 million in commercial lease depreciation from continued growth in our equipment finance business, $0.5 million in loan workout related legal fees mostly related to a commercial mortgage warehouse borrower that filed for bankruptcy and $1.8 million in other non-interest expenses primarily associated with our team members' return to office and increases in business development related expenses and charitable contributions. These increases were offset partially by decreases in salaries and employee benefits of $2.0 million primarily due to lower headcount and incentives, $1.4 million in one-time severance expenses recorded in Q3 2022 and $1.0 million in technology, processing and deposit servicing-related expenses mostly due to lower deposit servicing fees paid to BM Technologies offset by higher software licenses and fees paid for software as a service.

Non-interest expenses totaled $78.4 million in Q4 2022, a decrease of $3.1 million compared to Q4 2021. The decrease was primarily attributable to decreases of $4.1 million in technology, processing and deposit servicing-related expenses mostly due to lower deposit servicing and interchange maintenance fees paid to BM Technologies, $0.7 million in salaries and employee benefits primarily due to lower incentives and $0.7 million in occupancy primarily due to expenses associated with the relocation of the Bank headquarters recorded in Q4 2021. These decreases were offset in part by increases of $1.9 million in commercial lease depreciation from continued growth and $0.8 million in advertising and promotion due to higher spending on media for our deposit products.

Taxes

Income tax expense from continuing operations decreased by $10.8 million to $7.1 million in Q4 2022 from $17.9 million in Q3 2022 primarily due to lower pre-tax income and increased investment tax credits.

Income tax expense from continuing operations decreased by $5.9 million to $7.1 million in Q4 2022 from $13.0 million in Q4 2021 primarily due to lower pre-tax income, partially offset by reduced investment tax credits.

The effective tax rate from continuing operations for Q4 2022 was 19.9% and 21.7% for the twelve months ended December 31, 2022. Customers expects the full-year 2023 effective tax rate from continuing operations to be approximately 22% to 24%.

Outlook

“Looking ahead, we expect to moderate growth as we optimize the balance sheet, further build out our deposit franchise, maximize our efficiency ratio with prudent expense management, and actively buy back common shares to the extent we remain trading below book value. We expect 2023 core loan growth to be in the low-to-mid single digits with tighter margins in the first half of 2023 and wider margins in the second half of 2023. Deposits are expected to remain relatively flat with a focus on reducing high cost deposits. Full year 2023 net interest margin is expected to be between 2.85% - 3.05%. 2023 Core EPS (excluding PPP) is expected to be between $6.00 - $6.25 with a return on common equity of over 15%. Core non interest expense (excluding BM Technologies expense) is expected to increase between 8% - 10% in 2023 and we are targeting a CET 1 ratio of approximately 9.5%. We are focused on improving the quality of our balance sheet and deposit franchise, improving our net interest margin, and achieving a book value in excess of $45 by year-end 2023. Customers Bancorp stock at the close of business on January 20, 2023 was trading at $31.12, only 0.8 times tangible book value* at December 31, 2022,” concluded Mr. Sam Sidhu.

Webcast

The live audio webcast, presentation slides, and earnings press release will be made available at https://www.customersbank.com/investor-relations/ and at the Customers Bancorp 4th Quarter Earnings Webcast.

You may submit questions in advance of the live webcast by emailing our Communications Director, David Patti at dpatti@customersbank.com; questions may also be asked during the webcast through the webcast application.

The webcast will be archived for viewing on the Customers Bank Investor Relations page and available beginning approximately two hours after the conclusion of the live event.

Institutional Background

Customers Bancorp, Inc. (NYSE:CUBI) is one of the nation’s top-performing banking companies with over $20 billion in assets, making it one of the 100 largest bank holding companies in the US. Through its primary subsidiary, Customers Bank, commercial and consumer clients benefit from a full suite of technology-enabled tailored product experience delivered by best-in-class customer service. A pioneer in Banking-as-a-Service and digital banking products, Customers Bank is one of the very few banks that provides a blockchain-based 24/7/365 digital payment solution. In addition to traditional lines such as C&I lending, commercial real estate lending, and multifamily lending, Customers Bank also provides a number of national corporate banking services for Fund Finance, Equipment Finance, Financial Institutions, Technology and Venture, and Healthcare clients. Major accolades include:

• #3 top-performing bank with over $10 billion in assets at year-end 2021 per S&P Global S&P Global Market Intelligence,
• #6 in top-performing banks with assets between $10 billion and $50 billion in 2021 per American Banker, and
• #21 out of the 100 largest publicly traded banks in 2022 per Forbes.

A member of the Federal Reserve System with deposits insured by the Federal Deposit Insurance Corporation, Customers Bank is an equal opportunity lender. Learn more: www.customersbank.com.

“Safe Harbor” Statement

In addition to historical information, this press release may contain “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events and factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements, including: the impact of the ongoing pandemic on the U.S. economy and customer behavior, the impact that changes in the economy have on the performance of our loan and lease portfolio, the market value of our investment securities, the continued success and acceptance of our blockchain payments system, the demand for our products and services and the availability of sources of funding, the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that affect market interest rates and the money supply, actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships, higher inflation and its impacts, and the effects of any changes in accounting standards or policies. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2021, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank, except as may be required under applicable law.

Q4 2022 Overview

The following table presents a summary of key earnings and performance metrics for the quarter ended December 31, 2022 and the preceding four quarters, and full year 2022 and 2021: