Customers Bancorp(CUBI) - 2024 Q3 - Quarterly Results

Third Quarter 2024 Highlights Customers Bancorp reported Q3 2024 net income of $42.9 million and diluted EPS of $1.31, maintaining strong capital ratios and asset quality despite NIM compression Q3 2024 Key Performance Indicators | Metric | Q3 2024 Value | | :--- | :--- | | Net Income (Common) | $42.9 million | | Diluted EPS | $1.31 | | Core Earnings* | $43.8 million | | Core Diluted EPS* | $1.34 | | ROAA | 0.88% | | ROCE | 10.44% | | CET 1 Ratio | 12.5% | | TCE / TA Ratio* | 7.7% | | Net Interest Margin (NIM) | 3.06% | | Non-Performing Assets / Total Assets | 0.22% | | Tangible Book Value Per Share* | $52.96 | - Total loans and leases held for investment grew by $520.8 million in Q3 2024, representing a 16% annualized growth rate[1] - The bank experienced deposit inflows from commercial customers of $1.1 billion, which was used to pay down $0.7 billion of higher-cost deposits, resulting in a net increase of $391.3 million in total deposits[1] - Liquidity remains strong, with immediately available liquidity covering an estimated 183% of uninsured deposits, and approximately 75% of total deposits are estimated to be insured[1] CEO Commentary CEO Jay Sidhu highlighted successful deposit transformation, strong loan growth, robust asset quality, and strategic share repurchases - The bank is in phase two of its deposit transformation strategy, remixing higher-cost deposits into core lower-cost and granular deposits[4] - New commercial banking teams have opened over 3,000 new deposit accounts, gathering $536 million in deposits at an average interest rate of approximately 2.9%, with 30% being non-interest bearing[4] - Asset quality remains a key differentiator, with a non-performing asset (NPA) ratio of 0.22% and minimal exposure to the higher-risk commercial real estate office sector (approx. 1% of the loan portfolio)[4] - The bank repurchased 373,974 shares of common stock at an average price below Tangible Book Value per share, while the TCE / TA ratio remained flat at 7.7%[4] Financial Highlights Q3 2024 profitability declined QoQ and YoY due to lower NIM and higher expenses, while the balance sheet grew and capital metrics improved Q3 2024 Profitability vs. Q2 2024 | Metric | Q3 2024 | Q2 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Net Income (Common) | $42.9M | $54.3M | (20.9)% | | Diluted EPS | $1.31 | $1.66 | (21.1)% | | Net Interest Margin | 3.06% | 3.29% | (0.23) bps | | Efficiency Ratio | 62.40% | 51.87% | 10.53 bps | Q3 2024 Profitability vs. Q3 2023 | Metric | Q3 2024 | Q3 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Income (Common) | $42.9M | $83.0M | (48.2)% | | Diluted EPS | $1.31 | $2.58 | (49.2)% | | Net Interest Margin | 3.06% | 3.70% | (0.64) bps | | Efficiency Ratio | 62.40% | 41.01% | 21.39 bps | Balance Sheet and Capital Trends (as of Sept 30, 2024) | Metric | vs. Q2 2024 | vs. Q3 2023 | | :--- | :--- | :--- | | Total Assets | +2.5% | -1.8% | | Total Loans & Leases | +3.1% | +2.5% | | Total Deposits | +2.2% | -0.7% | | Tangible Book Value/Share* | +4.5% | +16.8% | Key Balance Sheet Trends The balance sheet expanded with growth in loans and deposits, while capital levels remained robust due to earnings and AOCI improvements Loans and Leases Total loans and leases held for investment grew by $520.8 million, driven by commercial loans, partially offset by a decrease in consumer installment loans Loan Portfolio Composition (Held for Investment) | Loan Category | Sept 30, 2024 ($M) | % of Total | | :--- | :--- | :--- | | Total Commercial Loans | $12,522.3 | 90.9% | | Total Consumer Loans | $1,255.4 | 9.1% | | Total HFI Loans | $13,777.7 | 100.0% | - Quarter-over-quarter loan growth was driven by mortgage finance (+21.8%), owner-occupied CRE (+21.9%), and non-owner occupied CRE (+10.3%)[12] - The bank sold consumer installment loans with a carrying value of $200.8 million during Q3 2024, recognizing a loss of $0.3 million[14] Allowance for Credit Losses and Provision Provision for credit losses remained stable at $17.8 million, with a modest decrease in net charge-offs and an allowance of 1.06% of loans Credit Loss Provision and Charge-offs (Q3 2024) | Metric | Q3 2024 | Q2 2024 | | :--- | :--- | :--- | | Provision for Credit Losses (Loans) | $17.8M | $17.9M | | Net Charge-offs | $17.0M | $18.7M | | Annualized Net Charge-offs / Avg Loans | 0.50% | 0.56% | - The provision for credit losses on available-for-sale investment securities was a benefit of $0.7 million in Q3 2024, compared to a provision of $0.3 million in Q2 2024[17] Asset Quality Asset quality remains strong with NPAs at 0.22% of total assets and NPLs at 0.34%, supported by robust allowance coverage Asset Quality Metrics | Metric | Sept 30, 2024 | June 30, 2024 | | :--- | :--- | :--- | | Non-performing assets (NPAs) | $47.3M | $47.4M | | NPAs to total assets | 0.22% | 0.23% | | Non-performing loans (NPLs) to total loans | 0.34% | 0.35% | | Reserves to NPLs | 281.36% | 279.52% | - The bank's strategy focuses on commercial loan products with relatively low credit risk, such as C&I, mortgage finance, and multifamily loans[21] - The consumer installment portfolio is small, representing less than 4% of total assets, with strong borrower characteristics (average FICO of 746)[22] Investment Securities The $3.5 billion investment securities portfolio is highly liquid and short-duration, with AFS at $2.4 billion and HTM at 5.0% of total assets - The AFS debt securities portfolio has a spot yield of 5.23%, an effective duration of ~2.0 years, and is 63% AAA rated[25] - The HTM debt securities portfolio represents only 5.0% of total assets, with a spot yield of 4.31% and an effective duration of ~3.5 years[26] - HTM securities increased due to the addition of $160.0 million of asset-backed securities related to financing provided for the sale of consumer installment loans[27] Deposits Total deposits increased by $391.3 million to $18.1 billion, with a shift towards non-interest bearing and money market deposits Deposit Composition (Sept 30, 2024) | Deposit Category | Balance ($B) | % of Total | | :--- | :--- | :--- | | Demand, non-interest bearing | $4.7 | 25.9% | | Demand, interest bearing | $5.6 | 31.0% | | Money market | $4.0 | 21.9% | | Savings | $1.4 | 7.7% | | Time deposits | $2.4 | 13.5% | | Total Deposits | $18.1 | 100.0% | - The total average cost of deposits increased by 6 basis points to 3.46% in Q3 2024 from 3.40% in Q2 2024[28] - Year-over-year, total deposits decreased slightly by 0.7%, with a significant $1.6 billion reduction in time deposits offset by a $1.5 billion increase in money market deposits[29] Borrowings Total borrowings increased by $74.0 million QoQ to $1.4 billion, driven by FHLB advances, but decreased YoY by $437.1 million - Total borrowings increased 5.6% quarter-over-quarter to $1.4 billion, mainly from higher FHLB advances[30] - Total borrowings decreased 23.8% year-over-year, primarily from net repayments of $435.0 million in FHLB advances[31] Capital Capital ratios remain strong with CET1 at 12.5% and TCE/TA at 7.7%, as tangible common equity increased by $54.3 million Key Capital Ratios (Sept 30, 2024) | Ratio | Value | Target | | :--- | :--- | :--- | | CET 1 Ratio | 12.5% | 11.5% | | Total Risk Based Capital | 15.4% | N/A | | TCE / TA Ratio* | 7.7% | 7.5% | - Tangible book value per common share increased by $2.26 to $52.96 in Q3 2024, a 4.5% increase over Q2 2024 (17.7% annualized)[33] - The increase in common equity was driven by $42.9 million in earnings and a $25.3 million decrease in AOCI losses, partially offset by $18.2 million in share repurchases[33] Key Profitability Trends Profitability declined due to decreased net interest income and margin compression, while non-interest income fell sharply and expenses remained flat Net Interest Income Net interest income declined by $9.1 million to $158.5 million, with NIM compressing to 3.06% due to non-recurring benefits - NII decreased by $9.1 million from Q2 2024, due to lower interest income from loans and higher interest expense on deposits and borrowings[37] - The decline in NIM was primarily attributed to non-recurring benefits in Q2 2024, the sale of consumer installment loans, and a securities portfolio repositioning[38] Non-Interest Income Non-interest income decreased significantly by $22.5 million to $8.6 million, primarily due to a non-recurring gain and a loss on leases Non-Interest Income Breakdown (Q3 2024 vs Q2 2024) | Category | Q3 2024 ($M) | Q2 2024 ($M) | | :--- | :--- | :--- | | Net gain (loss) on sale of loans/leases | ($14.5) | ($0.2) | | Unrealized gain on equity investments | $0.0 | $11.0 | | Loan fees | $8.0 | $5.2 | | Total Non-Interest Income | $8.6 | $31.0 | - The decrease from Q2 2024 was mainly due to a non-recurring $11.0 million unrealized gain in Q2 and a $14.3 million loss on commercial clean vehicle leases in Q3[41] Non-Interest Expense Non-interest expenses remained relatively flat at $104.0 million, with increases in salaries and professional fees offset by other reductions - Salaries and employee benefits rose by $2.8 million due to higher headcount from Q2 hires and annual merit increases[43] - The bank incurred approximately $3.0 million in professional services expenses for investments to enhance its risk management infrastructure, with an additional $3.0-$5.0 million expected in each of the next two quarters[44] - Year-over-year, non-interest expenses increased by $14.6 million, primarily due to a $13.9 million rise in salaries and benefits from the addition of new banking teams[45] Taxes The company recorded an income tax benefit of $0.7 million in Q3 2024, driven by lower pre-tax income and investment tax credits - Income tax expense decreased by $19.8 million to a benefit of $0.7 million in Q3 2024, primarily due to lower pre-tax income and higher estimated income tax credits[47] - The company generated $14.3 million of investment tax credits from commercial clean vehicle leases, which offset the loss of the same amount recognized in non-interest income[47][48] Outlook The company reaffirms its strategy for deposit growth, profitability, and capital, with specific guidance on loan growth, NIM, expenses, and tax rate - Loan Growth: Confident in delivering 10% - 15% loan growth for the full year 2024[49] - Net Interest Margin: Expects NIM in Q4 2024 to be roughly flat with Q3 2024, with positive impacts to profitability and earnings in 2025[49] - Expenses: Investments in new teams ($8-10 million quarterly) and risk management ($3-5 million quarterly for a few quarters) will elevate the efficiency ratio near-term, with a medium-term target in the mid-40s[49] - Tax Rate: Full-year 2024 effective tax rate guidance adjusted to 18% - 20%[49] - Capital Targets: Committed to maintaining CET 1 ratio of 11.5% and TCE / TA ratio of 7.5% in 2024[49] Appendix: Financial Statements and Reconciliations This appendix provides detailed unaudited financial statements, supporting tables, and comprehensive reconciliations of GAAP to non-GAAP measures Consolidated Financial Statements This section presents the unaudited Consolidated Statements of Operations and Consolidated Balance Sheet for Q3 2024 - The Consolidated Statement of Operations shows detailed breakdowns of interest income, interest expense, non-interest income, and non-interest expense leading to the net income calculation[57] - The Consolidated Balance Sheet provides a detailed view of assets (cash, securities, loans), liabilities (deposits, borrowings), and shareholders' equity at the end of the period[59] Detailed Financial Metrics This section provides granular financial data, including average balance sheets, loan/deposit compositions, and detailed asset quality metrics - Provides detailed tables on the composition of loans and deposits at period end, allowing for analysis of portfolio shifts[63][64] - Includes comprehensive asset quality tables showing allowance for credit losses and non-performing loans broken down by specific commercial and consumer loan categories[66][69] Reconciliation of GAAP to Non-GAAP Measures This section provides detailed reconciliations of GAAP financial measures to non-GAAP metrics like Core Earnings and Tangible Common Equity - Provides a reconciliation from GAAP Net Income to Core Earnings by adjusting for items like severance expense, gains/losses on securities, and derivative valuation adjustments[74] - Details the calculation of Tangible Common Equity by subtracting preferred stock and goodwill/intangibles from total shareholders' equity[82] - Shows the calculation for the Core Efficiency Ratio by adjusting both non-interest income and non-interest expense for non-core items[81]