Customers Bancorp Inc.'s stock price plummeted after the company reported its fourth-quarter 2022 financial results.
The West Reading, Pa.-based company's earnings results included a higher cost of funds and a declining net interest margin as a result of intensifying funding pressures, the sale of available-for-sale securities at a loss and earnings pressure related to Paycheck Protection Program loans. The company's stock plummeted and was down 19.13% as of 12:21 p.m. ET.
Loan growth remained strong in the quarter, with linked quarter growth of 3%, but the company turned to higher cost funding levers to support that growth. The company's average balance of certificates of deposits was $3.26 billion in the quarter, up from $1.14 billion in the third quarter of 2022. The average yield or cost of those CDs was 3.62% in the fourth quarter of 2022, up from 1.92% in the linked quarter.
"To fund loan growth ... the company leaned on higher costing deposit sources," Hovde analyst David Bishop wrote in a note.
Customers Bancorp's deposit base, which is largely comprised of business customers, is "sophisticated" and expects competitive deposit rates, founder, Chairman and CEO Jay Sidhu said on the company's fourth-quarter 2022 earnings call. That dynamic, coupled with the historic pace of rising interest rates, "led to an increase in our deposit cost over our expectations," he said.
"Practically, all our deposits are corporate or institutional deposits and only a very small percentage are consumer deposits that have virtually no corresponding branch expenses which, in our opinion, should be factored into the total cost of deposits," CFO Carla Leibold said.
The company's total cost of deposits for the quarter was 2.73%, up from 0.36% in the fourth quarter of 2021.
The higher cost of funds weighed on the company's net interest margin, which was 2.67% in the fourth quarter of 2022, down from 3.16% in the third quarter of 2022.
The company guided to a full-year 2023 net interest margin between 2.85% and 3.05%. The company plans to moderate loan growth in 2023, President and Vice Chairman Sam Sidhu said, projecting full-year loan growth in the mid-single-digit range.
Also in the quarter, the company reported diluted earnings per share of 77 cents, down from $1.85 in the linked quarter and $2.87 in the year-ago period. The company's CFO said two items "negatively impacted" the company's results.
The first was the sale of investment securities "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," according to the company's earnings release.
The sale resulted in a net loss of $16.9 million pretax, or $13.5 million after tax.
The second negative impact cited by the CFO was an $11 million charge-off of Paycheck Protection Program, or PPP, loans in the quarter that were "determined to be ineligible for [Small Business Administration] forgiveness and guarantee and were deemed uncollectible," according to the earnings release. However, the company recorded a $7.5 million recovery from a legal settlement with a third-party PPP provider related to those charge-offs, Leibold said on the call.
"We think this is largely behind us but thought it was prudent to take the charge-off in the fourth quarter," Leibold said.
Piper Sandler analyst Frank Schiraldi wrote in a note following the company's results that the charge-offs were "worrisome to us, and something we haven't seen."
"This certainly raised some alarm bells," he added. The analyst also noted that the company has experienced "slowish forgiveness," with about $1 billion in PPP loans still on the bank's balance sheet.
In the earnings release, the company acknowledged that PPP loan forgiveness is happening "slower than expected." The company recognized $4 million in PPP fees in the quarter, compared to Hovde's modeling estimate of $13 million for the quarter.
Since Customers Bancorp fully paid off the Federal Reserve Board PPP liquidity facility in 2021, the PPP loans still sitting on its balance sheet are currently funded by higher cost funding and reducing short-term profitability, the company's CFO said in the earnings release.
The higher cost of funding those — which resulted in negative net interest income of $2.8 million — the $11 million charge-off and the $7.5 million settlement with the third-party PPP service provider led to a total negative impact on fourth-quarter 2022 earnings per diluted share of 18 cents, Leibold said in the release.
