10-Q: Customers Bancorp Q2 Profit Rises, YTD Net Income Falls

Customers Bancorp reported a slight increase in net income for Q2 2025, reaching $55.8 million, but saw a significant decline in year-to-date net income to $65.4 million, impacted by a large debt securities impairment.

Summary

• Net income available to common shareholders for the three months ended June 30, 2025, increased to $55.8 million, up from $54.3 million in the same period of 2024.
• Year-to-date net income available to common shareholders for the six months ended June 30, 2025, decreased significantly to $65.4 million, down from $100.2 million in the same period of 2024.
• Net interest income increased by $9.1 million for the three months ended June 30, 2025, and by $16.1 million for the six months ended June 30, 2025, primarily due to lower interest expense on deposits and growth in specialized lending.
• Net interest margin (NIM) decreased by 2 basis points to 3.27% for Q2 2025 but remained unchanged at 3.20% for the six months ended June 30, 2025.
• Provision for credit losses increased to $20.8 million for Q2 2025 and $49.1 million for YTD 2025, reflecting a slight deterioration in macroeconomic forecasts and increased loan balances.
• Non-interest income decreased by $1.4 million for Q2 2025 and by $47.2 million for YTD 2025, largely due to a $51.3 million impairment loss on debt securities and the absence of a prior year's $11.0 million unrealized gain on equity method investments.
• Total assets increased by $242.6 million to $22.6 billion at June 30, 2025, driven by growth in loans and leases.
• Total deposits increased by $129.6 million to $19.0 billion at June 30, 2025, with a favorable shift in deposit mix leading to a lower cost of interest-bearing liabilities.
• The company redeemed all outstanding shares of Series E Preferred Stock for $57.5 million on June 16, 2025, incurring a $1.9 million loss on redemption.
• The Allowance for Credit Losses (ACL) on loans and leases increased to $147.4 million at June 30, 2025, from $136.8 million at December 31, 2024, representing 1.07% of total loans and leases receivable.
• Non-performing assets (NPA) decreased to $40.8 million (0.26% of total portfolio) at June 30, 2025, from $55.8 million (0.25% of total assets) at December 31, 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to a significant year-to-date decline in net income driven by a large impairment loss on debt securities and increased provision for credit losses. While Q2 net income showed a slight increase and capital/liquidity positions remain strong, the substantial impairment and ongoing legal/regulatory risks temper overall optimism.

Positives

• Net income available to common shareholders increased by $1.5 million (2.8%) for the three months ended June 30, 2025, compared to the same period in 2024.
• Net interest income increased by $9.1 million (5.4%) for Q2 2025 and $16.1 million (4.9%) for YTD 2025, driven by lower interest expense on deposits and growth in specialized lending.
• Average interest-earning assets increased by $1.2 billion for Q2 2025 and $966.5 million for YTD 2025, primarily due to growth in specialized lending.
• Total cost of funds, including non-interest bearing deposits, decreased to 2.99% for Q2 2025 (from 3.51% in Q2 2024) and 2.98% for YTD 2025 (from 3.53% in YTD 2024), indicating improved funding costs.
• Loan fees increased by $3.9 million (74.0%) for Q2 2025 and $5.8 million (55.4%) for YTD 2025, driven by fees on unused lines of credit and consumer installment loan servicing.
• Bank-owned life insurance income increased by $0.2 million (12.1%) for Q2 2025 and $1.6 million (31.2%) for YTD 2025 due to death benefits and cash surrender value increases.
• Other non-interest income increased significantly by $5.4 million (229.4%) for Q2 2025 and $6.7 million (150.3%) for YTD 2025, partly due to fees from the sunsetting of a fintech loan origination program and increased deposit account fees.
• Total assets grew by $242.6 million (1.1%) to $22.6 billion at June 30, 2025.
• Loans and leases receivable increased by $592.2 million (4.5%) to $13.7 billion at June 30, 2025.
• Mortgage finance loans at fair value increased by $215.1 million (16.3%) to $1.5 billion at June 30, 2025.
• Net charge-offs decreased to $13.1 million for Q2 2025 (from $18.7 million in Q2 2024) and $30.3 million for YTD 2025 (from $36.7 million in YTD 2024), primarily due to lower consumer installment loan charge-offs.
• Non-performing assets (NPA) decreased to $40.8 million (0.26% of total portfolio) at June 30, 2025, from $43.3 million (0.30% of loans and leases) at December 31, 2024, indicating improved asset quality.
• The company's capital ratios (Common Equity Tier 1, Tier 1, Total Capital, Tier 1 Leverage) are all well above regulatory minimums, indicating strong capital adequacy and compliance with Basel III requirements.
• Maintained a strong liquidity position with $8.6 billion immediately available, covering approximately 115% of uninsured deposits and 150% of uninsured deposits less collateralized and affiliate deposits at June 30, 2025.
• Loan to deposit ratio was 81% at June 30, 2025, indicating a healthy funding structure.

Negatives

• Net income available to common shareholders for the six months ended June 30, 2025, decreased by $34.9 million (34.8%) compared to the same period in 2024.
• Provision for credit losses increased by $2.7 million (14.7%) for Q2 2025 and $13.9 million (39.5%) for YTD 2025, reflecting a slight deterioration in macroeconomic forecasts.
• Total non-interest income decreased by $47.2 million (90.2%) for the six months ended June 30, 2025, primarily due to a $51.3 million impairment loss on debt securities.
• A $1.9 million loss was incurred on the redemption of Series E Preferred Stock.
• Net loss on sale of investment securities increased by $1.1 million for Q2 2025 and $1.0 million for YTD 2025.
• Interest income from investment securities, consumer installment loans, and interest-earning deposits decreased.
• Professional services expense increased significantly by $7.7 million (126.9%) for Q2 2025 and $13.3 million (106.4%) for YTD 2025, due to consulting fees for risk management infrastructure enhancement.
• Technology, communication, and bank operations expense decreased, but the prior year included $7.1 million in deposit servicing fees related to prior periods, making the current period's decrease less favorable than it appears.
• Deposits serviced by BM Technologies under a white label relationship decreased by approximately $187.0 million, including $166.7 million transferred to a new sponsor bank.

Risks

• Continuation of recent turmoil in the banking industry and potential for negative consequences from regulatory violations, investigations, and examinations, including fines, penalties, and reputational damage.
• Effects of competition on deposit rates and growth, loan rates and growth, and net interest margin.
• Failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyberattacks.
• Public health crises and pandemics and their effects on the economic and business environments.
• Geopolitical conditions, including acts or threats of terrorism, and military conflicts (Russia-Ukraine, Middle East), which could impact economic conditions.
• Impact of changes in the economy on the performance of the loan and lease portfolio, market value of investment securities, demand for products/services, and funding availability.
• Effects of actions by the federal government, including the Federal Reserve, that affect market interest rates and money supply.
• Higher inflation and sustained higher interest rate environment.
• Changes in U.S. trade policies, including tariffs and retaliatory tariffs.
• Elevated liquidity risk to the U.S. banking system and exposure to the U.S. commercial real estate market, particularly for regional banks.
• Uncertainty in economic forecasts used for Allowance for Credit Losses (ACL) estimation, which could lead to materially different allowance levels.
• Potential for further meaningful provisions for credit losses if the pace of economic recovery is worse than expected or if geopolitical instability, rising inflation, or worsening U.S. banking system conditions occur.
• The company is a defendant in a federal securities class action complaint (Chang v. Customers Bancorp, Inc. et al.) alleging materially false and/or misleading statements and omissions, seeking damages.
• The Board of Directors received a demand letter to investigate and pursue causes of action against current and former directors/officers based on alleged deficiencies in anti-money laundering and bank secrecy compliance.
• The company historically has not paid cash dividends on common stock and does not expect to in the foreseeable future, and regulatory restrictions limit dividend payments by bank holding companies and their subsidiaries.

Future Outlook

The company continues to monitor the impact of macroeconomic conditions, U.S. banking system weaknesses, military conflicts, high tariffs, inflation, and monetary/fiscal policy measures on the U.S. economy. It is highly uncertain how these factors will impact operations and financial results for the remainder of 2025. The company is reducing asset sensitivity through derivative hedging and investment securities portfolio rebalancing as interest rates begin to decline. The Federal Reserve is expected to lower interest rates in September and December 2025 and gradually reduce the policy rate to its neutral level by late 2026. The company does not expect the recently enacted One Big Beautiful Bill Act (OBBBA) to have a material impact on its consolidated financial statements.

Management Comments

• Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented.
• Customers has maintained higher levels of liquidity, reserves for credit losses on loans and leases and off-balance sheet credit exposures and strong capital ratios, and shifted the mix of its loan portfolio towards low credit risk commercial loans with floating or adjustable interest rates during the period of high interest rates.
• As the interest rates begin to decline, Customers has been reducing the Bank's asset sensitivity through derivative hedging and investment securities portfolio rebalancing.
• Customers remains focused on growing its non-interest bearing and lower-cost interest-bearing deposits.
• The extent to which inflation, interest rates and other macroeconomic and industry factors, the geopolitical conflicts and developments in the U.S. banking system will impact Customers operations and financial results during the remainder of 2025 is highly uncertain.
• There can be no assurance that Customers will realize gains from sales of investment securities in 2025, given the significant uncertainty in the capital markets and fluctuations in our funding needs, which may impact Customers investment strategy.
• Management believes that the assumptions and combination of methods used in evaluating interest rate risk in the new balance sheet forecasting model are reasonable.

Industry Context

The banking industry continues to face uncertainties related to macroeconomic conditions, including inflation and interest rate fluctuations, and potential elevated liquidity risk, particularly for regional banks. Geopolitical conflicts and changes in trade policies add to this uncertainty. Customers Bancorp is actively managing its asset sensitivity through hedging and portfolio rebalancing in anticipation of future rate cuts, aligning with broader industry efforts to navigate evolving economic landscapes. The company's minimal exposure to the higher-risk commercial real estate office sector (approximately 1% of loan portfolio) positions it favorably compared to some regional banks with higher exposure.

Comparison to Industry Standards

• The company's capital ratios (Common Equity Tier 1 at 12.050%, Tier 1 at 12.587%, Total Capital at 14.489%, and Tier 1 Leverage at 8.583% for the Bancorp as of June 30, 2025) are significantly above the Basel III compliant minimums (7.000%, 8.500%, 10.500%, and 4.000% respectively), indicating a strong capital position relative to industry benchmarks.
• The loan to deposit ratio of 81% at June 30, 2025, suggests a balanced funding structure, which is generally considered healthy within the banking sector.
• The company's exposure to the commercial real estate office sector is approximately 1% of its loan portfolio, which is minimal compared to some regional banks that have faced heightened scrutiny due to higher concentrations in this sector.
• The company's liquidity position, with $8.6 billion immediately available covering 115% of uninsured deposits, demonstrates robust liquidity management, exceeding typical industry expectations for immediate coverage of uninsured deposits.

Management Changes

Corporate Governance

Legal Proceedings

• A federal securities class action complaint, 'Chang v. Customers Bancorp, Inc. et al.,' was filed on December 2, 2024, alleging materially false and/or misleading statements and/or omissions during the period of March 1, 2024, through August 8, 2024, in violation of Section 10(b) of the Exchange Act and Rule 10b-5. The suit also alleges individual defendants are liable under Section 20(a) as controlling persons.
• On January 31, 2025, Chun Yao Chang filed an application for lead plaintiff, which was denied by the court on June 24, 2025, due to the plaintiff not making the required prima facie showing of being an adequate class representative.
• The company intends to defend itself against this action.
• On or about June 17, 2025, the Board of Directors received a demand letter to investigate and pursue causes of action against certain current and former directors and/or officers based on alleged deficiencies in the company's anti-money laundering and bank secrecy compliance.
• In response to the demand letter, on July 23, 2025, the Board approved the formation of a Special Litigation Committee comprised entirely of independent directors to investigate the allegations.

Stakeholder Impact

• Shareholders: Impacted by the decrease in year-to-date net income due to the debt securities impairment and loss on preferred stock redemption. Potential for future share price volatility due to ongoing legal proceedings and macroeconomic uncertainties. Benefit from completed share repurchase program and strong capital ratios.
• Employees: Impacted by changes in salaries and employee benefits, and share-based compensation plans. New executive appointment and associated performance-based restricted stock units could incentivize performance.
• Customers: Benefit from the company's focus on growing non-interest bearing and lower-cost interest-bearing deposits, and continued provision of commercial and consumer loan products. Fintech partnerships and their sunsetting may affect certain consumer loan offerings.
• Creditors: Positively impacted by the company's strong capital adequacy ratios and robust liquidity position, indicating a lower risk of default.
• Regulatory Authorities: The company is subject to ongoing regulatory scrutiny, including capital requirements and investigations into compliance matters (e.g., AML/bank secrecy), which could lead to future actions or penalties.

Next Steps

• Continue monitoring the impact of macroeconomic conditions, U.S. banking system weaknesses, military conflicts, high tariffs, inflation, and monetary/fiscal policy measures.
• Further reduce asset sensitivity through derivative hedging and investment securities portfolio rebalancing.
• Focus on growing non-interest bearing and lower-cost interest-bearing deposits.
• The Special Litigation Committee will investigate allegations raised in the demand letter regarding anti-money laundering and bank secrecy compliance.
• The company intends to defend itself against the federal securities class action lawsuit.

Key Dates

Recommendation

While Customers Bancorp demonstrates strong capital adequacy and liquidity, along with growth in net interest income and a reduction in net charge-offs, the significant year-to-date decline in net income due to a large debt securities impairment and increased provision for credit losses raises concerns. The ongoing legal proceedings and internal investigation into compliance issues introduce additional uncertainty and potential future costs. The mixed financial performance and unresolved legal/regulatory matters suggest a 'hold' recommendation, as the positives are offset by notable negatives and risks that warrant careful monitoring before a more definitive stance can be taken.

Keywords

Banking, Financial Services, Commercial Lending, Mortgage Finance, Deposits, SEC Filing, 10-Q, Financial Results, Credit Quality, Capital Adequacy, Interest Rates, Risk Management, Shareholder Equity, Loan Portfolio, Fintech