Customers Bancorp's Margin Bottoms as Reserve Cushion Thins
Customers Bancorp (CUBI) grew net interest income to $193.4 million in the second quarter even as its net interest margin fell to a 3.17% trough and reserve coverage of nonperforming loans slid to 293% from 337%.
Customers Bancorp (CUBI), the specialty commercial lender known for its C&I and mortgage-warehouse finance books, posted a net interest margin of 3.17% on a tax-equivalent basis in the second quarter, down 5 basis points from 3.22% in the first quarter and 23 basis points below the 3.40% level a year earlier. Management called the print a trough, guiding to a rebound toward roughly first-quarter levels in the third quarter and further expansion in the fourth, a call that rests on gathering lower-cost deposits and sustaining loan growth. Net interest income rose to $193.4 million, up 1.0% quarter over quarter and 9.4% year over year from $176.7 million, as higher C&I specialized lending income outran increased interest expense tied to deposit mix shift and FHLB borrowings.
The loan book did its part. Total loans and leases reached a record $18.0 billion, up $623.8 million (3.6%) quarter over quarter and $2.6 billion (16.9%) year over year. C&I specialized lending added $253 million (3.4%), non-owner-occupied CRE added $145 million (8.3%), and multifamily contributed $113 million (4.5%), while mortgage finance loans shrank $101 million (5.5%), a trade of higher-yielding growth against a runoff category.
The funding side told a more cautious story. Total deposits hit a record $21.7 billion, but the $140.3 million (0.6%) quarter-over-quarter increase marked a sharp deceleration from the $813.9 million (3.9%) gain booked in the first quarter, even as year-over-year growth held at 14.5%. Non-interest-bearing deposits grew $174.1 million to a record $6.9 billion, or 31.8% of total deposits, again a slower build than the $436.0 million added in the prior quarter. The average cost of deposits ticked up 4 basis points quarter over quarter to 2.50%, even as it remained 35 basis points below the year-ago level of 2.85%, a sign that the multi-quarter decline in funding costs has stalled for now. That combination — slower low-cost deposit accumulation paired with rising deposit costs — is the mechanism behind the NIM guidance, and it puts the burden on Customers to reaccelerate deposit gathering to hit its rebound target.
Credit quality moved in the wrong direction for a fourth straight quarter. The nonperforming-loan ratio climbed to 0.31% from 0.27% in the first quarter, continuing a steady march up from 0.26% in the fourth quarter of 2023, 0.18% in the third quarter and 0.18% a year ago. Reserve coverage of those nonperforming loans, which include SBA-guaranteed balances, fell to 293% from 337% in the first quarter, 356% in the fourth quarter of 2023 and as high as 534% in the third quarter of 2023. Provision expense held flat at $23 million quarter over quarter but sits above the $21 million booked a year ago, and net charge-offs rose to $15 million, or 0.34% annualized, from $13 million (0.32%) in the first quarter. The reserve cushion is thinning even as charge-offs stay low in absolute terms, which leaves less room to absorb a further uptick without a provision step-up.
Expense discipline slipped modestly. The efficiency ratio rose 87 basis points quarter over quarter to 50.55% from 49.68%, though it still improved 68 basis points from 51.23% a year earlier. Non-interest expense rose to $114.9 million from $112.0 million, with $4.7 million of higher salaries and benefits — including $1.0 million of severance — and $1.2 million of higher technology spend partly offset by a $3.6 million drop in FDIC assessments as special-assessment charges continue to roll off.
Capital drifted lower even as the balance sheet expanded. The CET1 ratio fell to 12.8% from 12.89% in the first quarter and 12.99% at year-end 2023, though it remains well above the 12.05% level of a year ago. Customers slowed its buyback pace alongside the capital dip, repurchasing 92,804 shares at an average $73.03 in the second quarter versus 621,668 shares at $68.04 in the first, a pullback consistent with prioritizing capital retention as loan growth accelerates.
Non-interest income held roughly flat quarter over quarter at $34.0 million, down $0.3 million from $34.3 million, but rose $4.4 million year over year from $29.6 million, helped by higher commercial lease income and gains on loan sales against a prior-year period weighed down by a $1.8 million securities loss.
The quarter leaves Customers with a loan-growth engine running ahead of its deposit-gathering pace, a margin management insists has bottomed, and a credit reserve cushion that has more than halved in coverage terms since the third quarter of 2023. Whether the promised NIM rebound materializes in the third quarter will depend on whether low-cost deposit inflows reaccelerate quickly enough to offset the FHLB and mix-driven funding costs that compressed the margin this quarter.