Executive Summary / Key Takeaways

• Customers Bancorp is executing a strategic transformation, evolving from a regional community bank into a high-performing specialized commercial and business bank with a national presence in niche markets, driven by a customer-centric, single point of contact model.
• The company's deposit franchise is undergoing significant remixing, successfully replacing higher-cost, less strategic deposits with granular, low-cost, relationship-based commercial deposits, primarily fueled by newly recruited banking teams and enhanced by the proprietary cubiX payments platform.
• Disciplined, selective loan growth in specialized verticals and commercial real estate, often deposit-led, is contributing to asset expansion and attractive risk-adjusted returns, bucking broader industry trends.
• Strategic investments in talent, technology (including cubiX), and risk management infrastructure, while temporarily impacting near-term expenses, are expected to drive significant profitability and efficiency gains in 2025 and beyond, targeting mid-teens ROE and sub-50s efficiency ratio.
• Customers maintains robust capital and liquidity levels, providing flexibility for continued organic growth and opportunistic capital deployment, positioning the company favorably amidst macroeconomic uncertainties and competitive pressures.

Forging A Differentiated Future

Customers Bancorp, Inc. (NYSE: CUBI) is not a static institution. Its story is one of deliberate evolution, transforming from a community bank rooted in Southeastern Pennsylvania into a dynamic regional business bank with a growing national footprint in specialized niches. This journey, marked by a foundational equity infusion around 15 years ago to take control of a bank with significant non-performing assets, has instilled a deep-seated focus on risk management and strategic adaptation. Today, CUBI operates through its subsidiary, Customers Bank, serving businesses and residents across various regions and specialized sectors nationwide, guided by a core strategy centered on a single point of contact service model and leveraging technology to differentiate itself.

At the heart of CUBI's differentiation lies its blend of high-touch relationship banking and sophisticated technological capabilities. Unlike traditional banks heavily reliant on extensive branch networks, CUBI employs a branch-light model, enabling it to invest strategically in both top-tier talent and advanced technology. A prime example is the cubiX platform, the company's proprietary payments and treasury management technology. This platform is more than just a service offering; it's a strategic asset designed to provide clients with capabilities typically found at the nation's largest banks. The tangible benefits are clear: cubiX supports instant blockchain-based digital payments and treasury services, enhancing controls and generating meaningful fee income, contributing an estimated run rate of over $8 million as of Q1 2025. The strategic intent behind building this proprietary platform is to improve risk and compliance infrastructure, consolidate technology solutions, and serve a broader range of commercial clients beyond the digital asset space. This technological edge contributes to CUBI's competitive moat in the payments and treasury arena, supports its relationship-based banking model, drives non-interest income growth, and aligns with its operational efficiency targets.

In the competitive landscape, CUBI positions itself as a nimble yet capable alternative to both larger superregional banks like U.S. Bancorp (USB) and PNC Financial Services (PNC), and smaller, more localized regional players such as ConnectOne Bancorp (CNOB) and Citizens Financial Group (CFG). While CUBI may not match the sheer scale or extensive digital infrastructure of giants like USB or PNC, it competes effectively through specialized expertise, operational agility, and a superior customer service model. CUBI's focus on niche verticals like Fund Finance, Healthcare, and Venture Banking allows it to target attractive risk-adjusted deals, often pricing floating-rate loans around SOFR plus 275-300 basis points all-in, a level of focus and pricing power not always achievable by broader competitors. Furthermore, CUBI's relatively low exposure to higher-risk commercial real estate sectors like office (approximately 1% of the loan portfolio as of March 31, 2025) provides a competitive advantage against peers with higher concentrations, allowing CUBI to selectively grow its CRE book with strong, relationship-based clients when competitors pull back.

Quantitatively, CUBI demonstrates strong capital efficiency. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CUBI's performance metrics offer insight. Its ROE (ranging from 10.7% to 15% core over recent quarters) and ROIC/WACC ratio (1.10) suggest effective capital deployment relative to some peers like CNOB (ROIC/WACC 0.66), indicating CUBI is generating returns that exceed its cost of capital. This efficiency, coupled with its talent recruitment strategy – attracting over a hundred client-facing team members and leaders in recent years – allows CUBI to gain market share, particularly in deposits, often winning relationships from larger institutions in a muted lending environment.

Performance Reflecting Strategic Execution

Recent financial performance reflects CUBI's strategic initiatives and the prevailing macroeconomic environment. For the three months ended March 31, 2025, net income available to common shareholders was $9.5 million, or $0.29 per diluted share, compared to $45.9 million, or $1.40 per diluted share, for the same period in 2024. Core earnings per share were $1.05 in Q1 2025, with a core ROCE of 11.7% and ROA of 97 basis points.

Net interest income increased by $7.1 million year-over-year in Q1 2025, reaching $167.4 million. This was primarily driven by a decrease in interest expense on deposits, partially offset by lower interest income from interest-bearing deposits and investment securities. The Net Interest Margin (NIM) expanded by 3 basis points to 3.13% in Q1 2025, a result of a favorable shift in deposit mix and lower market interest rates on deposits. The total cost of funds, including non-interest bearing deposits, decreased to 2.96% in Q1 2025 from 3.55% in Q1 2024.

The provision for credit losses increased to $28.3 million in Q1 2025 from $17.1 million in Q1 2024. This increase primarily reflected a slight deterioration in macroeconomic forecasts and an increase in loan balances held for investment. Net charge-offs, however, decreased to $17.1 million (48 basis points annualized) in Q1 2025 from $18.0 million (55 basis points annualized) in Q1 2024, mainly due to lower consumer installment loan charge-offs, partially offset by higher multifamily charge-offs. Asset quality metrics remained strong, with NPAs at 26 basis points of total assets and reserves to NPLs at 324% as of March 31, 2025.

Non-interest income saw a significant decrease, falling to $24.5 million in Q1 2025 from $21.2 million in Q1 2024, primarily due to a $51.3 million impairment loss on investment securities the Bank decided to sell to improve liquidity, credit profile, and reduce asset sensitivity. This was partially offset by increases in loan fees, bank-owned life insurance income, and commercial lease income. Non-interest expense increased by $3.6 million to $102.8 million, driven by higher salaries and employee benefits (due to increased headcount, including new teams), professional services (consulting for risk management enhancements), and occupancy, partially offset by a notable decrease in technology, communication and bank operations expense (due to lower deposit servicing fees, including reduced payments to BM Technologies (BMTX)) and FDIC assessments. Core noninterest expense declined 5% sequentially in Q1 2025, improving the core efficiency ratio to 52.7%. Operational excellence initiatives have exceeded targets, realizing $30 million in annualized impact as of Q1 2025, including $22 million in cost savings and $8 million in new recurring fee income, providing headroom for strategic investments.

The balance sheet reflects continued growth and strategic positioning. Total assets increased slightly to $22.4 billion at March 31, 2025, from $22.3 billion at December 31, 2024, driven by loan growth. Total deposits increased by $86.5 million to $18.9 billion, primarily in savings/MMDA and time deposits, partially offset by decreases in interest-bearing and non-interest bearing demand deposits. The deposit transformation momentum is strong, with new teams adding approximately $400 million in deposits in Q1 2025 alone, managing over $2.1 billion in low-cost, granular deposits. Commercial account openings are robust, up 14% annualized in Q1 2025. The deposit pipeline from new teams remains over $2 billion.

Loan growth continues to outpace the industry. Held-for-investment loans and leases grew by $428.2 million in Q1 2025, an annualized pace of 12%. This growth is diversified across specialized lending, commercial real estate, and is increasingly driven by the relationships brought in by new banking teams. Over the last three quarters, CUBI has achieved nearly $500 million of self-funded net loan growth in commercial real estate, demonstrating the power of its deposit-led lending strategy. The loan portfolio mix has strategically shifted over the past five years, reducing concentrations in mortgage finance, multifamily, and consumer installment while increasing focus on specialized verticals.

Liquidity remains robust, with $3.4 billion cash on hand and $5.2 billion immediately available borrowing capacity from the FHLB and FRB as of March 31, 2025, covering 55% of uninsured deposits (70% including collateralized and affiliate deposits). The loan-to-deposit ratio was 80%.

Capital levels are strong, with CET1 at 11.7% and TCE increasing to 7.7% in Q1 2025, comfortably above internal targets and regulatory minimums, providing ample capacity for growth and capital deployment, including share repurchases under the authorized program.

Outlook and Risks

Management's outlook for 2025 reflects optimism tempered by macroeconomic uncertainties. They are reaffirming full-year loan growth guidance with a bias towards the higher end of the 7% to 10% range (or even more), driven by strong pipelines and the ability to selectively originate franchise-enhancing loans from diversified verticals and new teams. Net interest income is projected to grow between 3% to 7% year-over-year (6% to 10% normalized for accretion income), fueled by continued deposit remixing and loan growth, regardless of the rate environment. The core efficiency ratio is targeted in the low to mid-fifties for the full year, progressing towards a mid-40s medium-term target, as operational excellence initiatives yield results and investment costs normalize. Management anticipates achieving EPS growth of 30% or more in 2025, leveraging the payoff from strategic investments made in 2024.

However, the path forward is not without risks. Macroeconomic conditions, including the extent and timing of future Federal Reserve rate cuts, inflation levels, potential impacts of U.S. trade policies (tariffs), and geopolitical events, could affect loan demand, credit quality, and funding costs. While CUBI's exposure to higher-risk CRE is low, a significant downturn could still impact the portfolio. The hypothetical sensitivity analysis showing an approximately $80 million incremental ACL impact under an adverse economic scenario highlights the potential impact of unforeseen macroeconomic deterioration. Regulatory risks, including the ongoing work related to the digital asset business and the federal securities class action lawsuit, require continued focus and investment. The success of integrating new teams and realizing the full potential of the cubiX platform are key execution risks.

Conclusion

Customers Bancorp is actively building a differentiated bank for the future, leveraging a customer-centric model, specialized expertise, and strategic technology investments like the cubiX platform. The ongoing deposit transformation, fueled by successful talent recruitment, is a powerful tailwind for NII and NIM expansion. Disciplined loan growth in targeted verticals, coupled with robust capital and liquidity, positions the company favorably to navigate the current environment and capitalize on opportunities. While investments have temporarily weighed on profitability and expenses, management's clear guidance for 2025 signals an expected payoff, driving significant EPS growth and efficiency improvements. The core investment thesis rests on CUBI's ability to continue executing its unique strategy, converting its strong pipelines, and realizing the full benefits of its transformed franchise and technological capabilities, ultimately driving long-term value creation for shareholders.