Customers Bancorp, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Customers Bancorp operates Customers Bank, with community and commercial banking, mortgage warehouse lending, and digital banking activities. BankMobile was classified as held for sale and reported as discontinued operations.
Key financial metrics
| Metric | Q2 2017 / June 30, 2017 | Comparable / prior period |
|---|---|---|
| Total assets | $10.88 billion | $9.38 billion at December 31, 2016 |
| Net income available to common shareholders | Q2: $20.1 million; six months: $42.2 million | Q2 2016: $17.4 million; six months 2016: $34.3 million |
| Diluted EPS | Q2: $0.62; six months: $1.29 | Q2 2016: $0.59; six months 2016: $1.17 |
| Continuing-operations net interest income | Q2: $68.6 million; six months: $131.0 million | Q2 2016: $63.2 million; six months 2016: $120.8 million |
| Net interest margin, tax-equivalent | Q2: 2.78%; six months: 2.76% | Q2 2016: 2.83%; six months 2016: 2.85% |
| Continuing-operations non-interest income / expense | Q2: $7.0 million / $30.6 million | Q2 2016: $5.9 million / $32.1 million |
| Cash and cash equivalents | $401.7 million | $244.7 million at December 31, 2016 |
| Loans receivable, net of allowance | $6.68 billion | $6.11 billion at December 31, 2016 |
| Deposits (continuing operations) | $7.02 billion | $6.85 billion at December 31, 2016 |
| Shareholders’ equity | $910.3 million | $855.9 million at December 31, 2016 |
For the six months, continuing-operations net income was $55.9 million; net income including BankMobile’s discontinued-operations loss was $49.5 million. Continuing-operations cash from operating activities was $52.1 million, versus cash used of $490.6 million in the first half of 2016. Investing activities used $1.35 billion and financing activities provided $1.46 billion; cash and cash equivalents increased by $157.0 million overall.
Total borrowings were approximately $2.44 billion at June 30, including $2.00 billion of FHLB advances, $150 million of federal funds purchased, $186.0 million of other borrowings, and $108.8 million of subordinated debt. In June, the company issued $100 million of five-year senior notes at a 3.95% coupon and contributed net proceeds to the Bank. FHLB borrowing capacity was $4.9 billion, with $2.0 billion borrowed and $1.8 billion of capacity used to collateralize municipal deposits; Federal Reserve borrowing capacity was $146.2 million.
Regulatory capital remained above applicable requirements. At June 30, the Bancorp’s common equity Tier 1, total risk-based capital, and Tier 1 leverage ratios were 8.28%, 12.44%, and 8.68%, respectively; the Bank’s were 12.30%, 14.12%, and 9.74%.
Material changes versus comparable periods
- Q2 common-shareholder earnings rose 15.4%; first-half earnings rose 23.1%. Management attributed improvement principally to higher net interest income from asset growth and lower continuing-operations expenses.
- Net interest margin narrowed as funding costs rose faster than asset yields. Q2 combined deposit and borrowing costs increased 24 basis points year over year; the margin fell five basis points. For the first half, the margin declined nine basis points.
- Loans receivable grew 8.7% from year-end; available-for-sale securities more than doubled to $1.01 billion, largely from purchases of agency commercial mortgage-backed securities. Total assets rose 16.0% and exceeded $10 billion.
- Non-interest expense fell 4.7% in Q2 and 5.1% for the first half, mainly reflecting lower FDIC assessments and regulatory fees.
- Continuing-operations non-interest income included a $3.2 million securities-sale gain and a $2.9 million Q2 impairment loss on Religare equity securities ($4.6 million for the first half). First-half taxes benefited from a $4.6 million tax strategy-related benefit and a $3.9 million stock-award-related benefit.
Outlook, risks, contingencies, and unusual items
- BankMobile sale: The company intended to sell BankMobile and anticipated closing within one year. BankMobile reported a $5.2 million Q2 net loss and a $6.4 million first-half net loss; management cited seasonal weakness in student activity and system-conversion costs. Sale timing and terms were uncertain. If the sale is not completed and assets remain above $10 billion at year-end, the company warned of heightened regulatory requirements and possible loss of the small-issuer debit-card interchange exception, potentially reducing interchange income from July 1, 2018.
- Credit: Management reported non-performing loans of $19.2 million (0.21% of total loans) and non-performing assets of 0.20% of total assets. The allowance was $38.5 million, or 0.57% of loans receivable. First-half net charge-offs were $2.4 million, including a $1.8 million charge-off tied to one commercial and industrial relationship. Troubled debt restructurings increased to $21.3 million from $16.4 million at year-end.
- Investment exposure: The Religare position was written down to a $10.7 million cost basis at June 30; by July 31, its estimated fair value had fallen to $6.3 million. The company said it was evaluating exit alternatives and warned further share-price or foreign-exchange declines could cause additional losses and consume regulatory capital.
- Interest-rate risk: Modelled net interest income declined 0.8%, 4.1%, and 10.0% under immediate rate increases of 100, 200, and 300 basis points, respectively; a 100-basis-point decline reduced it 3.5%. Management cautioned actual results could differ from model estimates.
- Commitments and contingencies: Off-balance-sheet commitments included $448.2 million to fund loans, $1.29 billion of unfunded mortgage-warehouse commitments, $489.2 million of unfunded lines of credit, and $40.4 million of letters of credit. The Higher One acquisition agreement also provides for contingent payments if specified annual revenues exceed $75 million; no liability was recorded at June 30.
- Management stated it believed liquidity was adequate for foreseeable needs. No material change to previously disclosed legal proceedings or other risk factors was reported, apart from the added risks associated with crossing the $10 billion asset threshold and the Religare investment.
Most important facts for investors to verify
- Whether and when BankMobile is sold, the transaction’s final terms, and the impact on assets, deposits, earnings, and debit-card interchange revenue.
- Whether loan growth, credit quality, charge-offs, TDRs, and the allowance remain consistent with management’s assessment.
- Whether funding costs continue to outpace asset-yield increases and pressure net interest margin, particularly as borrowings and deposit pricing change.
- The value and disposition of the Religare investment, including any additional impairment or regulatory-capital effect.
- The durability of earnings after securities gains, investment impairment charges, tax benefits, and other unusual items; the filing provides no specific earnings guidance.
- Whether heightened requirements following the $10 billion asset threshold add material compliance costs; management reported disclosure controls were effective and no material internal-control changes during the quarter.