Customers Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance sheet comparisons are to December 31, 2016. Unaudited consolidated results include Customers Bank. BankMobile is classified as held for sale, with its results presented as discontinued operations.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Net income | $25.7 million; common shareholders’ income $22.1 million | $18.2 million; common shareholders’ income $16.9 million in Q1 2016 |
| Diluted EPS | $0.67 overall; $0.71 from continuing operations | $0.58 overall; $0.62 from continuing operations in Q1 2016 |
| Net interest income, continuing operations | $62.4 million | $57.6 million in Q1 2016 |
| Net interest margin, tax-equivalent | 2.73% | 2.88% in Q1 2016 |
| Provision for loan losses | $3.1 million | $2.0 million in Q1 2016 |
| Non-interest income / expense, continuing operations | $5.4 million / $30.1 million | $5.3 million / $31.9 million in Q1 2016 |
| Assets / shareholders’ equity | $9.91 billion / $879.8 million | $9.38 billion / $855.9 million |
| Loans receivable, net of allowance | $6.56 billion | $6.11 billion |
| Deposits, continuing operations | $6.63 billion | $6.85 billion |
| Borrowings | Approximately $1.62 billion, including $1.21 billion in FHLB advances and $215 million in federal funds purchased | Approximately $1.15 billion |
| Cash and cash equivalents | $157.1 million | $244.7 million |
| Operating cash flow, continuing operations | $453.7 million provided | $177.3 million used in Q1 2016 |
| Investing / financing cash flow, continuing operations | $1.05 billion used / $246.2 million provided | $434.6 million used / $521.5 million provided in Q1 2016 |
Material changes and management commentary
- Net income available to common shareholders rose 31% year over year. Management attributed the improvement mainly to higher net interest income, lower non-interest expense and lower income tax expense, partly offset by greater loan-loss provisions and preferred dividends.
- Net interest income increased 8.3%, primarily as average interest-earning assets grew about $1.2 billion. Margin contracted 15 basis points as deposit and borrowing costs rose and growth in lower-yielding securities and interest-bearing deposits diluted asset yields.
- Continuing-operation expenses fell 5.4%, helped by lower FDIC assessments and the absence of prior-year one-time legal charges. Technology and professional-services costs increased to support growth.
- Assets increased 5.6% from year-end, driven largely by a $523.8 million rise in available-for-sale securities. Mortgage warehouse loans held for sale declined $432.6 million, which the company described as a seasonal movement. Loans receivable, net, increased $451.8 million.
- Management said it was moderating balance-sheet growth because crossing $10 billion in assets could adversely affect BankMobile. It reported a 43.3% continuing-operations efficiency ratio, 13.80% return on average common equity and 1.09% return on average assets.
- Management characterized asset quality as strong: non-performing loans were $27.2 million, or 0.33% of total loans, and non-performing assets were 0.30% of total assets. The allowance was $39.9 million, or 0.60% of loans receivable; net charge-offs were $0.5 million.
Outlook, risks, contingencies and unusual items
- BankMobile sale: The company anticipated closing a sale in 2017. At March 31, BankMobile had $72.9 million of assets held for sale and $738.8 million of liabilities held for sale, including $702.4 million of non-interest-bearing deposits. The company expected to transfer cash, securities or loans with market value approximately equal to deposits outstanding at closing. Sale completion and terms remain important uncertainties.
- Discontinued operations: BankMobile reported a $1.2 million net loss in Q1 2017. The BankMobile segment showed $1.5 million net income under management’s segment allocation methodology; that presentation differs from discontinued-operations results, principally because of internal funds-transfer pricing.
- Religare investment: Customers recorded a $1.7 million Q1 impairment loss on its Religare Enterprises equity investment, bringing its fair value and new cost basis to $13.5 million. Management had decided to exit the investment; further market-price or foreign-exchange declines, or inability to exit as planned, could cause additional losses. The investment also consumes regulatory capital.
- Taxes: The decline in continuing-operations tax expense included a $2.6 million benefit related to equity awards and a $3.5 million benefit from strategies to recognize tax benefits on impairment losses. These items materially supported the quarter’s earnings comparison.
- Funding and liquidity: Deposits from continuing operations fell 3.2%, while borrowings rose about 40.9%. FHLB borrowing capacity was $4.8 billion, with $1.2 billion borrowed and $1.8 billion used to collateralize state and municipal deposits. Management said available funding sources were adequate for foreseeable requirements. Cash flow was affected by large mortgage warehouse originations and sales and substantial securities purchases.
- Credit and commitments: Multi-family loans were approximately 41.5% of the total loan portfolio. Off-balance-sheet commitments included $1.73 billion of unfunded mortgage warehouse commitments, $505.5 million of commitments to fund loans and $528.1 million of unfunded lines of credit. These are not necessarily expected to be drawn in full.
- Legal matters: The filing describes a new class action concerning Higher One accounts and debit cards, and ongoing Halbreiner and Lifestyle Healthcare litigation. The company could not determine the likelihood or range of loss for these matters.
- No specific earnings guidance: The filing provides no quantified forward earnings guidance. Management’s outlook statements are subject to economic, competitive, regulatory and financial-market uncertainties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the BankMobile sale closed, its final consideration and the disposition of its deposit base and related assets.
- Whether earnings growth persists excluding the identified tax benefits, and how funding costs affect net interest margin.
- Changes in non-performing loans, charge-offs, specific reserves and the concentration of multi-family and other commercial lending.
- Deposit trends, borrowing levels, liquidity availability and the effect of balance-sheet growth near the $10 billion threshold.
- Developments in the Religare exit and valuation, the reported lawsuits, and any resulting impairment, capital or contingency effects.