Business context and reporting period
Customers Bancorp, Inc. is a bank holding company operating through Customers Bank, serving businesses, consumers and nonprofits primarily in the Northeast and Mid-Atlantic. Its lending focuses on commercial and multifamily/commercial real estate loans, mortgage-company warehouse lending, and consumer loans. This Form 10-K covers the fiscal year ended December 31, 2013; quarterly figures below include the fourth quarter. Amounts are U.S. dollars.
Financial performance and condition
| Metric | FY 2013 / December 31, 2013 | FY 2012 / December 31, 2012 |
|---|---|---|
| Net interest income | $103.2 million | $71.8 million |
| Non-interest income | $23.3 million | $29.2 million |
| Provision for loan losses | $2.2 million | $14.3 million |
| Non-interest expense | $74.0 million | $50.7 million |
| Net income available to common shareholders | $32.7 million | $23.8 million |
| Diluted EPS | $1.43 | $1.73 |
| Net interest margin | 3.17% | 3.26% |
| Return on average assets / equity | 0.95% / 9.49% | 1.02% / 12.69% |
| Total assets | $4.15 billion | $3.20 billion |
| Deposits | $2.96 billion | $2.44 billion |
| Borrowings | $771.8 million | $471.0 million |
| Shareholders’ equity | $386.6 million | $269.5 million |
- FY 2013 net cash provided by operating activities was $722.0 million, versus $1.24 billion used in 2012. Investing activities used $1.59 billion; financing activities provided $913.0 million. Cash and cash equivalents ended the year at $233.1 million. Operating cash flow is substantially affected by the high-volume mortgage warehouse lending and loan-sale cycle.
- Net loans receivable were $2.44 billion, with an additional $747.6 million of loans held for sale. Commercial loans were 67.1% of the total loan portfolio, including loans held for sale; multifamily loans and commercial real estate lending were major growth drivers.
- The allowance for loan losses was $24.0 million, or 1.00% of non-covered loans. Non-performing non-covered loans were $13.5 million, down from $22.3 million; non-performing assets were $18.8 million, down from $26.4 million. Net charge-offs rose to $6.9 million from $5.5 million.
- Liquidity and funding: the loan-to-deposit ratio was 108.5%; wholesale funding was 20.8% of total funding. Time deposits were about 38% of deposits, and $719.6 million were scheduled to mature in 2014. FHLB advances were $706.5 million; federal funds purchased were $13.0 million.
- Capital ratios at year-end included a 10.81% Bank Tier 1 leverage ratio, 13.33% Tier 1 risk-based ratio and 14.11% total risk-based ratio. Management reported the Bank and Bancorp met applicable requirements and considered the Bank well capitalized. The Bancorp issued $63.3 million of 6.375% senior notes due 2018 during 2013.
Material changes versus prior comparable periods
- Annual net income rose 37.3%, primarily on 43.8% growth in net interest income and a $12.0 million lower loan-loss provision. Average loans increased $964.7 million, while lower loan yields and a slightly lower net interest margin partly offset volume gains.
- Diluted EPS fell to $1.43 from $1.73 despite higher net income, reflecting a substantial increase in weighted-average shares following equity issuance. The public offering generated $97.5 million net proceeds; the company also repurchased about 485,000 shares for $7.8 million.
- Non-interest expense increased $23.4 million, led by $11.6 million more in salaries and benefits as staffing expanded, plus higher occupancy, regulatory and professional costs. Non-interest income fell $5.9 million, largely because 2012 included larger securities-sale gains and a $4.5 million FDIC-related estimate benefit.
- Total assets grew 29.7%. Non-covered loans receivable nearly doubled, driven principally by multifamily/commercial real estate lending. Deposits grew 21.3%; borrowings also increased. The investment securities portfolio rose to $497.6 million from $129.1 million.
- Fourth-quarter 2013 net income was $9.0 million, versus $7.6 million in Q4 2012; diluted EPS was $0.36 versus $0.40. Q4 net interest income increased to $27.7 million from $21.7 million. Q4 provision was a $0.5 million benefit, compared with a $1.6 million expense in Q4 2012.
Outlook, risks, contingencies and unusual items
- Management expected moderate 2014 U.S. economic growth of 2.0%–2.5% and 2%–3% growth in its markets. It cited improving commercial and real estate loan demand and expected mortgage lending to improve. These are management’s views, not earnings or financial guidance.
- Management identified concentration and execution risks from rapid growth in multifamily/commercial real estate and mortgage warehouse lending, funding and deposit retention, rising operating costs, interest-rate changes, and the ability to integrate acquisitions and manage growth. A negative cumulative interest-rate gap exists over the next year; modeled net interest income declined 4.9% under an immediate 3-percentage-point rate rise.
- In 2013, the Federal Reserve rated the Bank “needs to improve” under the Community Reinvestment Act, principally citing alleged fair-lending issues from limited mortgage originations in 2011–2012. The Reserve Bank referred the matter to the Department of Justice, which opened an investigation under the Equal Credit Opportunity Act and Fair Housing Act. The company disputed noncompliance and said it was cooperating. The filing does not provide a resolution or a clear estimate of potential exposure.
- A suspected mortgage warehouse fraud discovered in March 2013 initially involved loans of $5.2 million. The Bank recorded a $2.0 million loss contingency, recovered $1.5 million, and reported a remaining $0.7 million receivable at year-end.
- The planned Acacia Federal Savings Bank transaction was terminated in April due to delayed regulatory approvals; the CMS Bancorp merger agreement was terminated by mutual consent in December. The Bank completed a $155.1 million drawn commercial-loan purchase from Flagstar in March and, after year-end, purchased $277.9 million of adjustable-rate jumbo mortgage loans from Flagstar.
- New Basel III capital rules were scheduled to begin phasing in from 2015; management expected compliance. The company historically paid no common dividends and did not expect to pay them in the near future. It reported an unqualified audit opinion and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the DOJ fair-lending investigation or CRA rating leads to enforcement, application restrictions, costs or other material consequences.
- Credit quality and reserve adequacy as multifamily/commercial real estate exposure grows; in particular, monitor delinquencies, criticized loans, charge-offs and non-covered versus FDIC-covered problem assets.
- How the Bank funds loan growth and manages the $719.6 million of 2014 time-deposit maturities, wholesale funding, and a loan-to-deposit ratio above 100%.
- Whether mortgage warehouse volumes, fraud controls and fee income remain sustainable, and whether the fraud-related receivable is recovered.
- Whether expense growth, capital requirements and share issuance affect returns and per-share earnings; compare net income with diluted EPS and monitor the investment portfolio’s unrealized losses.