Customers Bancorp, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The 10-K reports annual results; selected unaudited quarterly data show fourth-quarter 2019 results separately.
Business context
Customers Bancorp operates through Customers Bank, with two reportable segments: Customers Bank Business Banking and BankMobile. Its branch-light banking model combines commercial and specialty lending, deposit services, mortgage warehouse lending, equipment finance, and nationwide digital banking. At year-end, the company had $11.5 billion of assets, $8.6 billion of deposits, and $1.1 billion of shareholders’ equity.
Financial results and key metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $277.3 million | $257.9 million |
| Provision for loan and lease losses | $24.2 million | $5.6 million |
| Non-interest income | $80.9 million | $59.0 million |
| Non-interest expense | $231.9 million | $220.2 million |
| Net income | $79.3 million | $71.7 million |
| Net income available to common shareholders | $64.9 million | $57.2 million |
| Diluted EPS | $2.05 | $1.78 |
| Net interest margin, tax-equivalent | 2.75% | 2.58% |
- Fourth-quarter 2019 net income was $27.5 million; common-shareholder income was $23.9 million, and diluted EPS was $0.75.
- Year-end assets rose 17.2% to $11.52 billion. Deposits increased 21.1% to $8.65 billion; loans and leases, including mortgage warehouse loans and loans held for sale, totaled about $10.05 billion.
- Cash and cash equivalents were $212.5 million, up from $62.1 million. Shareholders’ equity was $1.05 billion; tangible common equity to tangible assets was 7.13%.
- Cash flows: $78.3 million provided by operating activities, $1.44 billion used in investing activities, and $1.52 billion provided by financing activities; cash increased $150.4 million.
- Borrowings totaled approximately $1.69 billion, including $538 million of federal funds purchased, $850 million of FHLB advances, $123.6 million of other borrowings, and $181.1 million of subordinated debt. The gross loan-to-deposit ratio was 116.2%; excluding mortgage warehouse loans, it was 89.55%.
- The company and bank met applicable regulatory capital requirements. At year-end, Bancorp and Bank common equity Tier 1 ratios were 7.98% and 11.32%, respectively; total risk-based capital ratios were 12.21% and 12.93%.
- Nonperforming assets were $21.5 million, or 0.19% of assets. The allowance for loan and lease losses was $56.4 million, 0.77% of loans and leases held for investment, excluding mortgage warehouse loans carried at fair value.
Material changes versus 2018
- Net income available to common shareholders increased 13.3%. Net interest income grew 7.5%, reflecting higher asset yields, improved net interest margin, and increased average interest-earning assets.
- Credit-loss provision rose by $18.6 million, primarily reflecting changes in loan mix as the company expanded commercial and consumer lending. Net charge-offs increased to $7.8 million from $3.7 million, chiefly due to other consumer loans.
- Non-interest income increased 37.2%. The comparison benefited from the prior-year $18.7 million loss on sales of investment securities; 2019 also included a $7.5 million loss on acquired GNMA securities.
- Deposits grew $1.51 billion, largely in non-time deposits. The cost of deposits, including non-interest-bearing deposits, rose to 1.76% from 1.49%; total cost of funds rose to 1.95% from 1.70%.
- The company reduced multi-family loans by about $893 million during 2019 and increased commercial and industrial and consumer lending. Consumer loans increased to $1.6 billion from $721.8 million; mortgage warehouse loans at fair value rose to $2.25 billion from $1.41 billion.
- BankMobile reported a $4.9 million net loss, improved from a $13.5 million loss in 2018. Business Banking net income was $84.2 million, compared with $85.2 million.
Outlook, risks, contingencies, and unusual items
- Management planned to continue reducing the multi-family portfolio, with a further $500 million reduction targeted for 2020, while emphasizing commercial and industrial and consumer lending. The filing does not provide numeric earnings guidance.
- Customers crossed the $10 billion asset threshold at year-end. It expected increased CFPB supervision and FDIC assessment requirements; the small-issuer debit interchange exemption was scheduled to end July 1, 2020, potentially reducing interchange revenue.
- CECL was adopted January 1, 2020. Management expected a significant increase in the allowance for credit losses but did not provide a clear dollar estimate; regulatory capital effects may be phased in over three years.
- New York rent-regulation changes may affect collateral and property cash flows. The company disclosed approximately $1.5 billion of New York State multi-family exposure, including about $1.0 billion tied to rent-regulated properties.
- A commercial mortgage warehouse customer ceased operations in 2019. Collateral securities were acquired at a $7.5 million loss; their year-end fair value was $16.3 million and depends on Level 3 valuation inputs, including estimated prepayment speed.
- An internet-based crime ring targeting BankMobile accounts and other disputed charges contributed to a $9.6 million operating-loss provision, up from $5.6 million in 2018.
- The DOE asserted $6.5 million of liabilities related to student ATM access. Customers appealed; it estimated possible loss of $1 million to $3 million and accrued $1 million. A separate Halbreiner matter settled for $1 million in December 2019. The filing says another related Lifestyle Healthcare matter remained unresolved and the loss range could not be estimated.
- Management said a prior material weakness concerning classification of mortgage warehouse cash flows was remediated by December 31, 2018. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2019; the 2019 financial statements received an unqualified audit opinion.
- Customers continued exploring strategic alternatives for BankMobile. Execution, timing, and value of a possible divestiture were uncertain. Other material risks include credit quality, deposit funding and liquidity, interest-rate exposure, LIBOR transition, cybersecurity and vendor reliance, and regulatory compliance.
Important facts for investors to verify
- How the rapidly expanded consumer-loan portfolio performs, including losses, delinquencies, and allowance adequacy under CECL.
- Whether deposit growth can support lending without excessive wholesale funding, and how upcoming time-deposit maturities affect funding costs and liquidity.
- The realized effect of the $10 billion threshold, debit interchange limits, and any higher FDIC assessments on BankMobile revenue and profitability.
- Progress and actual outcomes of the multi-family portfolio reduction, including New York rent-regulated exposure and any planned 2020 runoff.
- Updates on DOE and Lifestyle Healthcare contingencies, BankMobile fraud losses, and the valuation assumptions for GNMA interest-only securities.
- Any BankMobile strategic transaction, and whether the digital and white-label business can improve profitability while managing operating, compliance, and technology risks.