Customers Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filing dated February 23, 2018. Customers Bancorp is a bank holding company operating Customers Bank and the nationwide digital-banking business BankMobile. The filing presents BankMobile as continuing operations after the company changed its planned divestiture structure.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $267.3 million | $249.5 million |
| Net interest margin, tax-equivalent | 2.73% | 2.84% |
| Non-interest income | $78.9 million | $56.4 million |
| Non-interest expense | $215.6 million | $178.2 million |
| Provision for loan losses | $6.8 million | $3.0 million |
| Net income | $78.8 million | $78.7 million |
| Net income available to common shareholders | $64.4 million | $69.2 million |
| Diluted EPS | $1.97 | $2.31 |
| Total assets at year-end | $9.84 billion | $9.38 billion |
| Deposits at year-end | $6.80 billion | $7.30 billion |
| Shareholders’ equity at year-end | $921.0 million | $855.9 million |
Fourth quarter: Net income was $21.6 million and diluted EPS was $0.55, versus $19.8 million and $0.51 in fourth quarter 2016. Common-shareholder income was $18.0 million, compared with $16.2 million.
Cash flow: Operating activities provided $385.6 million in 2017, versus $270.5 million used in 2016; investing activities used $888.5 million and financing activities provided $384.5 million. Operating cash flow included $322.9 million of net cash from sales of loans held for sale. Cash and cash equivalents ended the year at $146.3 million, down from $264.7 million.
Loans, credit and liquidity: Total loans, including held-for-sale loans, were $8.7 billion, up 5.3%. Non-performing loans were $26.4 million (0.30% of total loans), versus $17.8 million (0.22%) a year earlier. The $38.0 million allowance was 0.56% of loans held for investment; net charge-offs rose to $6.1 million from $1.7 million. Gross loans-to-deposits were 128.1%; excluding mortgage warehouse loans funded by short-term FHLB borrowings, the ratio was 101.7%. Wholesale deposits, including brokered and municipal deposits, were 39.8% of deposits.
Debt and capital: Year-end borrowings were $2.06 billion, including $1.61 billion of FHLB advances and $108.9 million of subordinated debt. The company issued $100 million of 3.95% senior notes due 2022. Customers Bank reported a 13.08% common equity Tier 1 ratio and 14.96% total risk-based capital ratio; the Bancorp’s corresponding ratios were 8.81% and 13.05%. Both met applicable capital requirements.
Changes versus 2016
- Net interest income rose 7.2%, principally on 11.7% growth in average interest-earning assets; the tax-equivalent margin narrowed 11 basis points as funding costs increased.
- Non-interest income rose 40.0%, led by higher BankMobile interchange and card revenue from a full year of the acquired student-disbursement business, plus $8.8 million in securities-sale gains.
- Expenses increased 21.0%, primarily due to BankMobile’s full-year operating costs. Management said core-bank non-interest expense, excluding BankMobile-related costs, declined $1.8 million.
- Net income was nearly unchanged, but income available to common shareholders fell 7.0%, reflecting higher preferred dividends and operating costs.
- Deposits fell 6.9% as time deposits declined $0.9 billion; transaction deposits increased $0.4 billion. Borrowings increased, including higher FHLB advances.
Outlook, commentary and notable risks
- BankMobile transaction: Customers planned a shareholder spin-off of BankMobile followed by its merger into Flagship Community Bank; Flagship would separately buy BankMobile-related deposits for cash. Management expected closing in mid-2018, subject to regulatory and shareholder approvals, Flagship raising approximately $100 million, and other conditions. The company placed $1.0 million in transaction escrow. Completion, timing, tax treatment and expected benefits were uncertain.
- BankMobile performance: The segment recorded a $13.2 million after-tax loss in 2017; management disclosed cumulative after-tax losses of $16.9 million over the six quarters through year-end 2017. Failure to complete the divestiture could leave Customers exposed to its operating costs and risks. The company reduced assets below $10 billion at year-end to preserve small-issuer debit interchange treatment for 2018.
- Management outlook: Management expected continued moderate economic growth in its markets in 2018 and projected U.S. GDP growth of 2.50%–2.75%; it anticipated three Federal Reserve rate increases. Customers estimated a 2018 effective tax rate of approximately 24%. These are expectations, not guarantees.
- Tax and unusual items: The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% effective 2018. Re-measuring deferred taxes added $5.5 million to 2017 tax expense; the accounting remained provisional. Customers recorded $12.9 million of 2017 impairment losses on its Religare equity investment. Net interest income simulation estimated declines of 0.9% under a 100-basis-point rate rise and 10.7% under a 300-basis-point rise.
- Key exposures: Lending is concentrated in commercial and real estate-related activities, including multifamily lending and mortgage warehouse finance. Risks include credit deterioration, fraud and seasonality in mortgage lending, reliance on wholesale funding, rising deposit costs, interest-rate sensitivity, cybersecurity and vendor disruptions, and regulatory or legal matters. Three disclosed lawsuits had outcomes and possible losses that the company said it could not estimate; a separate Federal Reserve order related to the former Higher One relationship included a $960,000 penalty, paid in 2016.
The independent auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the BankMobile spin-off and Flagship merger closed on the contemplated terms, with required approvals, capital raising and intended tax treatment.
- Whether BankMobile’s losses, deposit levels and operating costs improved, and how the divestiture affects Customers’ revenue, expenses, capital and liquidity.
- Deposit mix and wholesale-funding reliance, including maturities of $1.45 billion in time deposits during 2018 and available FHLB borrowing capacity.
- Credit trends behind the increase in non-performing loans, net charge-offs and special-mention loans, particularly commercial and industrial exposures.
- Final tax-accounting effects of the 2017 tax law and subsequent reported tax rate; also distinguish recurring earnings from securities gains, Religare impairment and share-based tax benefits.
- Actual results versus management’s 2018 economic and rate expectations, including net interest margin performance and funding costs.