Customers Bancorp, Inc. quarterly report, Q1 FY2014

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Business context and reporting period

Customers Bancorp, Inc., a bank holding company operating through Customers Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The bank provides commercial and consumer banking and nationwide mortgage-warehouse financing. Management highlighted strong growth in multifamily and commercial lending and a January purchase of $277.9 million of adjustable-rate jumbo residential mortgages from Flagstar Bank.

Financial performance and condition

  • Earnings: Net income was $8.1 million, up 13.2% from $7.2 million in Q1 2013. Diluted EPS was $0.32, down from $0.38, as the weighted-average diluted share count increased materially. Income before tax was $11.6 million.
  • Interest income and margins: Net interest income rose 31% to $29.5 million. Net interest margin fell to 2.92% from 3.25%; average loan yields declined amid lower market rates, repayments of higher-yielding loans, and growth in lower-yielding multifamily loans.
  • Other income and expenses: Non-interest income increased to $7.6 million, including a $2.8 million realized securities gain; mortgage-warehouse fees fell $1.9 million. Non-interest expense rose to $21.2 million from $16.5 million, reflecting higher staffing, professional services, occupancy, regulatory assessments, and technology spending.
  • Credit costs: Provision for loan losses was $4.4 million, compared with a $0.1 million benefit in Q1 2013. The increase reflected loan growth and a $1.5 million reduction in estimated FDIC loss-sharing benefits. Allowance for loan losses was $26.7 million; quarterly net charge-offs were $0.2 million.
  • Balance sheet: Total assets reached $5.01 billion, up 20.7% from year-end. Net loans receivable were $3.33 billion, including $2.47 billion in non-covered commercial real estate loans. Loans held for sale were $697.5 million. Total deposits were $3.61 billion, up 21.8%; shareholders’ equity was $400.9 million.
  • Debt and liquidity: Borrowings totaled $970.3 million at quarter-end, principally $905.0 million of FHLB advances and $65.3 million of other borrowings. Cash and cash equivalents were $290.5 million. Operating cash flow was $79.3 million; investing activities used $853.8 million and financing activities provided $831.9 million. Management said available funding sources were adequate for foreseeable needs; disclosed FHLB capacity was $2.1 billion, with $835 million utilized in short-term borrowings.
  • Capital: The Bank’s total risk-based capital ratio was 12.36%, Tier 1 risk-based ratio 11.63%, and Tier 1 leverage ratio 9.71%. The filing says the Bank and Bancorp met applicable capital adequacy requirements and the Bank was well capitalized.

Material changes, outlook, and risks

  • Quarter-end total assets increased $861.1 million from December 31, 2013. Management cited multifamily loan growth of $495.3 million, the Flagstar residential mortgage purchase, and $134.6 million growth in commercial real estate and commercial and industrial loans.
  • Deposits grew substantially, partly from seasonal student deposits and brokered money-market accounts. Such growth supported loan expansion, alongside increased FHLB borrowing.
  • Credit quality indicators included $12.6 million of non-accrual non-covered loans and $6.3 million of non-covered OREO. Non-performing covered assets were $14.8 million. The filing reported $5.1 million of total troubled debt restructurings.
  • Management reported no specific forward earnings guidance. It described continued growth and infrastructure investment, while cautioning that forward-looking statements are subject to risks and actual results may differ. It also noted forthcoming Basel III requirements and potential regulatory compliance costs.
  • Unusual items included the $2.8 million securities-sale gain, a $0.6 million out-of-period tax adjustment relating to 2013, and higher professional-services spending associated with loan workouts, litigation, and regulatory inquiries. A $2.0 million loss contingency had been recorded in Q1 2013 for suspected mortgage-warehouse fraud; the filing reported a remaining net amount of $0.7 million in other assets.
  • Key risks include concentration and rapid growth in commercial real estate and multifamily lending; reliance on deposit and wholesale funding, including seasonal and brokered deposits; interest-rate and margin pressure; acquired and legacy loan workouts; mortgage-warehouse fraud or counterparty exposure; and rising operating and regulatory costs.

Important facts for investors to verify

  1. Whether rapid multifamily and commercial real estate loan growth is maintaining underwriting standards and appropriate loss reserves.
  2. How deposit composition, seasonal student balances, brokered funding, and FHLB advances evolve, and their effect on liquidity and funding costs.
  3. Whether falling net interest margin and lower loan yields persist, and how much earnings depend on nonrecurring securities gains and the tax adjustment.
  4. Trends in non-accrual loans, OREO, acquired-credit portfolios, FDIC reimbursements, and the remaining mortgage-warehouse fraud-related asset.
  5. Capital ratios relative to growth, the impact of Basel III implementation, and any changes in regulatory or litigation costs.