Customers Bancorp, Inc. — Q2 2014 Form 10-Q
Period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. Customers Bancorp is a bank holding company whose principal subsidiary, Customers Bank, provides commercial and consumer banking, including nationwide financing to mortgage originators.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $36.9 million | $26.1 million | $66.7 million | $48.7 million |
| Provision for loan losses | $2.9 million | $2.1 million | $7.3 million | $2.0 million |
| Non-interest income | $6.9 million | $5.6 million | $14.2 million | $10.3 million |
| Non-interest expense | $25.2 million | $16.9 million | $46.4 million | $33.4 million |
| Net income | $10.2 million | $8.2 million | $18.4 million | $15.4 million |
| Diluted EPS | $0.37 | $0.34 | $0.66 | $0.69 |
Q2 net income rose 24.4%; first-half net income rose 19.2%, while first-half diluted EPS declined from $0.69 to $0.66. Per-share amounts reflect the 10% stock dividend issued June 30, 2014. Q2 net interest margin on a tax-equivalent basis was 2.96%, down from 3.25%; the comparable first-half figures were 2.95% and 3.24%. Management attributed margin pressure mainly to lower loan yields, payoff of higher-yield loans, and growth in lower-yielding multifamily lending.
Balance sheet, cash flow, debt and liquidity
- Total assets were $5.64 billion at June 30, up $1.48 billion, or 35.7%, from year-end 2013. Net loans receivable were $3.62 billion, compared with $2.44 billion at year-end; multifamily loans grew to about $1.8 billion.
- Loans held for sale were $1.06 billion, up from $747.6 million at year-end, reflecting mortgage warehouse activity. Available-for-sale securities fell to $425.1 million from $497.6 million; management said sales shortened portfolio duration and reduced interest-rate risk.
- Deposits increased 24.7% to $3.69 billion. FHLB advances were $1.30 billion, other borrowings $88.3 million, and subordinated debt $112.0 million. The company issued $25 million of 4.625% senior notes due 2019 and the Bank issued $110 million of subordinated notes due 2029; proceeds totaled $133.2 million net. The subordinated notes qualify as Tier 2 capital.
- Cash and cash equivalents were $265.5 million, up from $233.1 million at year-end. For the first half, operating cash flow was negative $286.1 million, investing cash flow was negative $1.13 billion, and financing cash flow was positive $1.45 billion; financing was supported by deposit growth and borrowing proceeds. Management said available funding sources were adequate for foreseeable requirements.
- At June 30, the Bank reported capital ratios of 13.47% total risk-based, 10.22% Tier 1 risk-based, and 8.33% Tier 1 leverage; management reported that the Bank and Bancorp met applicable capital requirements and were well capitalized.
Material changes and management commentary
- Q2 net interest income increased 41.4%, principally due to higher average loan balances, including multifamily and commercial lending. Average interest-earning assets grew substantially, but the average yield declined 33 basis points.
- First-half provision expense increased to $7.3 million from $2.0 million, which management primarily attributed to growth in loans held for investment and lower estimated benefits from FDIC loss sharing. The allowance for loan losses was $28.2 million at June 30; management cited improving asset quality, while also noting strong loan growth.
- Non-interest income included a $3.2 million first-half gain on investment-security sales and income from Flagstar loan sales and advisory services. Mortgage warehouse transaction fees declined $3.6 million year over year for the first half.
- First-half non-interest expense rose $13.0 million. Management cited staffing and infrastructure investment, higher regulatory assessments and Pennsylvania bank shares tax, and increased legal and consulting costs related to loan workouts, litigation, and regulatory matters. Full-time-equivalent staffing increased from 332 to 407 year over year.
- No specific earnings or growth guidance is provided in the supplied filing text. Management described continued organic growth and expansion, but cautioned that forward-looking statements involve risks and uncertainties.
Risks, contingencies and unusual items
- Credit exposure is concentrated in commercial real estate and multifamily lending, which grew rapidly. Non-covered non-accrual loans were $12.7 million and other real estate owned was $6.7 million at June 30; the filing also reports $4.2 million of non-covered loans 90 days or more past due and still accruing.
- The Federal Reserve was reviewing Customers Bank’s relationship with Higher One concerning student deposit accounts and possible compliance issues. The company said it had identified and remediated alleged deficiencies, but fines, a cease-and-desist order, or student restitution remained possible; the amount was not estimable.
- A suspected 2013 fraud involving loans held for sale resulted in a $2.0 million loss contingency. The Bank recovered $1.5 million and reported a remaining $0.7 million receivable in other assets as of June 30, 2014.
- The company identified open IRS tax years 2010–2012 and state tax years 2009–2012; reviews could result in additional tax expense, fines, or penalties. It also noted upcoming Basel III capital requirements and potentially higher compliance costs from financial regulation.
- The company entered into a $150 million interest-rate swap designated as a cash-flow hedge. Derivative counterparties may require settlement under specified default or capital-status provisions; the filing reports $7.4 million of collateral posted at June 30.
Important facts for investors to verify
- Whether rapid multifamily and commercial loan growth can be maintained without weaker underwriting, higher delinquencies, or increased credit-loss provisions.
- How net interest margin and funding costs respond to further loan-mix changes, interest-rate movements, and reliance on brokered deposits and FHLB funding.
- Whether operating expenses, especially regulatory, legal, staffing, and infrastructure costs, moderate as the business expands.
- The outcome and potential financial impact of the Higher One review, open tax examinations, and the remaining fraud-related receivable.
- How much of reported earnings growth is recurring versus attributable to securities-sale gains and other transaction-related income.