Customers Bancorp, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included below. The company is a bank holding company operating Customers Bank, with one reportable segment, Community Banking.
Business context and results
The bank serves businesses, consumers and nonprofits in the Northeast and Mid-Atlantic, and lends nationally to mortgage banking companies. Its strategy emphasizes commercial and multifamily lending, deposit growth, technology-supported relationship banking and selective acquisitions. BankMobile launched its first phase in January 2015, after the fiscal year-end.
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $190.4 million | $128.2 million |
| Net interest income | $151.9 million | $103.9 million |
| Provision for loan losses | $14.7 million | $2.2 million |
| Non-interest income | $25.1 million | $22.7 million |
| Non-interest expense | $98.9 million | $74.0 million |
| Net income | $43.2 million | $32.7 million |
| Diluted earnings per share | $1.55 | $1.30 |
| Return on average assets / equity | 0.78% / 10.39% | 0.95% / 9.49% |
| Net interest margin | 2.86% | 3.13% |
Fourth quarter: Net income was $13.2 million and diluted EPS was $0.47, versus $9.0 million and $0.32 in fourth-quarter 2013. Fourth-quarter 2014 net interest income was $45.0 million; provision for loan losses was $2.5 million.
Balance sheet, cash flow and capital
- Scale and growth: Total assets reached $6.83 billion, up 64.3% year over year. Net loans, including held-for-sale loans, were approximately $5.7 billion. Multifamily loans held for investment rose to $2.13 billion from $1.06 billion; commercial loans were 92.5% of the total loan portfolio, including loans held for sale.
- Funding and liquidity: Deposits were $4.53 billion, up 53.1%; cash and cash equivalents were $371.0 million and investment securities were $416.7 million. Borrowings totaled $1.82 billion, including $1.62 billion of FHLB advances, $88.3 million of senior notes and $110.0 million of subordinated notes. Wholesale deposits, including brokered deposits, were 35.3% of deposits. The gross loan-to-deposit ratio was 126.8%, or 97.4% excluding the mortgage warehouse portfolio funded by short-term FHLB borrowings. Management said available funding sources were adequate for foreseeable needs.
- Cash flow: Operating activities used $542.5 million, primarily reflecting held-for-sale loan originations exceeding sales. Investing activities used $1.92 billion, principally from loan growth. Financing activities provided $2.60 billion, including deposit growth and borrowing proceeds. Cash and equivalents increased $138.0 million to $371.0 million.
- Credit quality: Non-covered nonperforming loans declined to $7.5 million from $13.5 million; net charge-offs were $3.1 million versus $6.9 million. The allowance for loan losses was $30.9 million, or 0.72% of total loans held for investment. Total nonperforming loans, including covered loans, were $11.7 million. FDIC-covered loans were $42.2 million, with a $2.3 million loss-sharing receivable; the FDIC generally reimburses 80% of eligible losses.
- Capital: Shareholders’ equity was $443.1 million. At year-end, the Bank’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 11.98%, 9.27% and 7.39%, respectively; each exceeded the then-applicable “well capitalized” thresholds. Ratios were lower than in 2013 as the balance sheet expanded. New Basel III requirements took effect January 1, 2015; management expected compliance.
Material changes and management commentary
- Net income increased 32.2%, principally because net interest income rose 46.3% with higher average earning assets. Average interest-earning assets increased from $3.31 billion to $5.32 billion, while tax-equivalent net interest margin contracted from 3.14% to 2.87%, reflecting competition, lower rates and a shift toward lower-yielding multifamily lending.
- Loan-loss provision increased by $12.5 million, mainly due to organic loan growth and a lower expected benefit from FDIC loss sharing as covered-loan collections improved and commercial loss-sharing coverage approached expiration.
- Non-interest expense increased by $24.9 million, including higher staffing, regulatory assessments and taxes, occupancy, professional services and technology costs. Non-interest income increased $2.4 million; higher loan-sale gains and bank-owned life insurance income were partly offset by a $4.7 million decline in mortgage warehouse transactional fees.
- Management forecast moderate 2%–3% growth in its markets in 2015, improving housing and loan demand, and expected to increase lending. It cited a generally optimistic outlook but acknowledged uncertainty in political and external conditions. These are economic and business expectations, not formal earnings guidance.
Risks, contingencies and unusual items
- Portfolio and funding concentration: Commercial, multifamily/CRE and mortgage warehouse lending expose the bank to borrower, property, fraud and mortgage-market risks. Mortgage warehouse funding and loan volumes may be sensitive to interest rates and industry activity. Wholesale funding and brokered deposits increased materially; about $976.1 million of time deposits were scheduled to mature in 2015.
- Regulatory matters: The Bank received a “needs to improve” CRA rating following the 2011–2012 examination, principally related to alleged fair-lending issues. The Federal Reserve completed a subsequent examination; the company anticipated a new rating in first-quarter 2015. The Department of Justice completed its review of the Philadelphia fair-lending matter in August 2014 without enforcement action at that time and referred the matter back to the Federal Reserve; further action was uncertain.
- Other regulatory review: The Federal Reserve was reviewing the Bank’s relationship with Higher One concerning student deposit accounts and possible compliance issues. The company could not reasonably estimate potential fines or restitution, though management did not expect a material consolidated impact.
- Prior suspected fraud: A 2013 suspected fraud involving the held-for-sale portfolio led to a $2.0 million loss contingency. The remaining net receivable and reserve was $0.6 million at year-end 2014.
- FDIC protection and estimates: Loss-sharing coverage for commercial loans from the 2010 FDIC-assisted acquisitions expires in 2015; single-family coverage expires in 2020. The value of the FDIC receivable and allowance depends on estimates of future collections and losses.
- Interest-rate exposure: The company’s model estimated that an immediate 300-basis-point rate increase would reduce net interest income by 6.3% and economic value of equity by 30.0%. Results depend on modeling assumptions and actual repricing behavior.
- Dividends and audit: The company did not expect to pay cash dividends on common stock in the foreseeable future. BDO issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether rapid multifamily, CRE and mortgage warehouse growth is matched by underwriting quality, loan performance and adequate reserves.
- How the bank funds further asset growth, manages brokered/wholesale deposits and refinancing needs, and maintains liquidity as deposits and borrowings mature.
- Whether net interest margin stabilizes and earnings growth continues despite higher credit provisions and expanding operating costs.
- The outcome of the Federal Reserve’s CRA review and Higher One review, and any related restrictions, fines or restitution.
- Actual losses, reimbursements and remaining exposure as FDIC commercial loss-sharing agreements expire, including any changes in estimates or receivables.