Customers Bancorp, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Customers Bancorp is a bank holding company operating through Customers Bank, serving businesses and consumers in the Northeast and providing mortgage warehouse financing nationwide. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015, and income comparisons are to Q1 2015.
Financial performance and position
- Earnings: Net income was $17.7 million, up 26.9% year over year. Net income available to common shareholders was $16.4 million, up 17.6%; diluted EPS was $0.57 versus $0.49. Return on average assets was 0.85% and return on average common equity was 12.85%.
- Interest income and margins: Net interest income rose 24.4% to $57.6 million, primarily on higher average loan and securities balances. Tax-equivalent net interest margin eased 2 basis points to 2.88%. Total interest income was $73.4 million; non-interest income was $5.5 million.
- Credit costs and expenses: Provision for loan losses declined to $2.0 million from $3.0 million. Non-interest expense increased 23.4% to $33.9 million; management cited staffing and growth-related costs, and $1.2 million of one-time legal charges.
- Assets and lending: Total assets rose 7.6% from year-end to $9.04 billion. Loans held for investment were $5.91 billion before allowance; loans held for sale were $1.97 billion, including $1.94 billion of mortgage warehouse loans. Multifamily loans were $3.21 billion, about 41% of total loans; commercial loans, including held-for-sale balances, were about 95% of the portfolio.
- Credit quality: Non-performing loans were reported at 0.20% of total loans, including loans held for sale. The allowance for loan losses was $37.6 million, or 0.64% of loans receivable. Troubled debt restructurings totaled $14.0 million; certain previously modified loans subsequently defaulted.
- Deposits, debt and equity: Deposits increased 9.6% to $6.48 billion. Borrowings were approximately $1.91 billion, including $1.63 billion of FHLB advances and $108.7 million of subordinated debt. Shareholders’ equity was $599.2 million. The Bank and Bancorp met applicable regulatory capital requirements; the Bank’s CET1 ratio was 8.81% and total capital ratio was 10.85%.
- Cash flow and liquidity: Operating cash flow was negative $178.5 million and investing cash flow was negative $434.6 million, reflecting loan growth and mortgage warehouse activity. Financing provided $611.1 million, largely from deposit growth; cash and cash equivalents ended at $262.6 million. The company reported $4.0 billion of FHLB borrowing capacity, of which $1.6 billion was borrowed and $1.6 billion used to collateralize municipal deposits, plus $63.6 million of Federal Reserve borrowing capacity.
Material changes versus comparable periods
- Compared with Q1 2015, net interest income increased $11.3 million, driven principally by loan growth; the margin nevertheless narrowed slightly as commercial loan yields fell and short-term funding costs rose.
- Non-interest expense increased $6.4 million, including higher salaries, regulatory costs and professional services. The workforce grew to 536 full-time equivalents from 450 a year earlier.
- Compared with December 31, 2015, loans receivable net of allowance grew about $452 million and deposits grew about $569 million. Mortgage warehouse loans rose $186 million, reflecting increased refinancing activity.
- Customers issued $24.1 million net proceeds of Series D preferred stock in January. After quarter-end, it completed a $55.7 million net-proceeds Series E preferred offering on April 28.
Outlook, risks and unusual items
- No quantified earnings or margin guidance is provided. Management expected unusually elevated mortgage warehouse growth to moderate and return toward seasonal patterns as rates and the yield curve normalized.
- The planned $42 million acquisition of Higher One’s One Account student checking and refund disbursement business, including approximately 225 employees, was expected to close in Q2 2016, subject to transition activities, and no later than July 1. Management planned to combine it with BankMobile.
- Interest-rate modeling estimated net interest income changes of +0.7% under a 100-basis-point increase, −2.6% under a 200-basis-point increase, −9.4% under a 300-basis-point increase, and −1.2% under a 100-basis-point decrease. These are model estimates, not forecasts.
- Risk exposures include commercial and multifamily concentration, mortgage warehouse commitments, funding costs and interest-rate sensitivity. Off-balance-sheet commitments included $1.26 billion of unfunded mortgage warehouse commitments and $462.9 million of unfunded credit lines.
- The company recorded a $2.4 million estimated FDIC clawback liability, expected to be payable in 2020. At March 31, it had $23.3 million fair value of derivatives in a net liability position under specified agreements and had posted $22.8 million cash collateral.
- The filing reports no material changes in legal proceedings from the 2015 Form 10-K. Management cautions that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further margin compression, and how warehouse lending behaves as refinancing activity and interest rates change.
- Credit trends in the concentrated multifamily and commercial portfolios, including non-performing loans, TDR defaults and the adequacy of reserves.
- The costs, closing status and integration performance of the Higher One acquisition and its effect on BankMobile.
- Liquidity and funding conditions, including deposit mix, FHLB capacity, municipal-deposit collateral needs and derivative collateral requirements.
- Preferred-stock dividends and capital effects, including the post-quarter Series E issuance; the filing provides no quantified full-year earnings guidance.