Customers Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. Customers Bancorp is a bank holding company operating Customers Bank and BankMobile, offering commercial and consumer banking, mortgage warehouse lending, equipment finance, and digital banking services.
Key financial results
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $59.3 million | Down 8.8% from $65.0 million in Q1 2018 |
| Net interest margin | 2.59% | 2.67% tax-equivalent in Q1 2018 |
| Non-interest income | $19.7 million | Down 5.7% from $20.9 million |
| Non-interest expense | $54.0 million | Up 3.3% from $52.3 million |
| Provision for loan and lease losses | $4.8 million | Up from $2.1 million |
| Net income | $15.4 million | Down 36.0% from $24.1 million |
| Net income available to common shareholders | $11.8 million; diluted EPS $0.38 | Down 42.4% from $20.5 million; diluted EPS $0.64 |
| Operating cash flow | $(6.0) million | $33.3 million provided in Q1 2018 |
- Balance sheet and liquidity: Total assets were $10.14 billion, up 3.2% from year-end. Cash and cash equivalents were $117.7 million. Loans and leases, including mortgage warehouse loans, totaled about $8.7 billion net of allowance; deposits were $7.43 billion, up 4.0%. Shareholders’ equity was $978.4 million.
- Funding and debt: Federal funds purchased were $388.0 million, FHLB advances $1.03 billion, other borrowings $124.0 million, and subordinated debt $109.0 million. FHLB borrowing capacity was $4.2 billion, with $1.0 billion drawn and $1.4 billion of available capacity used to collateralize state and municipal deposits; FRB capacity was $148.3 million.
- Cash movement: Cash increased $55.5 million during the quarter, primarily supported by deposit growth and federal funds purchased, despite cash used in operations and investing. Investing cash use included $129.3 million of loan purchases and net mortgage warehouse loan originations of $74.8 million.
- Credit quality: Non-performing loans were $22.8 million, or 0.26% of total loans and leases; non-performing assets were 0.23% of total assets. The allowance was $43.7 million, 0.60% of loans and leases excluding mortgage warehouse loans. Net charge-offs were $1.1 million.
- Capital: Bancorp common equity Tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 8.91%, 11.47%, 12.92%, and 10.01%, respectively. The company and Bank reported compliance with applicable regulatory capital requirements.
Material changes versus prior periods
- Earnings fell substantially year over year as net interest income declined and credit-loss provision and operating expenses rose. Management attributed margin pressure largely to funding costs: the cost of interest-bearing liabilities increased 69 basis points, while asset yields rose 44 basis points.
- Non-interest income declined, mainly due to no SBA loan-sale gains in Q1 2019, lower interchange/card revenue, and reduced mortgage warehouse transaction fees. Higher commercial lease income partly offset those declines.
- Expenses rose, particularly technology and bank operations, commercial lease depreciation, salaries, and advertising; lower professional services and other expenses partly offset the increases.
- Management continued shifting the loan mix: C&I, residential mortgage, and consumer lending grew, while multi-family loans declined. Deposits increased, including non-interest-bearing demand deposits; time deposits declined.
- BankMobile recorded a $0.2 million segment loss, compared with a $1.3 million loss in Q1 2018. The Business Banking segment reported $15.6 million net income.
Outlook, commentary, and risks
- Management targets: NIM of at least 2.75% by Q4 2019 and full-year 2019 NIM above 2.70%; year-end 2019 assets below $10 billion; and BankMobile profitability in Q4 2019. Longer-term priorities include approximately 1.25% return on average assets and double-digit return on tangible common equity within two to three years. These are targets, not assurances.
- Management plans to reduce lower-yielding multi-family exposure, grow higher-yielding C&I and consumer lending, and replace higher-cost deposits and borrowings with lower-cost core deposits. It reported that T-Mobile began the first phase of national marketing for the BankMobile partnership on April 18, 2019; early account openings reportedly exceeded expectations.
- DOE matter: Customers is appealing a Department of Education determination asserting $6.5 million in financial liabilities related to student access to fee-free cash withdrawals. The company disputes the determination; outcome and loss likelihood cannot be predicted. Management did not believe the matter would materially affect the consolidated financial statements.
- Other contingencies: Two related lawsuits remain pending; Customers intends to defend them but cannot estimate the likelihood or range of loss.
- Interest-rate exposure: Modeling estimated net interest income to decline 10.6% under an immediate 300-basis-point rate increase and rise 4.3% under a 200-basis-point decrease. Estimated economic value of equity declined 18.7% under a 300-basis-point increase. Results depend on modeling assumptions.
- CECL: The company was preparing for the expected credit-loss standard and noted adoption may increase the allowance; it did not intend to adopt early.
- The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether margin and earnings recover as management pursues its stated 2019 NIM targets, given rising deposit and borrowing costs.
- Progress toward the BankMobile Q4 2019 profitability target and the scale, costs, and deposit economics of the T-Mobile partnership.
- Credit performance as consumer and C&I lending expand, including allowance adequacy, charge-offs, and any deterioration in criticized or non-performing loans.
- Liquidity and funding trends, including reliance on federal funds and other borrowings, deposit mix, and available secured borrowing capacity.
- Developments in the DOE appeal and the two lawsuits, including any change in estimated exposure or required actions.
- Impact of CECL implementation on the allowance, retained earnings, and capital when adopted.