Customers Bancorp, Inc. — Q3 2015 Form 10-Q
Unaudited; dollar amounts are in millions unless noted. Quarter ended September 30, 2015; comparisons are with Q3 2014 unless otherwise stated.
Business context and reporting period
Customers Bancorp is a bank holding company operating through Customers Bank. Its lending includes multifamily and other commercial loans, consumer lending, and nationwide mortgage-warehouse financing. Management said it was moderating balance-sheet growth; assets were largely unchanged from June 30, while total loans, including held-for-sale loans, remained near $6.5 billion.
Financial results and condition
| Metric | Q3 2015 / September 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $15.3; common-shareholder income $14.3 | Q3 2014: $11.7 |
| Diluted EPS | $0.50 | Q3 2014: $0.42 |
| Net interest income | $49.9 | Q3 2014: $40.2 |
| Net interest margin, tax-equivalent | 2.79% | Q3 2014: 2.79% |
| Provision for loan losses | $2.1 | Q3 2014: $5.0 |
| Total assets | $7,599.5 | December 31, 2014: $6,825.4 |
| Total loans, including held for sale | $6,499.1 | December 31, 2014: approximately $5,747.6 |
| Total deposits | $5,785.2 | December 31, 2014: $4,532.5 |
| Shareholders’ equity | $538.0 | December 31, 2014: $443.1 |
| Cash and cash equivalents | $383.4 | December 31, 2014: $371.0 |
For the nine months ended September 30, net income available to common shareholders was $39.3 million and diluted EPS was $1.37, versus $30.0 million and $1.08 in 2014. Net interest income rose 33.6% to $142.8 million, while tax-equivalent net interest margin declined to 2.80% from 2.88%. Noninterest income was $18.3 million, down from $19.3 million, and noninterest expense rose to $83.4 million from $71.1 million.
Third-quarter return on average assets was 0.82% and return on average common equity was 11.83%. The allowance for loan losses was $33.8 million, or 0.71% of non-covered loans receivable. Nonperforming loans were 0.27% of total loans; reserves were 197.0% of nonperforming loans, down from 289.6% at year-end 2014.
Nine-month cash flows were $(300.3) from operating activities, $(412.9) from investing activities, and $725.6 from financing activities. Operating cash outflow primarily reflected mortgage-warehouse loan originations exceeding loan-sale proceeds. Total borrowings included $985.9 million of FHLB advances, $50.0 million of federal funds purchased, $88.3 million of other borrowings, and $110.0 million of subordinated debt. Management said liquidity resources were adequate for foreseeable needs; available FHLB capacity was $3.3 billion, with $715.9 million used for short-term borrowings and $1.2 billion supporting municipal deposits. Federal Reserve Bank borrowing capacity was $61.1 million.
Material changes versus comparable periods
- Q3 common-shareholder income increased 22.7%, primarily on higher net interest income from loan growth and lower loan-loss provision, partly offset by higher operating costs, taxes, and preferred dividends.
- For the first nine months, net interest income increased $35.9 million, largely from higher average loan balances; margin pressure and higher funding costs partly offset the benefit.
- Assets increased 11.3% from year-end 2014. Loans grew by about $0.8 billion and deposits by $1.3 billion. FHLB advances declined from $1.618 billion to $985.9 million.
- Equity increased partly due to the May 2015 issuance of 2.3 million Series C preferred shares, generating $55.6 million net proceeds. The preferred stock pays a 7.00% fixed rate through June 2020, then three-month LIBOR plus 5.30%; dividends are noncumulative and subject to declaration.
- Q3 noninterest expense rose $5.6 million year over year, including higher salaries and benefits, professional services, and OREO expense. Staffing increased to 484 full-time equivalents from 400.
Outlook, risks, contingencies, and unusual items
- No specific earnings, revenue, or balance-sheet guidance is provided. Management described a strategy of moderating balance-sheet growth and continuing organic commercial lending.
- Credit concentration is notable: commercial loans were approximately 93.9% of the total loan portfolio, including held-for-sale loans; multifamily loans represented approximately 37.8%. Mortgage-warehouse lending is a large, short-term business sensitive to mortgage origination, investor settlement, and refinancing activity.
- The Bank recorded $6.0 million of specific reserves in Q2 for an isolated loan involving fraudulent activity; $5.3 million was charged off in Q3, leaving an approximately $3.7 million balance. This contributed to higher year-to-date net charge-offs and nonperforming loans.
- Year-to-date provision expense included $3.8 million predominantly related to estimated payments to the FDIC, including a $2.3 million clawback liability expected to be payable after loss-sharing agreements end in 2020. The submission period for non-single-family claims expired in Q3 2015; single-family claims may be submitted through Q3 2017.
- Troubled debt restructurings were $10.5 million at September 30, versus $5.0 million at year-end 2014. The filing reports defaults among modified loans, primarily manufactured-housing loans.
- Large off-balance-sheet commitments included $512.9 million to fund loans, $1,160.5 million of unfunded mortgage-warehouse commitments, and $386.4 million of unfunded lines of credit. Actual funding needs may be lower because some commitments expire undrawn.
- The Bank and holding company met applicable regulatory capital requirements and were described as well capitalized. The filing cautions that forward-looking statements are subject to risks and uncertainties; it refers investors to risk factors in prior filings. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the remaining exposure and recoveries associated with the fraudulent loan, charge-offs, and reserve methodology are fully reflected in credit metrics.
- Multifamily and mortgage-warehouse portfolio concentration, underwriting standards, and sensitivity to property markets and mortgage-industry activity.
- Deposit growth composition and durability, including municipal and broker-network funding, and the collateral or liquidity requirements tied to those deposits.
- Future credit costs, nonperforming-loan trends, TDR performance, and the FDIC clawback estimate as loss-sharing arrangements run off.
- The cost and terms of Series C preferred capital, including future declared dividends and the rate reset after June 2020.