Customers Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Unaudited quarter ended March 31, 2015; year-over-year comparisons are with Q1 2014 unless otherwise noted. Customers Bancorp is a bank holding company operating through Customers Bank, with commercial and consumer banking activities and nationwide mortgage-warehouse lending.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $58.7 million | $36.9 million in Q1 2014 |
| Net interest income | $46.3 million | $29.8 million in Q1 2014 |
| Net interest margin, tax-equivalent | 2.90% | 2.91% in Q1 2014 |
| Net income | $14.0 million; diluted EPS $0.49 | $8.1 million; diluted EPS $0.29 in Q1 2014 |
| Non-interest income / expense | $5.7 million / $27.5 million | $7.3 million / $21.2 million in Q1 2014 |
| Total assets | $7.13 billion | $6.83 billion at December 31, 2014 |
| Deposits | $4.89 billion | $4.53 billion at December 31, 2014 |
| Loans held for sale / loans receivable, net | $1.76 billion / $4.30 billion | $1.44 billion / $4.28 billion at December 31, 2014 |
| FHLB advances / other borrowings / subordinated debt | $1.545 billion / $88.3 million / $110.0 million | $1.618 billion / $88.3 million / $110.0 million at December 31, 2014 |
| Shareholders’ equity | $458.0 million | $443.1 million at December 31, 2014 |
Management reported return on average common equity of 12.5% and an efficiency ratio of 52.8%. Operating cash flow was negative $324.4 million, investing cash flow was negative $0.7 million, and financing cash flow was positive $287.9 million; cash and cash equivalents declined $37.2 million to $333.8 million. The operating cash outflow largely reflected loan-held-for-sale originations exceeding sales proceeds by $341.1 million.
At March 31, the Bank’s regulatory capital ratios included common equity Tier 1 of 9.05%, total risk-based capital of 11.66%, and Tier 1 leverage of 7.35%. The filing states the Bank and Bancorp met applicable capital requirements and that the Bank was well capitalized.
Material changes and management commentary
- Net income increased 71.5% year over year, primarily as net interest income rose 55.5%, reflecting substantial loan growth; the provision for loan losses also decreased.
- Average loans and loans held for sale together increased by $2.3 billion year over year. Mortgage warehouse loans held for sale rose to $1.67 billion from $1.33 billion at year-end, which management attributed partly to higher refinancing activity. Deposits increased 8.0% from year-end, including growth in demand and time deposits.
- Higher non-interest expense, up $6.3 million year over year, reflected staffing and operating support for growth, higher regulatory and deposit-related fees, occupancy costs, and approximately $1.0 million of BankMobile costs. Employees increased to 449 full-time equivalents from 387 a year earlier.
- Non-interest income fell $1.6 million year over year, mainly because Q1 2014 included $2.8 million of securities-sale gains. Q1 2015 included approximately $1.2 million of gains on loan sales; management said approximately $140 million of multifamily loans were sold during the quarter.
- Asset quality indicators included non-performing loans of 0.19% of total loans and reserves equal to 293.6% of non-performing loans. The allowance for loan losses was $33.6 million; quarterly net charge-offs were $1.0 million versus $0.2 million in Q1 2014.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific quantitative earnings or growth guidance. Management said it believed available funding sources and the core deposit base were adequate to meet short- and long-term cash requirements for the foreseeable future. Forward-looking statements are subject to risks and are not guarantees.
- Liquidity sources include deposits, loan cash flows, securities, and FHLB and Federal Reserve borrowing arrangements. Reported FHLB borrowing capacity was $3.2 billion; $1.2 billion was used for short-term borrowings and $901.2 million of capacity was used to collateralize state and municipal deposits. Federal Reserve Bank of Philadelphia borrowing capacity was $60.9 million.
- The Bank’s lending book is concentrated in commercial lending, including multifamily real estate and mortgage-warehouse lending. Mortgage warehouse exposure is short-term and tied to mortgage originators’ ability to sell underlying loans; multifamily loans were about $2.1 billion at quarter-end. Growth, loan concentration, credit performance, and funding costs warrant monitoring.
- The allowance reflects management estimates, including collateral values and expected cash flows. The non-single-family FDIC loss-sharing arrangements expire in Q3 2015; single-family arrangements expire in Q3 2020.
- Customers Bank remained in discussions with the Federal Reserve regarding its student deposit-services relationship with Higher One and a review of disclosures and operating processes. Potential penalties or backup restitution obligations were not determined; management did not then expect any eventual amount to have a material adverse effect, but could not predict the outcome.
- Other disclosed risks include litigation and regulatory actions, vendor oversight, competition in mobile banking, retaining relationship managers, and additional regulatory requirements if assets exceed $10 billion. BankMobile launched Phase 1 in January 2015; management described it as a no-customer-fee mobile bank.
- Interest-rate cash-flow hedges had a $150 million notional amount and produced a $1.17 million after-tax unrealized loss in other comprehensive income for the quarter. The filing reported no hedge ineffectiveness. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification checklist
- Confirm whether mortgage-warehouse and multifamily growth remains profitable after funding, operating, and credit costs, and track the associated loan concentrations.
- Review deposit mix, broker and municipal funding reliance, borrowing capacity and collateral availability, and the impact of rising funding costs on net interest margin.
- Track credit quality, charge-offs, collateral valuations, allowance adequacy, and the status and expiration effects of FDIC loss-sharing arrangements.
- Follow the Federal Reserve review involving Higher One and assess any eventual penalties, restitution, or operational requirements.
- Reconcile reported cash-flow trends with mortgage-warehouse originations and sales, and monitor BankMobile spending and deposit-generation results.
- Verify capital headroom under the applicable regulatory rules and assess the costs of future regulatory requirements as the company grows.