Customers Bancorp Reports Record Net Income for Second Quarter and First Six Months of 2016
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- Record Q2 2016 GAAP Net Income of $17.4 Million, Up 57.2% Over Q2 2015
- Record Q2 2016 Fully Diluted Earnings Per Share ("EPS") of $0.60, Up 53.8% over Q2 2015 Fully Diluted EPS
- Record Six Months of 2016 Net Income of $33.8 million, Up 35.1% over First Six Months of 2015 and EPS of $1.17, Up 33.0% over First Six Months 2015
- Exceptional Asset Quality with NPLs only 0.17% of Total Loans
- Acquisition of Higher One Holdings, Inc. Disbursements Business and Combination With Customers’ BankMobile Division Completed
Wyomissing, Pa. (July 20, 2016) - Customers Bancorp, Inc. (NYSE: CUBI), the parent company of Customers Bank (collectively "Customers"), reported net income to common shareholders of $17.4 million for the second quarter of 2016 ("Q2 2016") compared to net income to common shareholders of $11.0 million for the second quarter of 2015 ("Q2 2015"), an increase of $6.3 million, or 57.2%. Fully diluted earnings per share for Q2 2016 was $0.60 compared to $0.39 fully diluted earnings per share for Q2 2015, an increase of $0.21 per share, or 53.8%. Average fully diluted shares for Q2 2016 were 29.0 million compared to average fully diluted shares of 28.7 million for Q2 2015. The second quarter results included one-time costs for acquisition related expenses and a true-up to a higher effective tax rate as well as two weeks of Disbursements business results totaling approximately $2.7 million.
Customers also reported net income to common shareholders of $33.8 million for the first six months of 2016 compared to net income to common shareholders of $25.0 million for the first six months of 2015, an increase of $8.8 million, or 35.1%. Fully diluted earnings per share for the first six months of 2016 was $1.17 compared to $0.88 for the first six months of 2015, an increase of 33.0%.
“Customers is pleased to report record earnings for the second quarter and first six months of 2016. Customers' single point of contact business model delivered by highly experienced professional teams resulted in Customers continued origination of high quality loans, limiting our interest rate exposures, and controlling operating costs,” stated Jay Sidhu, Chairman and CEO of Customers. “Furthermore, Customers completed its strategic acquisition of the Disbursements business from Higher One Holdings, Inc. on June 15, 2016. Combining the Disbursements business with our BankMobile business and platform gives Customers over 2.1 million BankMobile serviced customers and the potential to add as many as 500,000 new BankMobile customers annually. We believe this acquisition will lower the overall cost of deposits for Customers and provide for realizing the value of BankMobile Technologies within 12 to 18 months, making this Division of Customers Bank potentially one of the most successful digital banking platforms in the United States,” Sidhu continued.
Other financial highlights for Q2 2016 compared to Q2 2015 include:
- Q2 2016 net interest income of $63.2 million increased $16.6 million, or 35.7%, from net interest income for Q2 2015 as average loan and security balances increased $2.2 billion. Net interest margin expanded by 10 basis points to 2.83% from Q2 2015.
- Commercial loan average balances increased $886 million, including commercial loans to mortgage banking companies, in Q2 2016 compared to Q2 2015.
- Multi-family average loan balances increased $1.2 billion.
- The increased yields from variable rate commercial loans and investment portfolios more than offset the slightly higher funding costs.
- Customers reported a $0.8 million provision for loan losses in Q2 2016. The Q2 2016 provision for loan losses included provisions for loan growth and impairment measured on specific loans of $2.1 million, offset in part by increased estimated cash flows expected to be collected on purchased credit-impaired loans and a reduction in the estimated amount owed to the FDIC for previous FDIC assisted acquisitions totaling $1.3 million. The Q2 2015 provision included a provision of $6.0 million for a fraudulent loan.
- Q2 2016 non-interest income of $8.3 million increased $1.9 million from Q2 2015 as a result of $2.2 million interchange and other fees received from the acquired Disbursements business and $0.3 million increase in warehouse fees offset in part by a decrease in gains on loan sales. There were no sales of multi-family loans in Q2 2016.
- Non-interest expenses in Q2 2016 of $38.2 million increased $12.5 million, or 48.8%, from non-interest expenses in Q2 2015. Q2 2016 operating expenses included approximately $3.2 million of Disbursements business expenses (salaries and employee benefits of $0.7 million, professional services of $0.5 million, technology, communication and bank operations of $0.9 million, and other expenses of $1.1 million) and one-time acquisition related expenses of $0.9 million (predominately for professional services). The remaining increases in salary and employee benefits, regulatory assessments and fees, professional services, technology, and occupancy expenses resulted largely from the increases in resources and services necessary to support and operate a $9.7 billion bank.
- Customers’ Q2 2016 income tax expense of $13.0 million reflects an estimated effective tax rate of 40.1% compared to Q2 2015 tax expense of $6.4 million with an effective tax rate of 35.6%. During Q2 2016, Customers evaluated its apportionment factors and estimated that due to the increasing proportion of income producing assets domiciled in New York, particularly in New York City, that Customers' effective tax rate for full year 2016 would be approximately 38.0%. The 40.1% Q2 2016 effective rate reflects recording the higher estimated taxes for the first six months of 2016 during Q2 2016.
- Customers achieved a return on average assets of 0.84% in Q2 2016 compared to 0.65% in Q2 2015, and achieved a return on average common equity of 13.03% in Q2 2016 compared to 9.44% in Q2 2015. Pre-tax and pre-provision return on average assets reached 1.44% in Q2 2016. Pre-tax and pre-provision return on average common equity was 23.38% in Q2 2016.
- Total loans, including commercial loans held for sale, increased $1.9 billion, or 28.4%, to $8.4 billion as of June 30, 2016 compared to total loans as of June 30, 2015 of $6.6 billion. Multi-family loan balances increased $1.0 billion to $3.3 billion and commercial loans including lines of credit to mortgage companies increased $0.9 billion to $4.7 billion.
- Total deposits increased $1.3 billion, or 23.3%, to $6.8 billion as of June 30, 2016 compared to total deposits of $5.5 billion as of June 30, 2015. Non-interest bearing demand deposits grew $165.2 million to $749.6 million, a 28.3% increase. Money market account balances were up $536.9 million to $3.0 billion as of June 30, 2016 compared to June 30, 2015, a 21.7% increase, and certificates of deposit accounts increased $469.3 million to $2.7 billion as of June 30, 2016, a 20.8% increase.
- The Q2 2016 efficiency ratio was 53.47% compared to a 48.4% Q2 2015 efficiency ratio. Q2 2016 operating expenses included acquisition related expenses of $0.9 million and Disbursements business expenses of $3.2 million.
- Capital levels continue to exceed the “well-capitalized” threshold established by regulation at the bank and exceed the applicable Basel III regulatory thresholds for the holding company and the bank.
- Customers Bancorp issued $57.5 million of non-cumulative perpetual preferred stock paying a 6.45% dividend on April 28, 2016. The proceeds from the capital raise were largely contributed to the subsidiary bank to support Customers Bank’s balance sheet growth and other general corporate purposes.
- Total Tier 1 equity for Customers Bancorp increased $141.3 million from June 30, 2015 to June 30, 2016, an increase in capital of 27.0% over the year.
- The tangible book value per common share continued to increase, reaching $19.35 at June 30, 2016, compared to $17.28 at June 30, 2015, an increase of 12.0% year-over-year.
- The $5.5 million increase in net interest income in Q2 2016 resulted from a $0.9 billion higher average loan balance in Q2 2016 as a result of loan growth.
- The $1.2 million decrease in provision for loan losses in Q2 2016 resulted primarily from a reduction in the amount estimated to be owed to the FDIC for FDIC assisted acquisitions and increased estimated cash flows expected to be collected on purchased credit-impaired loans totaling $1.3 million.
- The $2.8 million increase in non-interest income in Q2 2016 resulted primarily from an increase in interchange revenue and deposit fees of $2.2 million related to the Disbursements business acquisition, and a $0.5 million increase in mortgage warehouse transactional fees as the volume of loans processed increased in Q2 2016 compared to Q1 2016.
- The increase in operating expenses of $4.3 million in Q2 2016 compared to Q1 2016 resulted largely from Disbursements business related expenses of $3.2 million.
- Principally concentrated in New York City and principally to high net worth families;
- Average loan size is between $5 million - $7 million;
- Annual debt service coverage ratio is 140%;
- Median loan-to-value is 70%;
- All loans are individually stressed with an increase of 1% and 2% to the cap rate and an increase of 1.5% and 3% in interest rates;
- All properties are inspected prior to a loan being granted and monitored thereafter on an annual basis by dedicated portfolio managers;
- Customers to date has never experienced more than a 30 day delinquency on any of the multi-family loans that it has originated; and
- Credit approval process is independent of customer sales and portfolio management process.
Q2 2016 compared to Q1 2016:
Customers’ Q2 2016 net income to common shareholders of $17.4 million increased $1.0 million, or 5.8%, from net income to common shareholders of $16.4 million for the first quarter of 2016 ("Q1 2016"). The $1.0 million increase in Q2 2016 compared to Q1 2016 net income to common shareholders resulted primarily from increases in net interest income of $5.5 million to $63.2 million, a decrease in provisions for loan losses of $1.2 million to $0.8 million, an increase in non-interest income of $2.8 million to $8.3 million partially offset by increased operating expenses of $4.3 million to $38.2 million, and a $3.5 million increase in income tax expense to $13.0 million. Discussing these changes further:
The following table presents a summary of key earnings and performance metrics for the quarter ended June 30, 2016 and the preceding four quarters, respectively:
|CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
EARNINGS SUMMARY - UNAUDITED
|(Dollars in thousands, except per-share data)|
|Net income available to common shareholders||$17,368||$16,413||$16,780||$14,309||$11,049|
|Basic earnings per share ("EPS")||$0.64||$0.61||$0.62||$0.53||$0.41|
|Diluted EPS||$ 0.60||$ 0.57||$ 0.58||$ 0.50||$ 0.39|
|Average common shares outstanding - basic||27,080,676||26,945,062||26,886,694||26,872,787||26,839,799|
|Average common shares outstanding - diluted||28,971,040||28,783,101||28,912,644||28,741,129||28,680,664|
|Shares outstanding period end||27,286,833||27,037,005||26,901,801||26,882,383||26,871,745|
|Return on average assets||0.84%||0.85%||0.91%||0.82%||0.65%|
|Return on average common equity||13.03%||12.85%||13.46%||11.83%||9.44%|
|Return on average assets - pre-tax and pre-provision (1)||1.44%||1.40%||1.60%||1.39%||1.54%|
|Return on average common equity - pre-tax and pre-provision (2)||23.38%||21.87%||24.35%||20.53%||22.87%|
|Net interest margin, tax equivalent||2.83%||2.88%||2.83%||2.79%||2.73%|
|Non-performing loans (NPLs) to total loans (including held-for-sale loans)||0.17%||0.20%||0.15%||0.27%||0.16%|
|Reserves to non-performing loans||268.98%||242.10%||341.71%||197.01%||369.90%|
|Net charge-offs (recoveries)||1,060||(455)||4,322||5,657||999|
|Tier 1 equity to average tangible assets||7.17%||7.15%||7.16%||7.27%||7.36%|
|Tangible common equity to average tangible assets (3)||5.71%||6.17%||6.37%||6.49%||6.54%|
|Tangible book value per common share (period end) (4)||$19.35||$19.08||$18.39||$17.81||$17.28|
|Period end stock price||$25.13||$23.63||$27.22||$25.70||$26.89|
(1) Calculated as net income available to common shareholders, plus provision for loan loss and income tax expense divided by average total assets.
(2) Calculated as net income available to common shareholders, plus provision for loan loss and income tax expense divided by average common equity.
(3) Calculated as total equity less preferred stock and goodwill and other intangibles divided by total average assets less average goodwill and other intangibles.
(4) Calculated as total equity less preferred stock and goodwill and other intangibles divided by common shares outstanding at period end.
Customers recognizes the importance of not only being well capitalized in the current environment but to have adequate capital buffers to absorb any unexpected shocks. "Our capital ratios continue to be stretched as of June 30, 2016 due to the continued high usage of lines of credit by our mortgage banking customers (mortgage warehouse) and reflect the refinance boom triggered by the flat yield curve resulting in abnormally low 10-year yields. We are committed to controlling our asset growth over the next 12 months to two years and staying below $10 billion in assets. Over this time, we expect to demonstrate our business model's ability to gain new student demand deposit accounts and become the bank of choice for graduating students. Limiting our growth and possible future gains from our strategic alternatives for BankMobile should be significantly accretive to our capital ratios," stated Mr. Sidhu.
The BankMobile division took a significant step during Q2 2016 with Customers Bank’s acquisition of the Higher One Holdings, Inc. Disbursements business, and BankMobile’s combination with the acquired business. Together the new BankMobile division services over 2.1 million deposit accounts, and is perhaps the largest provider of mobile banking services in the United States by number of customers. The combined businesses also have the potential to add about 500,000 new student accounts annually. "We are very focused on continuing to build out BankMobile's technology software platform, introducing the Vibe and Bold deposit accounts, integrating the Disbursements business with the BankMobile business, developing and beginning to execute plans to continue to attract about 500,000 or more new millennial customers to its customer base each year and improve their engagement as a banking customer so they stay a BankMobile customer for life. The acquisition of the Disbursements business provides us with a great opportunity, marking an inflection point in BankMobile's development. We are committed to making BankMobile the primary bank for all our student customers and moving with them as they evolve to young professionals," stated Mr. Sidhu. "We are also focused on attracting more deposit customers with the Vibe and Bold accounts, arguably among the best customer offerings and the best priced banking services available in the U.S. We believe that 2016 and 2017 will be very exciting years as we build BankMobile as a profitable business and create value for Customers Bancorp, Inc. shareholders," Mr. Sidhu continued.
Managing Commercial Real Estate Concentration Risks and Providing High Net Worth Families Loans for Their Multi-Family Holdings
Customers' loans collateralized by multi-family properties were approximately 39.6% of Customers' total loan portfolio. Recognizing the risks that accompany certain elements of commercial real estate ("CRE") lending, Customers has as part of its core strategies studiously sought to limit its risks. Customers' total real estate construction and development exposure, arguably the riskiest area of CRE, was under $100 million as of June 30, 2016.
Our CRE exposures are focused principally on loans to high net worth families collateralized by multi-family properties that are of modest size and subject to what Customers believes are conservative underwriting standards. As of June 30, 2016, Customers had no non-performing multi-family loans. Customers believes it has a strong risk management process to manage the portfolio risks prospectively and that this portfolio will perform well even under a stressed scenario. Following are some unique characteristics of Customers' multi-family loan portfolio:
Asset Quality and Interest Rate Risk
Risk management is a critical component of how Customers creates long-term shareholder value. Two of the most important risks of banking to be understood and managed in an uncertain economy are asset quality and interest rate risk.
Customers believes that asset quality risks must be diligently addressed during good economic times with prudent underwriting standards so that when the economy deteriorates the bank's capital is sufficient to absorb all losses without threatening its ability to operate and serve its community and other constituents. "Customers adopted prudent underwriting standards in 2009 when the current management team assumed responsibility for the Bank and has not compromised those standards in the last six years," stated Mr. Sidhu. "Customers' non-performing loans at June 30, 2016 were only 0.17% of total loans, compared to our peer group non-performing loans of approximately 0.95% of total loans, and industry average non-performing loans of about 1.60% of total loans. Our expectation is superior asset quality performance in good times and in difficult years. We have no direct exposure to oil and gas or business investments in fracking," said Mr. Sidhu.
Interest rate risk is another critical element for banks to manage. An unexpected shift in interest rates can have a devastating effect on a bank's profitability for multiple years. Banks can position their assets and liabilities to speculate on future interest rate changes with the hope of gaining earnings by guessing the next movement in interest rates. "Customers' objective is to manage the estimated effect of future interest rate changes, up or down, to a neutral effect on net interest income, so not speculating on whether interest rates go up or down," said Mr. Sidhu. "This allows our team members to focus on generating earnings from the business of banking, aggregating deposits and making loans to customers in the communities we serve," concluded Mr. Sidhu.
Diversified Loan Portfolio
Customers is a Business Bank that principally focuses on four lending activities; commercial and industrial loans to privately held businesses, multi-family loans principally to high net worth families, selected commercial real estate loans, and commercial loans and banking services to privately held mortgage companies. Commercial and industrial loans, including owner-occupied commercial real estate loans, and commercial loans to mortgage companies, were approximately $3.5 billion at June 30, 2016. Multi-family loans, or loans to high net worth families, were approximately $3.3 billion at June 30, 2016. Non-owner occupied commercial real estate loans were approximately $1.1 billion at June 30, 2016. Consumer and residential mortgage loans make up only about 5% of the loan portfolio.
Date: Wednesday, July 20, 2016
Time: 5:00 PM ET
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Customers Bancorp, Inc. is a bank holding company located in Wyomissing, Pennsylvania engaged in banking and related business through its bank subsidiary, Customers Bank. Customers Bank is a community-based, full-service bank with assets of approximately $9.7 billion that was named one of Forbes magazine's 2016 100 Best Banks in America (there are over 6,200 banks in the United States). A member of the Federal Reserve System with deposits insured by the Federal Deposit Insurance Corporation, Customers Bank is an equal opportunity lender that provides a range of banking services to small and medium-sized businesses, professionals, individuals and families through offices in Pennsylvania, New York, Rhode Island, New Hampshire, Massachusetts, and New Jersey. Committed to fostering customer loyalty, Customers Bank uses a High Tech/High Touch strategy that includes use of industry-leading technology to provide customers better access to their money, as well as Concierge Banking® by appointment at customers’ homes or offices 12 hours a day, seven days a week. Customers Bank offers a continually expanding portfolio of loans to small businesses, multi-family projects, mortgage companies and consumers. BankMobile is a division of Customers Bank, offering state of the art high tech digital banking services with high level of personal customer service.
Customers Bancorp, Inc. voting common shares are listed on the New York Stock Exchange under the symbol CUBI. Additional information about Customers Bancorp, Inc. can be found on the Company’s website, www.customersbank.com.
“Safe Harbor” Statement
In addition to historical information, this press release may contain "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.'s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words "may," "could," "should," "pro forma," "looking forward," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan," or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.'s control). Numerous competitive, economic, regulatory, legal and technological factors, among others, could cause Customers Bancorp, Inc.'s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. In addition, important factors relating to the acquisition of the Disbursements business and the combination of Customers' BankMobile business with the acquired business also could cause Customers Bancorp's actual results to differ from those in the forward-looking statements. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management's current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.'s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2015 and subsequently filed quarterly reports on Form 10-Q. Customers Bancorp, Inc. does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank.View full release