Customers Bancorp, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Customers Bancorp operates through Customers Bank, a community bank serving Pennsylvania, New Jersey and New York, with nationwide mortgage warehouse lending.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total assets, year-end | $3.201 billion | $2.078 billion |
| Loans, including held-for-sale | $2.764 billion | $1.516 billion |
| Deposits, year-end | $2.441 billion | $1.583 billion |
| Shareholders’ equity, year-end | $269.5 million | $147.7 million |
| Net interest income | $71.8 million | $38.8 million |
| Provision for loan losses | $16.3 million | $9.5 million |
| Non-interest income | $31.2 million | $13.4 million |
| Non-interest expense | $50.7 million | $36.9 million |
| Net income attributable to common shareholders | $23.8 million | $4.0 million |
| Diluted EPS | $1.73 | $0.39 |
| Net interest margin | 3.26% reported; 3.05% excluding a PCI estimate change | 2.47% |
- Net income rose sharply as loan growth drove net interest income higher; average loan balances increased across warehouse, commercial and multifamily lending. Return on average assets was 1.02%, and return on average equity was 12.69%.
- Year-end cash and cash equivalents were $186.0 million; investment securities were $129.1 million. Borrowings included $471.0 million of other borrowings, $5.0 million of federal funds purchased and $2.0 million of subordinated debt.
- Wholesale funding was 35.8% of total funding, versus 17.6% in 2011. Time deposits represented 48.3% of deposits, with $806.9 million scheduled to mature in 2013. Management cited FHLB borrowing capacity of $608.9 million, of which $411.0 million was used.
- Operating cash flow was negative $1.242 billion, principally because warehouse loan originations exceeded sales by $1.265 billion. The filing says the fair-value election moved qualifying warehouse activity to operating cash flows; this presentation change makes the year-over-year cash-flow comparison less direct. Investing activities provided $262.1 million and financing activities provided $1.092 billion; cash increased $112.4 million.
Fourth quarter: Net income attributable to common shareholders was $7.6 million, compared with $3.2 million in Q4 2011. Q4 2012 net interest income was $21.7 million, provision $1.6 million, non-interest income $4.5 million and non-interest expense $13.4 million.
Material changes and unusual items
- Assets expanded 54% and deposits 54%. Total loans grew to $2.764 billion, including $1.440 billion of loans held for sale; mortgage warehouse lending represented about 52% of the loan portfolio.
- The Bank sold $257.6 million of investment securities in 2012 to support loan growth, recognizing a $9.0 million net gain on securities sales. Investment securities declined from $398.7 million to $129.1 million.
- Two 2012 private stock offerings raised $94.6 million net, and 7.1 million common shares were issued. Equity growth also reflected net income and stock-based compensation.
- A revised PCI loan valuation system led to $4.4 million of other non-interest income and $4.5 million of interest income; a separate $7.5 million provision was recorded after expected PCI cash flows were revised downward. Management estimated the combined estimate changes increased 2012 net income by $0.9 million after tax, or $0.07 per share.
- Non-performing non-covered assets declined to $30.5 million from $40.6 million; non-performing loans were 2.18% of non-covered loans. The allowance for loan losses was $25.8 million, and net charge-offs were $5.5 million. Covered assets remained subject to FDIC loss sharing, generally covering 80% of eligible losses.
Outlook, risks and contingencies
- Management expressed cautious optimism about 2013, citing modest expected economic and local-market growth, improved loan demand and plans to expand mortgage banking. It expected moderate warehouse lending growth and said warehouse loans should decline to about 25% of assets over time. No numerical earnings guidance was provided.
- Pending 2013 transactions included the Acacia acquisition, CMS Bancorp merger and Flagstar commercial-loan purchase; each was subject to stated closing conditions, including regulatory approvals. The Acacia and CMS transactions could involve substantial share issuance.
- Key risks include the large warehouse lending concentration and its exposure to mortgage-market activity and counterparty performance; commercial real estate and construction credit risk; reliance on wholesale and time-deposit funding; regional economic concentration; interest-rate sensitivity; acquisition integration and regulatory risks; and evolving capital and liquidity rules.
- Management disclosed that rapid late-December loan growth caused Customers Bank to be classified as adequately capitalized at December 31, 2012. A capital transfer from the Bancorp subsequently restored well-capitalized status. The Bank’s year-end capital ratios included a 9.53% total risk-based ratio, 8.50% Tier 1 risk-based ratio and 7.74% leverage ratio. Brokered deposits required regulatory approval while the Bank was adequately capitalized.
- The 2009 regulatory MOU was terminated in June 2012. The filing reports an unqualified audit opinion and effective internal control over financial reporting. The company did not expect to pay common dividends in the near future; its common stock had no established public trading market.
Important facts for investors to verify
- Confirm the Bank’s post-transfer capital ratios and current regulatory classification, particularly given the year-end capital event and brokered-deposit restrictions.
- Assess warehouse portfolio concentration, fair-value accounting, unfunded warehouse commitments of $428.4 million, and whether management’s planned diversification is progressing.
- Review deposit funding quality, brokered and listing-service dependence, and the $806.9 million of time deposits due in 2013.
- Evaluate the PCI cash-flow assumptions and the earnings impact of the 2012 estimate changes; the filing also contains differing descriptions of a $6.6 million tax valuation-allowance reversal, which investors should reconcile to the financial-statement tax note.
- Track regulatory approvals, final consideration and dilution, integration costs, and realized benefits for the pending Acacia, CMS and Flagstar transactions.