Customers Bancorp, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. Customers Bancorp is a bank holding company whose subsidiary, Customers Bank, serves businesses and consumers, with significant commercial real estate, acquired-loan, and mortgage warehouse operations. Pre-September 2011 comparative information reflects the Bank as predecessor.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable / prior date |
|---|---|---|
| Net interest income | $13.5 million | $6.3 million in Q1 2011 |
| Net income (loss) | $3.1 million; diluted EPS $0.27 | $(1.7) million; diluted EPS $(0.18) in Q1 2011 |
| Net interest margin | 2.98% tax-equivalent | 1.82% in Q1 2011 |
| Non-interest income / expense | $3.7 million / $10.7 million | $3.2 million / $9.1 million in Q1 2011 |
| Provision / net charge-offs | $1.8 million / $1.4 million | $2.8 million / $0.6 million in Q1 2011 |
| Total assets | $1.976 billion | $2.078 billion at December 31, 2011 |
| Deposits | $1.804 billion | $1.583 billion at December 31, 2011 |
| Net loans receivable | $1.298 billion | $1.328 billion at December 31, 2011 |
| Cash and cash equivalents | $90.8 million | $73.6 million at December 31, 2011 |
| Borrowings and subordinated debt | $11.0 million and $2.0 million | $336.0 million and $2.0 million, respectively, at December 31, 2011 |
Operating cash flow was $4.1 million, investing cash flow $117.1 million, and financing cash flow $(103.9) million; cash increased $17.3 million. Deposit growth and investing cash proceeds primarily funded repayment of $325 million in short-term borrowings. The Bank reported regulatory capital ratios above applicable minimums and “well-capitalized” thresholds: total risk-based capital 11.66%, Tier 1 risk-based capital 10.46%, and Tier 1 leverage 7.46%. The loan-to-deposit ratio was 72.77%; management reported unused FHLB borrowing capacity of $427 million and Federal Reserve capacity of $69.4 million.
Material changes versus comparable periods
- Net interest income more than doubled, driven by loan growth—including mortgage warehouse and commercial real estate lending—and lower deposit funding costs. The average cost of interest-bearing deposits fell 44 basis points; taxable loan yield declined 60 basis points.
- Mortgage warehouse transactional fees rose to $2.1 million from $1.1 million. Non-interest expense increased $1.6 million, mainly from staffing, occupancy, technology, and operating growth; 86 additional full-time equivalents were added year over year.
- Non-accrual non-covered loans declined to $35.0 million from $38.9 million at year-end. However, net charge-offs increased to $1.4 million from $0.6 million. The allowance was $15.4 million, or 1.29% of non-covered loans.
- Assets decreased 4.9% from year-end while deposits grew 14.0%, enabling substantial short-term borrowing repayment.
Outlook, risks, contingencies, and unusual items
- Management cited a strong outlook for loan growth, but gave no specific near-term earnings guidance. Stated long-term goals include return on assets of 0.90%–1.00%, return on equity of at least 10%, net interest margin of 3.00%–3.25%, a 50% efficiency ratio, and a 90%–100% loan-to-deposit ratio. These are expressly not forecasts and depend on assumptions and uncertain conditions.
- On May 8, 2012, the company withdrew its registration for a proposed $100 million public offering, citing market conditions. Related costs of $817,000 were reclassified to prepaid expense and would be expensed if the offering is not resumed.
- On May 9, 2012, it reclassified a $270 million held-to-maturity securities portfolio to available-for-sale to improve liquidity and support expected loan growth. The reported subsequent-event impact was a $5.3 million after-tax increase in equity; the company stated that it would be unable to classify securities as held-to-maturity for two years.
- Credit exposure remains concentrated in legacy and acquired construction and commercial real estate loans. Management warned that further real-estate deterioration could require higher reserves. Acquired loans represented 22% of loans and a disproportionate share of nonperforming assets; certain acquired loans have FDIC loss-sharing protection.
- Management identified mortgage warehouse risks including fraud, bankruptcy, and default. TDRs totaled $7.9 million; impaired loans were $58.3 million. A vendor dispute litigation was concluded after OSI withdrew its appeal on April 27, 2012.
Most important facts for investors to verify
- Whether deposit growth is sustainable and its pricing affects funding costs and net interest margin.
- Credit trends in acquired, legacy construction, and commercial real estate portfolios, including charge-offs, nonperforming assets, reserve adequacy, and FDIC recoveries.
- Mortgage warehouse growth, fee generation, exposure controls, and associated credit and liquidity risks.
- Effects of the securities reclassification on liquidity, capital, earnings volatility, and the two-year held-to-maturity restriction.
- Whether the proposed public offering will be revived and whether the $817,000 of deferred costs will require expense recognition.