Customers Bancorp, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Customers Bancorp became the holding company for Customers Bank on September 17, 2011; earlier-period results are those of the Bank, and Berkshire Bancorp results are included only from its acquisition date. Amounts below are in U.S. dollars.
Business context
The company operates a community bank with 14 branches in Pennsylvania, New Jersey and New York, plus a nationwide mortgage warehouse lending business. Its strategy emphasizes small-business and community banking, specialty lending, and selective acquisitions, including FDIC-assisted transactions.
Financial results and position
| Metric | FY 2011 / Dec. 31, 2011 | Prior comparable period |
|---|---|---|
| Interest income | $61.4 million | $30.9 million in 2010 |
| Net interest income | $39.0 million | $19.4 million in 2010 |
| Net interest margin | 2.44% | 2.70% in 2010 |
| Provision for loan losses | $9.5 million | $10.4 million in 2010 |
| Non-interest income | $13.7 million | $45.6 million in 2010, including $40.3 million of acquisition bargain-purchase gains |
| Non-interest expense | $37.3 million | $26.1 million in 2010 |
| Net income | $4.0 million; diluted EPS $0.39 | $23.7 million; diluted EPS $3.69 in 2010 |
| Total assets | $2.08 billion | $1.37 billion in 2010 |
| Deposits | $1.58 billion | $1.25 billion in 2010 |
| Shareholders’ equity | $147.7 million | $105.1 million in 2010 |
Net income was $3.22 million in Q4 2011, versus $2.35 million in Q3 and $0.44 million in Q4 2010. Q4 diluted EPS was $0.27. For the full year, return on average assets was 0.24% and return on average equity was 3.56%.
Net cash provided by operating activities was $29.9 million, compared with cash used of $221.5 million in 2010. Investing activities used $760.5 million and financing activities provided $565.4 million. Cash and cash equivalents ended the year at $73.6 million.
At year-end, the company had $331.0 million of other borrowings, $5.0 million of federal funds purchased and $2.0 million of subordinated debt. FHLB advances included $320.0 million of short-term borrowings. FHLB borrowing capacity was $571.3 million, of which $320.0 million was used; Federal Reserve borrowing capacity was $72.0 million. Bank regulatory capital ratios were 11.08% total risk-based, 9.97% Tier 1 risk-based and 7.33% Tier 1 leverage. Management said the Bank met requirements and believed it was well capitalized.
Material changes and asset quality
- Assets grew 52% year over year, reflecting loan growth, acquisitions and securities activity. Deposits rose 27%; loans net of allowance increased to $1.33 billion from $663.8 million.
- Net interest income more than doubled, primarily from higher average earning assets and the full-year contribution of the 2010 FDIC-assisted acquisitions. Net interest margin fell 26 basis points, mainly as loan yields declined in the low-rate environment.
- Full-year net income fell sharply from 2010, chiefly because 2010 included $40.3 million in bargain-purchase gains. Excluding those gains, 2011 non-interest income increased to $13.7 million from $5.3 million. Expenses rose with acquisitions, staffing and branch growth, loan workouts, professional services and FDIC assessments.
- Mortgage warehouse loans were $619.3 million and loans held for sale were $175.0 million. Warehouse balances grew substantially; the company funded $7.7 billion of mortgage loans under warehouse facilities during 2011.
- Non-covered non-performing loans were $45.1 million, versus $27.1 million in 2010; non-covered OREO was $7.3 million. Net charge-offs rose to $9.5 million from $5.3 million. The allowance was $15.0 million, or 1.24% of non-covered loans, down from 2.94% a year earlier.
- FDIC-covered loans totaled $126.3 million, with $45.2 million non-accrual; the FDIC generally reimburses 80% of covered losses, subject to agreement terms. The FDIC loss-sharing receivable was $13.1 million.
Outlook, risks and contingencies
- Management expected moderate growth in warehouse lending commitments in 2012, but said unusually high warehouse funding levels at year-end could recede in the first half of 2012. It expected warehouse lending to decline to about 25% of assets over time, from 38% at year-end 2011, as other lending grows.
- Management described economic and regional real-estate conditions as challenging and uncertain. It noted particular credit stress in construction and commercial real estate and the possibility of additional loan-loss reserves if conditions deteriorate.
- Wholesale funding was about 17.6% of total funding, up from 6.0% in 2010. Time deposits were 45% of deposits, and $495.4 million were scheduled to mature within 12 months. Management stated it believed available funding and liquidity were adequate.
- The company said it was in substantial compliance with a 2009 regulatory MOU. The MOU restricts dividends and certain capital actions without regulatory approval. Customers Bank had no accumulated net earnings and was not then permitted to pay dividends; the company did not expect to pay common dividends in the near future.
- Material risks include credit concentrations and acquired-loan performance, warehouse lending exposure and volatility, deposit retention and funding costs, acquisition integration, interest-rate sensitivity, regulatory changes and FDIC loss-sharing compliance. The company disclosed no established public trading market for its common stock.
- Customers Bank’s lawsuit against technology vendor Open Solutions had a district-court judgment vacated in August 2011; OSI appealed, and the Third Circuit had not set a briefing or argument schedule. The filing does not provide a clear estimate of any ultimate exposure.
Important facts for investors to verify
- Reconcile the substantial year-over-year earnings decline with the $40.3 million 2010 bargain-purchase gain, and assess recurring earnings and expense trends.
- Review subsequent credit performance, charge-offs and reserve adequacy, especially for legacy, acquired, construction and commercial real-estate loans.
- Check warehouse lending concentration, collateral controls, commitment utilization and whether year-end funding levels normalized as management anticipated.
- Track the maturity and retention of $495.4 million of time deposits, wholesale funding reliance, borrowing availability and liquidity under stress.
- Confirm capital and dividend restrictions, MOU status, FDIC loss-sharing compliance and any updates to the OSI appeal.
- Note that the auditor issued an unqualified opinion on the financial statements, but the company did not provide management’s assessment or an auditor attestation on internal control over financial reporting due to the SEC transition period.