Customers Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Interim periods before September 17 reflect Customers Bank, the predecessor; the bank holding company reorganization was completed on that date.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $9.7 million | $6.2 million | $24.9 million | $12.2 million |
| Provision for loan losses | $0.9 million | $4.1 million | $6.6 million | $9.5 million |
| Non-interest income | $3.6 million | $41.7 million | $9.2 million | $43.8 million |
| Non-interest expense | $9.1 million | $11.5 million | $26.5 million | $18.7 million |
| Net income | $2.3 million | $27.8 million | $0.8 million | $23.3 million |
| Diluted earnings per share | $0.23 | $3.81 | $0.08 | $3.92 |
| Net interest margin | 2.46% | 2.86% | 2.20% | 2.62% |
Amounts are rounded. The large 2010 non-interest income and earnings comparison reflects a $40.3 million bargain-purchase gain from bank acquisitions recorded in 2010; no such gain was recorded in 2011. Q3 2011 also included $1.4 million of securities-sale gains and $0.5 million of merger expenses.
Financial position, cash flow and capital
- At September 30, total assets were $1.863 billion, up 35.5% from December 31, 2010. Net loans were $1.000 billion, deposits $1.582 billion, and stockholders’ equity $149.7 million.
- Cash and cash equivalents were $52.8 million, down from $238.7 million at year-end, as management redeployed cash into loans and securities. Investment securities included $156.0 million available-for-sale and $361.3 million held-to-maturity.
- Borrowings included $110 million of securities sold under repurchase agreements, $11 million of other borrowings and $2 million of subordinated debt. Deposit growth and common-stock issuances were key funding sources.
- The financial statements report nine-month operating cash flow of negative $24.8 million, investing cash flow of negative $513.7 million, and financing cash flow of positive $352.6 million; cash declined $185.9 million to $52.8 million.
- Bank regulatory capital ratios were 13.57% total capital to risk-weighted assets, 12.21% Tier 1 risk-based capital and 8.13% Tier 1 capital to average assets. Management stated the Bank met applicable capital requirements.
Material changes and management commentary
- Customers acquired Berkshire Bancorp on September 17, issuing approximately 624,000 common shares; the reported purchase price was $11.3 million and preliminary goodwill was $2.5 million. Berkshire added approximately $98.4 million in loans and $121.9 million in deposits.
- Loans not covered by FDIC loss-sharing arrangements rose 70% from year-end to $873.9 million. Mortgage warehouse loans were a significant growth driver; the reported portfolio was $416.7 million, in addition to $205.0 million of loans held for sale.
- Management attributed higher net interest income to a larger earning-asset base, but net interest margin contracted as asset yields declined. Its stated priorities included growing mortgage warehouse lending, deploying excess cash, reducing deposit costs, improving stressed assets and integrating Berkshire.
- Non-covered nonperforming loans were $33.9 million, versus $22.3 million at year-end; non-covered nonperforming assets were $41.2 million. The allowance was $14.0 million, or 1.61% of non-covered loans. Nine-month net charge-offs were $7.7 million.
- Covered nonaccrual loans were $43.4 million, and covered nonperforming assets were $48.6 million. The filing says the FDIC generally reimburses 80% of eligible losses on covered assets; the related receivable was $11.9 million.
- Management said liquidity resources were adequate for foreseeable needs. The filing provides no numerical earnings guidance or specific forward outlook.
Risks, contingencies and unusual items
- Real-estate exposure is concentrated: 87.9% of the total loan portfolio was secured by real estate. Management identified construction and commercial real estate as areas of greater credit difficulty and cautioned that further deterioration could require additional reserves.
- There were $9.7 million of troubled debt restructurings at September 30. The filing also describes $7.8 million of impaired loans with related allowance and $11,000 of specific reserves associated with newly modified TDRs.
- Customers Bank’s litigation with Open Solutions remained subject to an appeal. A prior $104,000 judgment against the Bank was vacated; OSI appealed the dismissal of its counterclaim. OSI had also sought estimated legal fees and costs of about $205,000.
- As a subsequent event, the Bank reported a $32 million warehouse exposure to Allied Home Mortgage as of November 9, secured by residential mortgages. Following federal allegations concerning Allied, the Bank said it would make no further loans, expected to eliminate the exposure within 90 days and did not expect a loss.
- The filing identifies uncertainty related to the U.S. government and agency credit-rating downgrade, including possible effects on securities values, collateral, funding costs and borrowers.
Important facts for investors to verify
- Reconcile cash-flow figures: the financial statements report operating, investing and financing cash flows of negative $24.8 million, negative $513.7 million and positive $352.6 million, respectively; MD&A gives different figures (negative $1.0 million, negative $521.9 million and positive $337.1 million).
- Confirm the correct income-tax expense comparison. The statements show $0.93 million for Q3 2011 and $0.30 million for the nine months; MD&A text appears to reverse those amounts in one passage.
- Track credit quality, provision needs, charge-offs and the adequacy of reserves, particularly for commercial real estate, construction and FDIC-covered portfolios.
- Monitor the margin and funding effects of asset growth, deposit pricing, repurchase borrowing and the shift into held-to-maturity securities.
- Follow the Allied warehouse exposure, OSI appeal and completion of preliminary Berkshire acquisition fair-value estimates.