Customers Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Balance-sheet comparisons are against December 31, 2012 unless otherwise noted. Financial amounts are in U.S. dollars; amounts below are generally shown in millions.
Business context and financial results
Customers Bancorp is a bank holding company whose principal subsidiary is Customers Bank. Its business includes commercial and multifamily lending, mortgage warehouse lending, deposits, and acquired loan portfolios. Management emphasized rapid organic growth and expansion.
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Net interest income | $22.5 million | $13.4 million; up 68% |
| Net interest margin | 3.25% reported; 3.26% tax-equivalent | 3.00% in Q1 2012 |
| Non-interest income | $6.1 million | $3.7 million; up $2.4 million |
| Non-interest expense | $16.5 million | $10.6 million; includes $2.0 million fraud-related contingency |
| Net income | $7.2 million | $3.1 million; up 131% |
| Diluted earnings per share | $0.38 | $0.27 |
| Provision for loan losses | $1.1 million | $1.8 million |
| Net charge-offs | $0.5 million | $1.4 million |
| Operating cash flow | $88.0 million provided | $4.1 million provided |
| Investing cash flow | $338.9 million used | $117.1 million provided |
| Financing cash flow | $246.0 million provided | $103.9 million used |
Operating cash flow included $78.1 million of proceeds from sales of loans held for sale in excess of originations; it should not be read as a direct measure of recurring operating earnings. Cash and cash equivalents ended at $181.1 million, down $4.9 million during the quarter.
Balance sheet, funding, and asset quality
- Total assets were $3.46 billion, up 8.0%; net loans receivable were $1.59 billion, up $293.8 million. Non-covered loans grew approximately $300 million, including $155.1 million of commercial loans acquired from Flagstar on March 28.
- Loans held for sale were $1.36 billion, including $1.17 billion of mortgage warehouse loans at fair value. Warehouse lending drove substantial interest and fee income growth.
- Deposits were $2.54 billion, up 3.9%. Federal funds purchased were $90 million, compared with $5 million at year-end; other borrowings were $537 million, up from $471 million. Subordinated debt was $2 million.
- Shareholders’ equity was $276.9 million, up from $269.5 million. At March 31, the Bank’s total capital-to-risk-weighted-assets ratio was 10.39%, above the 10.0% well-capitalized threshold; its Tier 1 risk-based and leverage ratios were 9.43% and 8.99%.
- Non-covered nonaccrual loans were $21.4 million, down from $22.3 million; non-covered nonperforming assets were $26.6 million. The allowance was $26.4 million, or 1.03% of non-covered loans. Legacy pre-September 2009 originations remained a notable problem area.
- Management disclosed wholesale funding at approximately 25.4% of total funding and a loan-to-deposit ratio of 117.6% at March 31. The Bank reported $738.5 million of FHLB borrowing capacity, of which $110 million was used in long-term borrowings, and $85.2 million of Federal Reserve borrowing capacity.
Material changes and management commentary
Year-over-year earnings growth chiefly reflected higher average earning assets and loan volumes, particularly mortgage warehouse, commercial real estate, and multifamily lending. Management reported average interest-earning assets of $2.81 billion versus $1.80 billion in Q1 2012. Warehouse transactional fees rose to $3.7 million from $2.1 million, and FDIC loss-sharing receivable accretion increased to $1.2 million from $0.7 million.
Expenses also rose: salaries and benefits increased by $1.9 million, partly reflecting 56 additional full-time equivalent employees since March 2012; occupancy and FDIC assessments also increased. The provision for loan losses declined year over year, while loan growth required additional reserves.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or financial guidance. Management described plans to grow commercial and mortgage warehouse lending and to establish a Philadelphia branch intended to serve underserved and lower- and moderate-income customers. Results for the quarter are not necessarily indicative of full-year results.
- A suspected fraud in the loans-held-for-sale portfolio involved approximately $5.2 million. Management estimated possible losses of $1.5 million or less to $3.2 million and recorded a $2.0 million contingency. The investigation and loss-mitigation efforts were ongoing.
- After year-end loan growth reduced the Bank’s capital ratios, the Bank was classified as adequately capitalized at December 31, 2012. The holding company transferred capital to the Bank; management reported the Bank was well capitalized at March 31, 2013. The temporary restrictions on brokered deposits and deposit pricing associated with the earlier status were subsequently lifted.
- Acquisition developments: the Acacia Federal Savings Bank purchase agreement was terminated April 4, 2013 after regulatory approval delays, with each party bearing its own costs. The CMS merger agreement was amended April 22, extending the outside date to December 31, 2013, subject to possible extension. Terms include a $300,000 expense reimbursement and a possible $1.0 million termination fee under specified circumstances; CMS also obtained a termination right tied to a proposed $1.5 million preferred-stock investment or agreement on a $2.0 million secured credit facility.
- Key disclosed risks include concentration in commercial real estate and mortgage warehouse lending, fraud and credit losses, reliance on wholesale funding and time deposits, deposit retention and funding costs, rapid-growth execution, regulatory requirements, and the need for approvals for acquisitions and expansion. The filing also notes that a portion of investment securities had unrealized losses; management attributed these primarily to market and interest-rate conditions rather than credit quality.
Investor verification points
- Track the fraud investigation, recoveries, and any change to the $2.0 million reserve or estimated loss range.
- Assess warehouse and commercial real estate growth, underwriting, delinquencies, nonaccruals, and allowance adequacy, including legacy and acquired portfolios.
- Monitor funding mix, wholesale-funding dependence, time-deposit maturities, liquidity capacity, and capital ratios as assets grow.
- Confirm subsequent progress, required approvals, financing obligations, and potential termination costs under the amended CMS transaction.
- Separate recurring earnings and cash generation from warehouse-loan turnover, FDIC accretion, and other acquisition- or contingency-related items.