Customers Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Amounts below are for Customers Bank, the accounting acquirer, and are supplemental; Customers Bancorp, Inc. itself had no operations, assets, liabilities, equity, or cash flows through June 30, 2011.
Business context and reporting basis
Customers Bank operated a growing community banking business, including commercial and real estate lending, mortgage warehouse lending, deposits, and acquired loans covered by FDIC loss-sharing agreements. The holding-company reorganization closed September 17, 2011, after the reporting period. On that date, Customers Bancorp also completed its acquisition of Berkshire Bancorp, Inc. for an approximately $10.9 million purchase price; Berkshire had $137 million of assets, $103 million of loans, and $119 million of deposits at June 30, 2011. Acquired results are included from the acquisition date, not in the reported quarter.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $8.9m | $3.6m | $15.2m | $5.9m |
| Provision for loan losses | $2.9m | $1.1m | $5.7m | $5.5m |
| Non-interest income | $2.5m | $1.5m | $5.7m | $2.2m |
| Non-interest expense | $8.4m | $3.6m | $17.4m | $7.1m |
| Net income (loss) | $0.145m | $0.430m | $(1.5)m | $(4.5)m |
Q2 basic and diluted EPS were $0.00, versus $0.02 a year earlier; six-month loss per share improved to $0.05 from $0.29. The reported net interest margin was 2.32% for Q2 and 2.08% for the first half, versus 2.76% and 2.72%, respectively, in 2010. Tax-equivalent margins were 2.33% for Q2 and 2.08% for the first half.
At June 30, 2011, Customers Bank had assets of $1.694 billion, up 23.3% from year-end; deposits of $1.406 billion, up $160.7 million; and equity of $123.4 million, versus $105.1 million at year-end. Net loans were $712.9 million, including $576.9 million not covered by FDIC loss sharing, and cash and cash equivalents were $101.7 million, down from $238.7 million. Investment securities totaled $633.1 million, including $381.8 million held to maturity.
Borrowings were $152.0 million ($125.0 million under securities repurchase agreements and $27.0 million in other borrowings), in addition to $2.0 million of subordinated debt. The Bank reported capital ratios of 7.7% Tier 1 capital to average assets, 16.2% Tier 1 to risk-weighted assets, and 17.6% total capital to risk-weighted assets; management said it met applicable capital requirements.
For the first six months, operating cash flow was $25.0 million, investing cash flow was $(479.2) million, and financing cash flow was $317.2 million. Cash declined by $137.0 million to $101.7 million. Investing outflows primarily reflected held-to-maturity securities purchases and loan growth; financing inflows included deposit growth and $15.5 million of stock proceeds.
Changes, management commentary, and risks
- Net interest income expanded substantially with asset and deposit growth, but margin fell year over year. Management attributed the margin pressure chiefly to a higher share of low-yielding interest-bearing deposits and investments; it said Q2 margin improved from Q1 as excess cash was redeployed.
- Loan-loss provision rose in Q2, and first-half net charge-offs were $6.8 million versus $3.2 million in 2010. Management cited problem credits, charge-offs, and declining real estate values. Five relationships accounted for most Q2 charge-offs.
- Non-interest income benefited from mortgage warehouse fees and $1.7 million of first-half accretion relating to the FDIC loss-sharing receivable. Expense growth reflected staffing and branch expansion, professional and legal services, and higher operating costs.
- Credit concentrations warrant attention: 92.2% of the loan portfolio was secured by real estate. Management warned that further deterioration in construction and commercial real estate could require additional loan-loss reserves. Non-covered non-accrual loans were $22.3 million; covered non-performing loans were $48.5 million. The allowance was $13.9 million, or 2.42% of non-covered loans.
- FDIC agreements covered 21% of loan principal and 51% of other real estate assets, generally reimbursing 80% of covered losses. The FDIC loss-sharing receivable was $12.6 million at quarter-end.
- Management described strategies to grow mortgage warehouse lending, redeploy cash into loans and investments, reduce deposit costs, improve stressed assets, and integrate Berkshire. It stated liquidity was adequate for foreseeable needs. No numerical earnings or margin guidance was provided.
- The Bank’s dispute with Open Solutions, Inc. had a prior $104,000 judgment vacated in August 2011 after the FDIC’s intervention and motion to dismiss. OSI appealed in September; the appeal remained pending. OSI had also sought approximately $205,000 in legal fees and costs.
- Management was evaluating new troubled-debt-restructuring guidance. New fair-value and comprehensive-income accounting guidance was not expected to have a significant impact. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Distinguish the Bancorp’s nil standalone financial statements from the supplemental Customers Bank results; the filing expressly says the Bank information is not Bancorp information.
- Assess whether Q2’s margin improvement from Q1 can persist despite lower year-over-year margins and the changing asset mix.
- Review credit trends, charge-offs, real-estate concentrations, reserve adequacy, and the extent and timing of FDIC reimbursements.
- Track liquidity and funding after the large securities purchases, repo borrowing, and cash decline, as well as integration and purchase-price accounting for Berkshire.
- Confirm the status and possible financial consequences of the OSI appeal and requested legal costs.