Customers Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Dollar amounts below are in millions unless stated otherwise. Customers Bancorp is a bank holding company whose principal subsidiary is Customers Bank.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $26.0 | $14.2 | $48.5 | $27.6 |
| Provision for loan losses | $4.6 | $2.7 | $5.7 | $4.5 |
| Non-interest income | $8.2 | $13.2 | $14.3 | $17.0 |
| Non-interest expense | $16.9 | $14.6 | $33.4 | $25.2 |
| Net income | $8.2 | $6.5 | $15.4 | $9.6 |
| Diluted EPS | $0.38 | $0.56 | $0.76 | $0.83 |
| Net interest margin | 3.25% | 2.90% | 3.25% | 2.95% |
- Q2 pretax income was $12.7 million. Net income rose 26.5% year over year, while diluted EPS fell because the share count increased following 2012 and May 2013 stock offerings.
- At June 30, total assets were $3.79 billion, up from $3.20 billion at December 31, 2012. Net loans receivable were $1.82 billion versus $1.30 billion; loans held for sale were $1.41 billion, including $1.15 billion of mortgage warehouse loans.
- Deposits were $2.78 billion, compared with $2.44 billion at year-end. Cash and cash equivalents were $205.7 million. Borrowings included $120 million of federal funds purchased, $505 million of other borrowings, and $2 million of subordinated debt.
- Shareholders’ equity increased to $379.8 million from $269.5 million, including $97.7 million of net proceeds from the May common-stock offering. Bank regulatory capital ratios were above well-capitalized thresholds at June 30.
- Six-month operating cash flow was $36.7 million, investing cash use was $598.6 million, and financing cash flow was $581.6 million; cash increased $19.7 million to $205.7 million. Investing outflows chiefly reflected loan growth and the Flagstar loan purchase.
Material changes and drivers
- Net interest income increased 83.7% in Q2 and 76.0% for the first half, principally from growth in mortgage warehouse, commercial real estate, and multifamily lending. Lower deposit costs helped support margin expansion.
- Non-interest income declined year over year, mainly because Q2 and first-half 2012 included $8.8 million and $9.0 million, respectively, of securities-sale gains. In 2013, FDIC loss-sharing receivable accretion contributed $2.5 million in Q2 and $3.7 million in the first half.
- Expenses increased with expansion: salaries and benefits rose $2.9 million in Q2, and management cited 80 additional full-time-equivalent employees since June 2012. Higher occupancy, technology, regulatory, and professional-service costs also contributed.
- The allowance for loan losses reached $28.1 million, up from $25.8 million at year-end. First-half net charge-offs were $3.4 million. Non-covered nonaccrual loans declined to $19.6 million from $22.3 million, while non-covered OREO increased to $6.2 million from $4.0 million.
- Commercial real estate loans not covered by FDIC agreements grew to $1.26 billion from $835.5 million at year-end. The Flagstar purchase contributed $155.1 million of drawn commercial loans at acquisition; the filing also reports $151.6 million outstanding at June 30 in its asset-quality discussion.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance is provided. Management describes continued organic growth in mortgage warehouse, commercial real estate, and other lending, alongside investments in staff, infrastructure, and new markets. Management cautions that interim results are not necessarily indicative of full-year results.
- Credit risk remains important, particularly in legacy and acquired commercial real estate and construction loans. Management notes that further deterioration could require additional reserves. Mortgage warehouse lending also carries fraud, bankruptcy, and default risks.
- A suspected fraud involving loans held for sale resulted in a $2.0 million loss contingency recorded in the first half. The Bank recovered $1.5 million in cash, sold $1.0 million of loans deemed uninvolved, and transferred the remaining $2.7 million of loans and related reserve to other assets while pursuing restitution. The ultimate recovery or loss is not stated clearly.
- Customers Bancorp announced a proposed investment and collaboration with India-based Religare, potentially up to $51 million, subject to definitive agreements and approvals. The contemplated warrant investment requires a $7 million non-refundable advance; the filing highlights regulatory, liquidity, currency, execution, and investment-loss risks.
- The CMS Bancorp merger agreement was extended, with a possible termination date of December 31, 2013, subject to specified extension conditions. Customers invested $1.5 million in CMS preferred stock and paid $300,000 toward merger expenses; certain termination circumstances could trigger a $1.0 million fee. The proposed Acacia acquisition was terminated after regulatory approval delays.
- After quarter-end, the company issued $55 million of five-year senior unsecured notes bearing 6.375% interest, with estimated net proceeds of $52.6 million. Proceeds were intended for the Bank, growth, working capital, and general corporate purposes.
- On August 7, 2013, the Federal Reserve Bank of Philadelphia informed the company it would refer the Bank to the Department of Justice following consumer-compliance and CRA examinations, alleging potential noncompliance with the Equal Credit Opportunity Act, Fair Housing Act, and Regulation B in parts of Philadelphia. The company said it believes the Bank complied and would cooperate.
- The filing reports $5.5 million of gross unrealized losses on available-for-sale securities at June 30, mainly attributed by management to interest-rate and market-liquidity changes rather than credit quality. Basel III rules were expected to apply to community banks beginning in 2015 and could raise capital needs or constrain dividends.
Important facts for investors to verify
- Whether rapid loan growth—especially commercial real estate and mortgage warehouse exposures—continues to produce returns consistent with underwriting and liquidity risks.
- Trends in delinquency, nonaccrual loans, charge-offs, OREO, acquired-loan marks, and allowance adequacy as the portfolio expands.
- The final disposition and recoverability of the fraud-related $2.7 million asset and $2.0 million reserve.
- Progress and final terms of the CMS merger and Religare investment, including approvals, the non-refundable warrant advance, and capital implications.
- Developments in the Philadelphia DOJ referral and any resulting legal, regulatory, or financial consequences.
- The effect of the new senior notes and future Basel III requirements on funding costs, liquidity, capital ratios, and the Bank’s ability to fund growth.
- How much reported earnings growth reflects recurring lending operations versus FDIC accretion and other unusual or comparison-period items; also monitor dilution from increased shares and equity awards.