Customers Bancorp, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited consolidated results. Customers Bancorp is a bank holding company operating through Customers Bank.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $27.0 million | $22.6 million | $75.5 million | $50.1 million |
| Provision for loan losses | $0.75 million | $10.1 million | $6.5 million | $14.7 million |
| Non-interest income | $4.9 million | $9.8 million | $19.1 million | $26.7 million |
| Non-interest expense | $18.3 million | $12.0 million | $51.7 million | $37.2 million |
| Net income | $8.3 million | $6.6 million | $23.7 million | $16.3 million |
| Diluted EPS | $0.33 | $0.51 | $1.07 | $1.35 |
| Net interest margin | 3.13% (3.14% tax-equivalent) | 3.80% (3.81% tax-equivalent) | 3.21% | 3.28% |
Balance sheet at September 30: Assets were $3.93 billion, up 22.6% from December 31, 2012. Net loans receivable, excluding loans held for sale, were $2.07 billion; loans held for sale were $917.9 million, including $840.4 million of mortgage warehouse loans. Deposits were $3.24 billion, shareholders’ equity was $388.9 million, and cash and cash equivalents were $255.7 million.
Cash flow and liquidity: Nine-month operating cash flow was $588.0 million, investing cash outflow was $1.175 billion, and financing cash flow was $656.5 million. Cash increased $69.6 million. Management reported $1.342 billion of FHLB borrowing capacity, of which $100 million was utilized in long-term borrowings, and $82.2 million of available Federal Reserve Bank borrowing capacity.
Debt and capital: Other borrowings totaled $235.3 million, down from $471.0 million at year-end 2012. This included $63.25 million of five-year senior unsecured notes issued at 6.375% in Q3. The Bank and Bancorp exceeded capital requirements at September 30; the Bank’s total risk-based capital ratio was 14.18% and Tier 1 leverage ratio was 11.04%. The Bank had been merely “adequately capitalized” at December 31, 2012 following rapid loan growth, but management transferred capital and restored well-capitalized status.
Material changes versus comparable periods
- Q3 net income rose 24.6%, and nine-month net income rose 45.7%; diluted EPS fell in both comparisons, which the company attributed primarily to a larger weighted-average share count following equity offerings.
- Net interest income increased with loan growth, especially commercial real estate and multifamily lending. Net interest margin declined, including because Q3 2012 had a significant purchased-credit-impaired loan estimate benefit.
- Provision expense fell substantially from 2012, which included $7.5 million of purchased-credit-impaired loan impairment adjustments; management also cited improved asset quality and lower loss factors.
- Non-interest income decreased, notably because 2012 included a $9.0 million securities-sale gain and a one-time purchased-credit-impaired loan estimate benefit. Non-interest expense increased with staffing and growth-related infrastructure costs.
- Net loans receivable grew about $744 million from year-end, driven mainly by commercial real estate growth and the Flagstar loan purchase. Deposits increased $802.5 million; some non-interest-bearing demand deposits are seasonal.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management described plans to expand commercial and multifamily lending, develop a Philadelphia branch, and pursue a South Asia-focused customer niche in collaboration with Religare.
- The company held a 2.8% stake in India-based Religare valued at $23.1 million and was considering a warrant for additional shares; the potential warrant was not reported as acquired.
- Credit risks remain concentrated in legacy commercial real estate and construction loans, acquired and purchased-credit-impaired portfolios, and mortgage warehouse lending. Management cautioned that further deterioration in real estate markets could require additional loan-loss reserves.
- Non-covered nonaccrual loans declined to $14.9 million from $22.3 million at year-end; non-covered nonperforming assets were $20.7 million. Net charge-offs were $5.5 million for the nine months, versus $4.7 million in 2012. The allowance for loan losses was $26.8 million.
- A suspected fraud in the loans-held-for-sale portfolio resulted in a $2.0 million loss contingency. The Bank reported recovering $1.5 million in cash and pursuing restitution; the remaining matter was recorded in other assets.
- The Federal Reserve referred the Bank to the Department of Justice after consumer compliance and Community Reinvestment Act examinations. The DOJ opened an investigation concerning alleged ECOA and Fair Housing Act compliance in Philadelphia. The company said it believes it complied and is cooperating; no outcome was reported.
- The CMS merger agreement was amended, with a possible termination date of December 31, 2013 (extendable in specified circumstances); a $1.5 million preferred-stock investment and $300,000 expense reimbursement had been made. A separate Acacia acquisition was terminated after regulatory approval delays.
- Management noted future Basel III capital requirements and Dodd-Frank implementation as potential sources of added capital and compliance requirements. The filing provides no quantified forecast of their impact.
Important facts for investors to verify
- Whether rapid commercial real estate and multifamily loan growth can be sustained without weakening underwriting or asset quality.
- The status and potential recovery from the suspected warehouse-loan fraud, including whether the $2.0 million contingency remains adequate.
- Developments and possible financial or operational consequences of the DOJ investigation.
- The composition, seasonality, and stability of deposit growth, and the bank’s funding costs and liquidity as borrowings mature.
- The effect of share issuance and compensation awards on future diluted EPS, and the terms/status of the CMS transaction and potential Religare warrant.
- Whether the decline in net interest margin and increased operating expenses affect future profitability; the filing gives no explicit numerical outlook.