Customers Bancorp, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Comparisons are with the periods ended June 30, 2011, or with December 31, 2011 for balance-sheet data. Amounts below are in millions unless stated otherwise. Customers Bancorp is a bank holding company; pre-September 17, 2011 comparative information reflects the predecessor bank.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $14.2 | $8.9 | $27.6 | $15.1 |
| Provision for loan losses | $2.7 | $2.9 | $4.5 | $5.7 |
| Non-interest income | $12.6 | $2.6 | $16.4 | $5.9 |
| Non-interest expense | $14.0 | $8.4 | $24.7 | $17.5 |
| Net income (loss) | $6.5 | $0.1 | $9.6 | $(1.5) |
| Diluted earnings (loss) per share | $0.56 | $0.01 | $0.83 | $(0.16) |
- Net interest margin was 2.91% in Q2 2012 versus 2.35% a year earlier; for the six-month period it was 2.95% versus 2.09% (tax-equivalent basis).
- For the six months, management reported return on average assets of 0.97%, return on average equity of 12.65%, and an efficiency ratio of 70.49%. These are not quarterly results.
- Net cash used in operating activities was $104.8 million for the six months, principally reflecting mortgage loans originated for sale exceeding sale proceeds. Investing activities used $40.5 million; financing provided $193.8 million. Cash and cash equivalents increased $48.5 million to $122.1 million.
Financial position, liquidity, and capital
- Total assets were $2.283 billion at June 30, up 9.9% from year-end 2011. Net loans were $1.635 billion, compared with $1.328 billion; loans held for sale were $283.5 million, compared with $175.0 million.
- Deposits increased 21.9% to $1.930 billion from $1.583 billion. Total other borrowings declined to $178.0 million from $331.0 million; federal funds purchased were $5.0 million and subordinated debt was $2.0 million.
- Shareholders’ equity rose to $158.7 million from $147.7 million. The Bank’s regulatory capital ratios were 10.16% total risk-based capital, 9.15% Tier 1 risk-based capital, and 7.43% Tier 1 leverage. The filing says the Bank and holding company met applicable capital requirements.
- Management reported $431.7 million of FHLB borrowing capacity, of which $178.0 million was utilized, and $67.5 million of available Federal Reserve borrowing capacity. It considered liquidity adequate for foreseeable requirements.
- The loan-to-deposit ratio was 100.24% in the filing’s selected-results table. The company also reported $63.5 million of brokered money-market deposits as a funding source.
Material changes and unusual items
- Loan growth, especially mortgage warehouse and commercial real estate lending, drove higher interest income and net interest income. Average mortgage warehouse loans increased substantially year over year. Lower deposit funding costs also supported margin expansion, partly offset by lower loan yields.
- In May, the company reclassified approximately $269 million of held-to-maturity securities to available for sale to provide liquidity for expected loan growth. It subsequently sold $257.6 million of securities, recognizing an $8.8 million pretax gain. The reclassification increased equity by approximately $5.3 million, net of tax. The filing says purchases cannot be classified as held to maturity for two years.
- Q2 non-interest income included the securities gain; warehouse transaction fees increased to $3.4 million from $1.3 million. The company also recorded a $0.7 million loss on OREO sales. Q2 expenses included $1.34 million related to its postponed public offering.
- Non-interest expense rose with staffing, occupancy, growth infrastructure, and the Berkshire acquisition completed in 2011. The company cited 96 additional full-time equivalent employees since June 2011.
- Net charge-offs were $2.0 million in Q2 and $3.5 million for the first half, down from $6.2 million and $6.8 million, respectively, in the comparable 2011 periods. The allowance was $16.1 million, or 1.05% of non-covered loans. Non-covered nonperforming loans were $32.7 million, down from $45.1 million at year-end; covered non-accrual loans were $44.1 million.
- Credit risk remains concentrated in legacy and acquired construction and commercial real estate loans; management cautioned that further deterioration could require increased reserves. Mortgage warehouse lending also carries fraud, bankruptcy, and default risks. Five corporate bonds were downgraded by Moody’s; management said payments remained current and it did not expect to sell them before recovery.
Outlook, transactions, and contingencies
- Management listed long-term goals for the quarter ending June 30, 2013: ROAA 0.90%–1.00%, ROAE at least 10%, net interest margin 3.00%–3.25%, efficiency ratio 50%, and loan-to-deposit ratio 90%–100%. The filing cautions these are aspirational, assumption-dependent targets, not forecasts or assurances.
- A June agreement to acquire Acacia Federal Savings Bank for total consideration of $65 million was expected to close in Q4 2012, subject to conditions. Consideration was to include common and non-voting shares and preferred stock; the company said it would not acquire specified higher-risk assets.
- After quarter-end, the company announced a CMS Bancorp merger agreement valued at approximately $20.8 million, subject to approvals and other conditions, with closing expected in the first half of 2013. It also acquired $63.2 million of manufactured-housing loans in July; the seller retained full recourse for losses. A July private share sale raised approximately $1.1 million.
- Proposed Basel III rules could raise capital requirements and restrict dividends, repurchases, and discretionary bonuses if capital falls below a conservation buffer. The filing reported no material change in previously disclosed risk factors or market-risk disclosures.
- The OSI litigation was concluded after OSI withdrew its appeal in April 2012. Management reported no other material legal proceedings.
Important facts for investors to verify
- How much of reported earnings depended on the nonrecurring $8.8 million securities gain and what earnings look like excluding it.
- Whether rapid loan and deposit growth is sustainable, particularly in mortgage warehouse lending, and how funding costs and net interest margin evolve.
- Credit quality and reserve adequacy across legacy, acquired, construction, commercial real estate, and FDIC-covered portfolios; reconcile reported TDR figures and classifications across disclosures.
- Execution, financing, dilution, regulatory approvals, and integration risks for the Acacia and CMS transactions, and the terms and performance of the post-quarter loan purchase.
- Actual liquidity availability and capital effects of planned growth, acquisitions, securities sales, and any eventual application of proposed capital rules.