Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

 

¨ Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

333-166225

(Commission File number)

 

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   27-2290659

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1015 Penn Avenue

Suite 103

Wyomissing PA 19610

(Address of principal executive offices)

(610) 933-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

On November 5, 2013, 23,674,168 shares of Voting Common Stock and 1,019,755 shares of Class B Non-Voting Common Stock were issued and outstanding.

 

 

 


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Customers Bancorp, Inc.

Table of Contents

 

Part I

  
Item 1.   

Customers Bancorp, Inc. Consolidated Financial Statements as of September 30, 2013 and for the three and nine month periods ended September 30, 2013 (unaudited)

     3   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     55   
Item 4.   

Controls and Procedures

     55   

PART II

  
Item 1.   

Legal Proceedings

     56   
Item 1A.   

Risk Factors

     56   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     56   
Item 3.   

Defaults Upon Senior Securities

     56   
Item 4.   

Mine Safety Disclosures

     56   
Item 5.   

Other Information

     56   
Item 6.   

Exhibits

     57   

SIGNATURES

     58   
Ex-31.1      
Ex-31.2      
Ex-32.1      
Ex-32.2      
Ex-101      

 

2


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

(dollars in thousands, except share data)

     September 30,
2013
    December 31,
2012
 
ASSETS     

Cash and due from banks

   $ 88,332      $ 12,908   

Interest earning deposits

     167,321        173,108   
  

 

 

   

 

 

 

Cash and cash equivalents

     255,653        186,016   

Investment securities available for sale, at fair value

     497,566        129,093   

Loans held for sale (including $840,425 and $1,248,935 of mortgage warehouse loans at fair value at September 30, 2013 and December 31, 2012, respectively)

     917,939        1,439,889   

Loans receivable not covered under Loss Sharing Agreements with the FDIC

     2,018,532        1,216,941   

Loans receivable covered under Loss Sharing Agreements with the FDIC

     81,255        107,526   

Less: Allowance for loan losses

     (26,800     (25,837
  

 

 

   

 

 

 

Total loans receivable, net (excluding loans held for sale)

     2,072,987        1,298,630   

FHLB, Federal Reserve Bank, and other stock

     19,113        30,163   

FDIC loss sharing receivable

     11,038        12,343   

Bank premises and equipment, net

     11,055        9,672   

Bank-owned life insurance

     85,991        56,191   

Other real estate owned (2013 $7,839; 2012 $4,109 covered under Loss Sharing Agreements with the FDIC)

     13,601        8,114   

Goodwill and other intangibles

     3,680        3,689   

Accrued interest receivable and other assets

     36,489        27,434   
  

 

 

   

 

 

 

Total assets

   $ 3,925,112      $ 3,201,234   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Liabilities:

    

Deposits:

    

Demand, non-interest bearing

   $ 671,211      $ 219,687   

Interest bearing

     2,572,101        2,221,131   
  

 

 

   

 

 

 

Total deposits

     3,243,312        2,440,818   

Federal funds purchased

     0        5,000   

Other borrowings

     235,250        471,000   

Subordinated debt

     2,000        2,000   

Accrued interest payable and other liabilities

     55,665        12,941   
  

 

 

   

 

 

 

Total liabilities

     3,536,227        2,931,759   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Preferred stock, no par value or as set by the board; 100,000,000 shares authorized; none issued

     0        0   

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 24,741,542 shares issued and 24,693,923 outstanding at September 30, 2013 and 18,507,121 shares issued and 18,459,502 outstanding at December 31, 2012

     24,742        18,507   

Additional paid in capital

     306,183        212,090   

Retained earnings

     61,997        38,314   

Accumulated other comprehensive (loss) income

     (3,537     1,064   

Less: cost of treasury stock; 47,619 shares at September 30, 2013 and December 31, 2012

     (500     (500
  

 

 

   

 

 

 

Total shareholders’ equity

     388,885        269,475   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,925,112      $ 3,201,234   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED

(dollars in thousands, except share data)

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013      2012  

Interest income:

         

Loans held for sale

   $ 9,495      $ 1,622      $ 31,536       $ 4,113   

Loans receivable, taxable, including fees

     22,363        25,368        57,489         55,850   

Loans receivable, non-taxable, including fees

     122        55        291         110   

Investment securities, taxable

     1,423        805        3,334         5,936   

Investment securities, non-taxable

     0        21        0         64   

Other

     148        91        370         225   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest income

     33,551        27,962        93,020         66,298   
  

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense:

         

Deposits

     5,470        5,191        15,742         15,687   

Federal funds purchased

     20        5        99         8   

Borrowed funds

     1,041        194        1,609         434   

Subordinated debt

     16        17        49         52   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     6,547        5,407        17,499         16,181   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     27,004        22,555        75,521         50,117   

Provision for loan losses

     750        10,116        6,470         14,654   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     26,254        12,439        69,051         35,463   
  

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest income

         

Mortgage warehouse transactional fees

     3,090        3,346        10,626         8,829   

Bank-owned life insurance

     615        359        1,658         948   

Deposit fees

     198        124        487         357   

Gain on sale of investment securities

     0        0        0         9,006   

Accretion of FDIC loss sharing receivable

     0        1,296        3,722         1,951   

Gain (loss) on sale of loans

     (6     (71     402         268   

Other

     958        4,723        2,253         5,388   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-interest income

     4,855        9,777        19,148         26,747   
  

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest expense

         

Salaries and employee benefits

     8,963        5,978        24,868         17,073   

Occupancy

     2,289        1,709        6,309         4,937   

Professional services

     1,191        819        3,149         2,474   

Technology, communications and bank operations

     1,121        699        3,023         2,037   

FDIC assessments, taxes, and regulatory fees

     1,105        669        3,510         2,205   

Loan workout

     928        617        1,674         1,519   

Advertising and promotion

     450        270        973         846   

Other real estate owned

     401        (276     962         539   

Loss contingency

     0        0        2,000         0   

Stock-offering expenses

     0        97        0         1,437   

Other

     1,899        1,424        5,254         4,140   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total non-interest expense

     18,347        12,006        51,722         37,207   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income tax expense

     12,762        10,210        36,477         25,003   

Income tax expense

     4,494        3,574        12,794         8,751   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 8,268      $ 6,636      $ 23,683       $ 16,252   
  

 

 

   

 

 

   

 

 

    

 

 

 

Basic earnings per share

   $ 0.34      $ 0.53      $ 1.10       $ 1.39   

Diluted earnings per share

     0.33        0.51        1.07         1.35   

See accompanying notes to the unaudited consolidated financial statements.

 

4


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(dollars in thousands)

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net income

   $ 8,268      $ 6,636      $ 23,683      $ 16,252   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized holding gains (losses) on securities arising during the period

     (10     1,597        (7,079     2,226   

Income tax effect

     3        (559     2,478        (779

Unrealized holding gain on securities transferred from the held-to-maturity category into the available-for-sale category

     0        0        0        8,509   

Income tax effect

     0        0        0        (2,978

Reclassification adjustment for gains included in net income

     0        0        0        (9,006

Income tax effect

     0        0        0        3,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (7     1,038        (4,601     1,124   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 8,261      $ 7,674      $ 19,082      $ 17,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

(dollars in thousands, except share data)

                                                                                                                      
     For the Nine Months Ended September 30, 2013 and 2012  
     Shares of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  

Balance, January 1, 2012

     11,347,683       $ 11,395       $ 122,602       $ 14,496       $ (245   $ (500   $ 147,748   

Comprehensive income

              16,252         1,124          17,376   

Share-based-compensation expense

           1,616                1,616   

Common stock issued, net of costs

     7,111,819         7,112         87,650                94,762   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     18,459,502       $ 18,507       $ 211,868       $ 30,748       $ 879      $ (500   $ 261,502   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

                                                                                                                      
     Shares of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
     (dollars in thousands)  

Balance, January 1, 2013

     18,459,502       $ 18,507       $ 212,090       $ 38,314       $ 1,064      $ (500   $ 269,475   

Comprehensive income

              23,683         (4,601       19,082   

Share-based-compensation expense

           2,461                2,461   

Public offering of common stock, net of costs of $5,994

     6,179,104         6,179         91,328                97,507   

Exercise and redemption of warrants

     31,904         32         76                108   

Issuance of common stock under share-based-compensation arrangements

     23,413         24         228                252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

     24,693,923       $ 24,742       $ 306,183       $ 61,997       $ (3,537   $ (500   $ 388,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(dollars in thousands)

Nine Months Ended September 30,

   2013     2012  

Cash Flows from Operating Activities

    

Net income

   $ 23,683      $ 16,252   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     6,470        14,654   

Loss contingency

     2,000        0   

Provision for depreciation and amortization

     2,115        1,447   

Stock-based compensation

     2,461        1,616   

Deferred taxes

     (5     (1,112

Net amortization of investment securities premiums and discounts

     368        2,897   

Gain on sale of investment securities

     0        (9,006

Gain on sale of SBA loans

     (402     (268

Origination/purchase of loans held for sale

     (17,177,835     (7,305,339

Proceeds from the sale of loans held for sale

     17,697,088        6,292,453   

Net increase in FDIC loss sharing receivable

     (5,054     (4,537

Amortization (accretion) of fair value discounts

     (724     (277

Net loss on sales of other real estate owned

     254        985   

Impairment charges on other real estate owned

     161        468   

Change in investment in bank-owned life insurance

     (1,658     (1,035

Increase in accrued interest receivable and other assets

     (3,888     (1,081

Increase (decrease) in accrued interest payable and other liabilities

     42,976        (2,190
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Operating Activities

     588,010        (994,073
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Proceeds from maturities, calls and principal repayments of investment securities available for sale

     14,816        26,488   

Proceeds from sales of investment securities available for sale

     0        306,610   

Purchases of investment securities available for sale

     (390,735     (108,249

Proceeds from maturities and principal repayments of investment securities held to maturity

     0        50,968   

Net (increase) decrease in loans

     (638,992     302,275   

Purchase of loan portfolio

     (155,306     (63,246

Proceeds from sales of SBA loans

     4,276        3,689   

Purchases of bank-owned life insurance

     (27,965     (10,000

Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other stock

     11,050        (763

Reimbursements from the FDIC on loss sharing agreements

     6,134        5,308   

Purchases of bank premises and equipment

     (2,740     (2,343

Proceeds from sales of other real estate owned

     4,582        7,383   
  

 

 

   

 

 

 

Net Cash (Used In) Provided by Investing Activities

     (1,174,880     518,120   
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net increase in deposits

     802,556        765,131   

Net decrease in short-term borrowed funds

     (339,000     (300,000

Proceeds from FHLB borrowings

     35,000        0   

Exercise and redemption of warrants

     108        0   

Proceeds from issuance of long-term debt, net of deferred costs of $2,914 at September 30, 2013

     60,336        0   

Net proceeds from stock offering

     97,507        94,762   
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     656,507        559,893   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     69,637        83,940   

Cash and Cash Equivalents - Beginning

     186,016        73,570   
  

 

 

   

 

 

 

Cash and Cash Equivalents - Ending

   $ 255,653      $ 157,510   
  

 

 

   

 

 

 

Supplementary Cash Flows Information

    

Interest paid

   $ 17,268      $ 16,257   

Income taxes paid

     7,743        12,625   

Non-cash items:

    

Transfer of loans to other real estate owned

   $ 10,259      $ 8,293   

Transfer of held to maturity investments to available for sale

     0        268,671   

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary Customers Bank (the “Bank”). In the third quarter of 2013, Customers Bancorp also has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Bancorp believes that the disclosures made are adequate to make the information not misleading. The Bancorp’s unaudited consolidated interim financial statements reflect all adjustments that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. Certain amounts reported in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation. These reclassifications did not significantly impact the Bancorp’s financial position or results of operations.

The accounting policies of Customers Bancorp, Inc. and Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as disclosed on pages 85 through 93 of Customers’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the latest Form 10-K.

Operating results for the three and nine-month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

The Bancorp evaluated its September 30, 2013 consolidated financial statements for subsequent events through the date the financial statements were issued. The Bancorp is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.

NOTE 2 — ACQUISITION ACTIVITY

CMS Bancorp Acquisition

Effective April 22, 2013, the Bancorp entered into an Amendment to the Agreement and Plan of Merger (“Amendment”) to that certain Agreement and Plan of Merger, dated as of August 10, 2012 (“Merger Agreement”), by and between the Bancorp and CMS Bancorp, Inc. (“CMS”).

The Amendment extended from April 30, 2013 to December 31, 2013 the initial date at which, if the merger of CMS with and into the Bancorp pursuant to the Merger Agreement, as amended, has not closed, either the Bancorp or CMS may terminate the Agreement, subject to the termination date being extended until March 31, 2014 under certain specified circumstances.

The Amendment also updated the definitions of “CMS Valuation” and “Customers Valuation,” establishing the valuation date for book value as of March 31, 2013. The exchange ratio will remain fixed until settlement, using the multiples of 0.95x for CMS common equity, and 1.25x for Customers common equity for purposes of calculating the exchange ratio.

Other key terms agreed to by the Bancorp and CMS under the Amendment provided for:

 

  CMS’s ability to have terminated the Merger Agreement, as amended, exercisable at any time after May 20, 2013, if either (i) the Bancorp had not made an investment in CMS of $1.5 million of CMS Preferred Stock, or (ii) the Bancorp and CMS had not agreed upon the terms of a $2.0 million senior secured lending facility that the Bancorp will have made available to CMS;

 

  the Bancorp’s payment of $300,000 to CMS as partial reimbursement for merger-related expenses incurred as of March 31, 2013; and

 

  the Bancorp to pay to CMS a termination fee of $1.0 million in the event the Merger Agreement, as amended, is terminated under certain provisions primarily relating to failure to consummate the Parent Merger due to non-receipt of required government approvals.

On May 22, 2013, the Bancorp purchased $1.5 million (1,500 shares) of CMS Series A Noncumulative Perpetual Preferred Stock, satisfying the first obligation listed above. On April 23, 2013, the Bancorp paid to CMS $300,000, satisfying the second obligation listed above. The third obligation has not been triggered at this time.

 

8


Table of Contents

Acacia Federal Savings Bank Acquisition

On April 4, 2013, Customers Bancorp, Inc., Acacia Life Insurance Company (“Acacia”) and Ameritas Life Insurance Corp. (together with Acacia, “Sellers”) announced their mutual decision, due to delays in the receipt of regulatory approvals, not to extend the term of that certain Stock Purchase Agreement, dated as of June 20, 2012, as amended by those certain Amendment to Stock Purchase Agreement, dated as of December 18, 2012, Amendment No. 2 to Stock Purchase Agreement dated as of January 30, 2013, and Amendment No. 3 to Stock Purchase Agreement dated as of February 28, 2013, by and among the Company and Sellers (the “Purchase Agreement”). Instead, on April 4, 2013, the parties entered into a Termination and Non-Renewal Agreement to terminate the Purchase Agreement and the transactions contemplated thereby (the “Termination Agreement”). Each party will bear its own costs and expenses in connection with the terminated transaction, without penalties. The parties mutually agreed that the termination was in each company’s best interest. Costs related to the acquisition have been expensed.

New England Commercial Lending Acquisition

On March 28, 2013, Customers Bank completed the purchase of certain commercial loans from Michigan-based Flagstar Bank. Under the terms of the agreement, Customers Bank acquired $182.3 million in commercial loan commitments, of which $155.1 million was drawn at the date of acquisition. Also, as part of the agreement, Customers Bank assumed the leases for two of Flagstar’s commercial lending offices in New England. The purchase price was 98.7% of loans outstanding.

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES

Purchased Loans

The Bancorp believes that the varying circumstances under which it purchases loans and the diverse quality of loans purchased should drive the decision as to whether loans in a portfolio should be deemed to be purchased-credit-impaired loans (“PCI” loans). Therefore, loan acquisitions are and will be evaluated on a case-by-case basis to determine the appropriate accounting treatment. Loans acquired that do not have evidence of credit deterioration at the purchase date are and will be accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs, and loans acquired with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are and will be accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Loans that are purchased that do not have evidence of credit deterioration

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for the acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Loans that are purchased that have evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected

For purchases of this type of loan, evidence of deteriorated credit quality may include past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages.

The fair value of loans with evidence of credit deterioration is recorded net of a nonaccretable difference and accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is not included in the carrying amount of acquired loans. Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of those cash flows.

Purchased-credit-impaired loans acquired in the same fiscal quarter may be aggregated into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. On a quarterly basis, the Bank re-estimates the total cash flows (both principal and interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that reflect then-current market conditions. If the timing and/or amounts of expected cash flows on purchased-credit-impaired loans were determined not to be reasonably estimable, no interest would be accreted and the loans would be reported as non-accrual loans; however, when the timing and amounts of expected cash flows for purchased-credit-impaired loans are reasonably estimable, interest is being accreted and the loans are being reported as performing loans.

 

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Recently Issued Accounting Standards

In January, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with relevant accounting guidance or subject to an enforceable master netting arrangement or similar agreement. The guidance in this ASU was effective for the first interim or annual period beginning on or after January 1, 2013 (the same effective date for ASU 2011-11) and is to be applied retrospectively. See “NOTE 15 — DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES” for the required disclosures.

In October, 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). This ASU requires an entity to subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. The amendments in this ASU were effective for the first interim periods or annual period beginning on or after December 15, 2012 and are to be applied prospectively. Adoption of this ASU has not had a significant impact on the Bancorp’s results of operations or financial position.

In February, 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The ASU requires entities to disclose additional information about reclassification adjustments, including (1) changes in accumulated other comprehensive income balances by component and (2) significant items reclassified out of AOCI. The new disclosure requirements were effective for fiscal years and interim periods beginning after December 15, 2012 for public companies. See “NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT” for the required disclosures.

NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (a)

 

     Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
    Foreign
Currency
Items
     Total  
     (dollars in thousands)  

Beginning Balance - July 1, 2013

   $ (3,530   $ 0       $ (3,530
  

 

 

   

 

 

    

 

 

 

Other comprehensive loss before reclassifications

     (8     1         (7

Amounts reclassified from accumulated other comprehensive loss

     0        0         0   
  

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive (loss) income

     (8     1         (7
  

 

 

   

 

 

    

 

 

 

Ending balance - September 30, 2013

   $ (3,538   $ 1       $ (3,537
  

 

 

   

 

 

    

 

 

 

 

     Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
    Foreign
Currency
Items
     Total  

Beginning Balance - January 1, 2013

   $ 1,064      $ 0       $ 1,064   
  

 

 

   

 

 

    

 

 

 

Other comprehensive loss before reclassifications

     (4,602     1         (4,601

Amounts reclassified from accumulated other comprehensive loss

     0        0         0   
  

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive (loss) income

     (4,602     1         (4,601
  

 

 

   

 

 

    

 

 

 

Ending balance - September 30, 2013

   $ (3,538   $ 1       $ (3,537
  

 

 

   

 

 

    

 

 

 

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

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NOTE 5 — EARNINGS PER SHARE

The following are the components and results of the Bancorp’s earnings per share calculation for the periods presented:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (dollars in thousands, except per share data)  

Net income allocated to common shareholders

   $ 8,268       $ 6,636       $ 23,683       $ 16,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares - basic

     24,678,317         12,465,744         21,494,880         11,723,090   

Share-based compensation plans

     475,987         310, 845         383,326         231,674   

Warrants

     182,898         134,926         175,999         112,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares - diluted

     25,337,202         12,911,515         22,054,205         12,067,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.34       $ 0.53       $ 1.10       $ 1.39   

Diluted earnings per share

   $ 0.33       $ 0.51       $ 1.07       $ 1.35   

The following is a summary of securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Weighted-average anti-dilutive securities:

           

Share-based compensation awards

     92,245         6,592         87,129         6,592   

Warrants

     118,745         129,946         118,745         129,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total anti-dilutive securities

     210,990         136,538         205,874         136,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 6 — INVESTMENT SECURITIES

In May 2012, Customers Bancorp reclassified its $269.0 million held-to-maturity investment portfolio to available for sale. Due to its strong outlook for loan growth, falling interest rates, and its decision to postpone its initial public offering of stock, the Bancorp decided to proceed with this reclassification to provide liquidity. In accordance with regulatory and accounting requirements, the Bancorp is prohibited from classifying security purchases as held to maturity for a period of two years, ending May 2014.

The amortized cost and approximate fair value of investment securities as of September 30, 2013 and December 31, 2012 are summarized as follows:

 

     September 30, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in thousands)  

Available for Sale:

           

Mortgage-backed securities (1)

   $ 454,933       $ 1,410       $ 6,822       $ 449,521   

Corporate notes

     25,000         163         23         25,140   

Equity securities

     23,074         81         250         22,905   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 503,007       $ 1,654       $ 7,095       $ 497,566   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes private-label securities with an aggregate amortized cost of $521 and an aggregate fair value of $513.

 

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     December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (dollars in thousands)  

Available for Sale:

           

Mortgage-backed securities (1)

   $ 102,449       $ 1,795       $ 109       $ 104,135   

Corporate notes

     25,000         89         137         24,952   

Equity securities

     6         0         0         6   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 127,455       $ 1,884       $ 246       $ 129,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes private-label securities with an aggregate amortized cost of $629 and an aggregate fair value of $612.

The following table shows proceeds from the sale of available-for-sale investment securities and gross gains and gross losses realized on those sales for the three and nine months ended September 30, 2013 and 2012:

 

     Three months ended September 30,      Nine months ended September 30,  
     2013      2012      2013      2012  
     (dollars in thousands)  

Proceeds from sale of available-for-sale securities

   $ 0       $ 0       $ 0       $ 306,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross gains

   $ 0       $ 0       $ 0       $ 9,006   

Gross losses

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains

   $ 0       $ 0       $ 0       $ 9,006   
  

 

 

    

 

 

    

 

 

    

 

 

 

These gains and losses were determined using the specific identification method and were included in non-interest income.

The following table shows available-for-sale debt securities by stated maturity. Debt securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and are, therefore, classified separately with no specific maturity date:

 

     September 30, 2013  
     Amortized
Cost
     Fair
Value
 
     (dollars in thousands)  

Due in one year or less

   $ 0       $ 0   

Due after one year through five years

     25,000         25,140   

Due after five years through ten years

     0         0   

Due after ten years

     0         0   

Mortgage-backed securities

     454,933         449,521   
  

 

 

    

 

 

 

Total debt securities

   $ 479,933       $ 474,661   
  

 

 

    

 

 

 

The Bancorp’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012 were as follows:

 

     September 30, 2013  
     Less Than 12 Months      12 Months or More      Total  
       Fair Value        Unrealized
      Losses      
       Fair Value        Unrealized
      Losses      
       Fair Value        Unrealized
      Losses      
 
     (dollars in thousands)  

Available for Sale:

                 

Mortgage-backed securities

   $ 129,120       $ 6,811       $ 309       $ 11       $ 129,429       $ 6,822   

Corporate notes

     4,980         20         4,997         3         9,977         23   

Equity securities

     22,068         250         0         0         22,068         250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 156,168       $ 7,081       $   5,306       $   14       $ 161,474       $ 7,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2012  
     Less Than 12 Months      12 Months or More      Total  
       Fair Value        Unrealized
      Losses      
       Fair Value        Unrealized
      Losses      
       Fair Value        Unrealized
      Losses      
 
     (dollars in thousands)  

Available for Sale:

                 

Mortgage-backed securities

   $ 5,695       $ 87       $ 429       $ 22         6,124       $ 109   

Corporate notes

     0         0         9,862         137         9,862         137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     5,695       $      87       $ 10,291       $ 159       $   15,986       $    246   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, there were twenty available-for-sale investment securities in the less-than-twelve-month category and seven available-for-sale investment securities in the twelve-month-or-more category. At December 31, 2012, there were two available-for-sale investment securities in the less-than-twelve-month category and eight available-for-sale investment securities in the twelve-month-or-more category. In management’s opinion, the unrealized losses reflect primarily changes in interest rates due to changes in economic conditions and the liquidity of the market, and not credit quality. In addition, the Bancorp does not believe that it will be more likely than not that the Bancorp will be required to sell the securities prior to maturity or market-price recovery.

During June 2012, five corporate bonds in the Bancorp’s portfolio were downgraded to ratings of A to A-. These downgrades were anticipated since these bonds were placed on negative watch in February 2012. The Bancorp analyzed these bonds in more detail at the time of downgrade. The Bancorp does not intend to sell these debt securities prior to recovery, and it is more likely than not that the Bancorp will not have to sell these debt securities prior to recovery. These bonds continue to pay their scheduled interest payments on time. No additional downgrades are anticipated at this time. The holdings are all in the financial services industry and all issuers are well capitalized.

At September 30, 2013 and December 31, 2012, Customers Bank had pledged investment securities aggregating $329.8 million and $103.5 million fair value, respectively, as collateral for borrowings from the FHLB. No amounts were outstanding against the securities pledged as collateral as of September 30, 2013.

During the third quarter of 2013, Customers Bancorp through its foreign subsidiaries, CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd., purchased 4.1 million in common shares of Religare Enterprises, Ltd., a diversified financial services company domiciled in India. The total investment as of September 30, 2013 is $23.1 million, 2.8% of the current outstanding shares of Religare Enterprises, Inc.

 

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NOTE 7 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans receivable excludes loans held for sale, largely mortgage warehouse loans, of $917,939 and $1,439,889 as of September 30, 2013 and December 31, 2012, respectively.

The composition of net loans receivable was as follows:

 

     September 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Construction

   $ 22,192      $ 27,792   

Commercial real estate

     29,623        44,901   

Commercial and industrial

     6,826        11,153   

Residential real estate

     19,233        19,952   

Manufactured housing

     3,381        3,728   
  

 

 

   

 

 

 

Total loans receivable covered under FDIC loss sharing agreements (1)

     81,255        107,526   
  

 

 

   

 

 

 

Construction

     34,674        28,897   

Commercial real estate

     1,490,930        835,488   

Commercial and industrial

     213,794        75,118   

Mortgage warehouse

     1,006        9,565   

Manufactured housing

     142,677        154,703   

Residential real estate

     133,503        109,430   

Consumer

     1,889        2,061   
  

 

 

   

 

 

 

Total loans receivable not covered under FDIC loss sharing agreements

     2,018,473        1,215,262   
  

 

 

   

 

 

 

Total loans receivable (2)

     2,099,728        1,322,788   

Deferred (fees) costs, net

     59        1,679   

Allowance for loan losses

     (26,800     (25,837
  

 

 

   

 

 

 

Loans receivable, net

   $ 2,072,987      $ 1,298,630   
  

 

 

   

 

 

 

 

(1) Loans that were acquired in two FDIC-assisted transactions and are covered under loss sharing agreements with the FDIC are referred to as “covered” loans throughout these financial statements.
(2) Customers Bank takes advantage of Federal Home Loan Bank (“FHLB”) programs for overnight and term borrowings. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying first-mortgage loans.

 

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Non-Covered Nonaccrual Loans and Loans Past Due

The following tables summarize non-covered loans, by class:

 

     September 30, 2013  
     30-89 Days
Past Due (1)
     Greater
Than
90 Days (1)
     Total Past
Due (1)
     Non-
Accrual
     Current (2)      PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 0       $ 0       $ 0       $ 221       $ 211,404       $ 2,169       $ 213,794   

Commercial real estate

     0         0         0         10,625         1,442,061         38,244         1,490,930   

Construction

     0         0         0         2,050         31,683         941         34,674   

Residential real estate

     400         0         400         945         121,550         10,608         133,503   

Consumer

     0         0         0         0         1,469         420         1,889   

Mortgage warehouse

     0         0         0         0         1,006         0         1,006   

Manufactured housing (3)

     6,311         3,095         9,406         1,101         126,981         5,189         142,677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   6,711       $ 3,095       $ 9,806       $ 14,942       $ 1,936,154       $ 57,571       $ 2,018,473   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     30-89 Days
Past Due (1)
     Greater
Than
90 Days (1)
     Total Past
Due (1)
     Non-
Accrual
     Current (2)      PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 38       $ 0       $ 38       $ 288       $ 72,715       $ 2,077       $ 75,118   

Commercial real estate

     1,437         0         1,437         17,770         770,508         45,773         835,488   

Construction

     0         0         0         2,423         25,022         1,452         28,897   

Residential real estate

     381         0         381         1,669         95,396         11,984         109,430   

Consumer

     0         0         0         56         1,486         519         2,061   

Mortgage warehouse

     0         0         0         0         9,565         0         9,565   

Manufactured housing (3)

     9,234         1,966         11,200         141         135,924         7,438         154,703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,090       $ 1,966       $ 13,056       $ 22,347       $ 1,110,616       $ 69,243       $ 1,215,262   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loan balances do not include non-accrual loans.
(2) Loans where payments are due within 29 days of the scheduled payment date.
(3) Purchased manufactured housing loans, purchased in 2010, are subject to cash reserves held at the Bank that are used to fund the past-due payments when the loan becomes 90-days or more delinquent.
(4) Loans exclude deferred costs and fees.
(5) Purchased-credit-impaired loans that were aggregated into pools are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because we recognize interest income on each pool of loans, they are all considered to be performing. PCI loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and being reported as performing loans.

 

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Table of Contents

Covered Nonaccrual Loans and Loans Past Due

The following tables summarize covered loans, by class:

 

     September 30, 2013  
     30-89 Days
Past Due (1)
     Greater Than
90 Days
Past Due (1)
     Total Past
Due (1)
     Non-
Accrual
     Current
(2)(3)
     PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 0       $ 0       $ 0       $ 0       $ 4,394       $ 2,432       $ 6,826   

Commercial real estate

     0         0         0         1,821         17,413         10,389         29,623   

Construction

     0         0         0         3,382         5,920         12,890         22,192   

Residential real estate

     0         0         0         564         14,328         4,341         19,233   

Manufactured housing

     86         0         86         21         3,138         136         3,381   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 86       $ 0       $ 86       $ 5,788       $ 45,193       $ 30,188       $ 81,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     30-89 Days
Past Due (1)
     Greater Than
90 Days
Past Due (1)
     Total Past
Due (1)
     Non-
Accrual
     Current
(2)(3)
     PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 220       $ 0       $ 220       $ 100       $ 8,404       $ 2,429       $ 11,153   

Commercial real estate

     0         0         0         3,712         20,859         20,330         44,901   

Construction

     0         0         0         5,244         6,472         16,076         27,792   

Residential real estate

     0         0         0         1,358         14,226         4,368         19,952   

Manufactured housing

     48         0         48         90         3,527         63         3,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 268       $ 0       $ 268       $ 10,504       $ 53,488       $ 43,266       $ 107,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans balances do not include nonaccrual loans.
(2) Loans receivable that were not identified upon acquisition as a loan with credit deterioration.
(3) Loans where payments are due within 29 days of the scheduled payment date.
(4) Loans exclude deferred costs and fees.
(5) Purchased-credit-impaired loans that were aggregated into pools are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because we recognize interest income on each pool of loans, they are all considered to be performing. PCI loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and being reported as performing loans.

 

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Table of Contents

Impaired Loans — Covered and Non-Covered

The following table presents a summary of impaired loans:

 

     September 30, 2013      For the Nine Months Ended
September 30, 2013
 
     Recorded
Investment
Net of
Charge Offs
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

              

Commercial and industrial

   $ 16,829       $ 16,891          $ 6,697       $ 362   

Commercial real estate

     16,223         17,075            23,271         548   

Construction

     2,830         4,100            6,545         14   

Consumer

     21         21            133         0   

Residential real estate

     2,827         2,827            2,791         36   

With an allowance recorded:

              

Commercial and industrial

     3,333         4,603       $ 961         1,192         157   

Commercial real estate

     6,687         7,637         2,233         7,919         169   

Construction

     1,148         1,148         368         5,544         46   

Consumer

     54         54         1         46         4   

Residential real estate

     378         378         187         953         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,330       $ 54,734       $ 3,750       $ 55,091       $ 1,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012      For the Nine Months Ended
September 30, 2012
 
     Recorded
Investment
Net of
Charge Offs
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

              

Commercial and industrial

   $ 3,844       $ 3,844          $ 5,191       $ 160   

Commercial real estate

     26,626         27,477            22,205         748   

Construction

     6,588         6,618            7,627         19   

Consumer

     101         101            105         3   

Residential real estate

     3,188         3,188            2,382         55   

With an allowance recorded:

              

Commercial and industrial

     374         374       $ 295         748         9   

Commercial real estate

     8,708         10,022         2,505         9,071         205   

Construction

     5,116         6,022         1,541         6,903         154   

Consumer

     100         100         14         29         4   

Residential real estate

     1,331         1,331         270         967         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,976       $ 59,077       $ 4,625       $ 55,228       $ 1,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

At September 30, 2013, there were $6.9 million in loans reported as troubled debt restructurings (“TDR”), and at September 30, 2012, there were $8.2 million in loans reported as troubled debt restructurings. All TDRs are reported as impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least nine months. A loan that has been modified at a below-market rate will be returned to performing status if it satisfies the six-month performance requirement; however, it will remain classified as impaired.

Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not TDRs.

 

17


Table of Contents

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and nine months ended September 30, 2013 and 2012. There were no modifications that involved forgiveness of debt.

 

     TDRs in
Compliance
with Their
Modified
Terms and
Accruing
Interest
     TDRs in
Compliance
with Their
Modified
Terms and
Not
Accruing
Interest
     Total  
     (dollars in thousands)  

Three months ended September 30, 2013

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     0         0         0   

Interest-rate reductions

     0         12         12   
  

 

 

    

 

 

    

 

 

 

Total

   $ 0       $ 12       $ 12   
  

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2013

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     0         0         0   

Interest-rate reductions

     93         1,179         1,272   
  

 

 

    

 

 

    

 

 

 

Total

   $ 93       $ 1,179       $ 1,272   
  

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2012

        

Extended under forbearance

   $ 0       $ 471       $ 471   

Multiple extensions resulting from financial difficulty

     0         0         0   

Interest-rate reductions

     0         61         61   
  

 

 

    

 

 

    

 

 

 

Total

   $ 0       $ 532       $ 532   
  

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2012

        

Extended under forbearance

   $ 0       $ 471       $ 471   

Multiple extensions resulting from financial difficulty

     47         0         47   

Interest-rate reductions

     268         61         329   
  

 

 

    

 

 

    

 

 

 

Total

   $ 315       $ 532       $ 847   
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

The following table provides, by class, the number of loans modified in troubled debt restructurings and the recorded investments and unpaid principal balances during the three and nine months ended September 30, 2013 and 2012.

 

     TDRs in Compliance with Their
Modified Terms and Accruing
Interest
     TDRs in
Compliance
with Their
Modified
Terms and Not
Accruing Interest
 
     Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Three months ended September 30, 2013

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     0         0         1         12   

Residential real estate

     0         0         0         0   

Consumer

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0         1       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2013

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     2         60         11         1,179   

Residential real estate

     0         0         0         0   

Consumer

     1         33         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 93         11       $ 1,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended September 30, 2012

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     0         0         1         61   

Residential real estate

     0         0         2         141   

Consumer

     0         0         1         330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 0         4       $ 532   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2012

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     6         315         1         61   

Residential real estate

     0         0         2         141   

Consumer

     0         0         1         330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 315         4       $ 532   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013 and 2012, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructuring.

All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses. There was $0 in specific reserves resulting from the addition of TDR modifications for both the three and nine months ended September 30, 2013 and 2012. There were no TDRs that defaulted in the three and nine month periods ended September 30, 2013 and 2012.

Credit Quality Indicators

Credit quality indicators for commercial and industrial, commercial real estate, residential real estate, and construction loans are based on an internal risk-rating system and are assigned at the loan origination and reviewed on a periodic or on an “as needed” basis. Consumer, mortgage warehouse, and manufactured housing loans are evaluated on the basis of the payment activity of the loan.

 

19


Table of Contents

To facilitate the monitoring of credit quality within the commercial and industrial, commercial real estate, construction portfolio, and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory, special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment and estimates, the risk rating process is intended to permit management to identify riskier credits in a timely manner and allocate the appropriate resources to managing the loans.

The Bank assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan and the Bank’s credit position.

The Bank assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans in this category also are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

When it is determined that these loans are uncollectible they are charged off in the period in which they are determined to be uncollectible. Loans, or portions of loans, classified as loss indicate that the Bank does not expect to collect the amounts classified as a loss.

Risk ratings are not established for home equity loans, consumer loans, and installment loans, mainly because these portfolios consist of a larger number of homogenous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based on aggregate payment history, through the monitoring of delinquency levels and trends and are classified as performing and nonperforming.

The following presents the credit quality tables as of September 30, 2013 and December 31, 2012 for the non-covered loan portfolio:

 

     September 30, 2013  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 200,651       $ 1,460,484       $ 32,499       $ 130,504   

Special Mention

     12,861         16,200         88         1,380   

Substandard

     282         14,246         2,087         1,619   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 213,794       $ 1,490,930       $ 34,674       $ 133,503   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Consumer      Mortgage
Warehouse
     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 1,889       $ 1,006       $ 141,576   

Nonperforming (1)

     0         0         1,101   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,889       $ 1,006       $ 142,677   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes loans that are on nonaccrual status at September 30, 2013.

 

20


Table of Contents
     December 31, 2012  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 70,955       $ 794,187       $ 26,020       $ 105,490   

Special Mention

     3,836         18,737         454         1,017   

Substandard

     327         21,801         1,971         2,919   

Doubtful

     0         763         452         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 75,118       $ 835,488       $ 28,897       $ 109,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Consumer      Mortgage
Warehouse
     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 2,005       $ 9,565       $ 154,562   

Nonperforming (1)

     56         0         141   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,061       $ 9,565       $ 154,703   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes loans that are on nonaccrual status at December 31, 2012.

The following presents the credit quality tables as of September 30, 2013 and December 31, 2012 for the covered loan portfolio:

 

     September 30, 2013  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 4,730       $ 17,920       $ 1,972       $ 14,245   

Special Mention

     119         3,020         3,949         455   

Substandard

     1,977         8,683         16,271         4,533   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,826       $ 29,623       $ 22,192       $ 19,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 3,274   

Nonperforming (1)

     107   
  

 

 

 

Total

   $ 3,381   
  

 

 

 

 

(1) Includes loans that are on nonaccrual status at September 30, 2013.

 

21


Table of Contents
     December 31, 2012  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 8,888       $ 26,195       $ 2,434       $ 14,021   

Special Mention

     51         225         4,038         455   

Substandard

     2,214         18,481         21,320         5,476   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,153       $ 44,901       $ 27,792       $ 19,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 3,638   

Nonperforming (1)

     90   
  

 

 

 

Total

   $ 3,728   
  

 

 

 

 

(1) Includes loans that are on nonaccrual status at December 31, 2012.

 

22


Table of Contents

Allowance for loan losses

The changes in the allowance for loan losses for the three and nine months ended September 30, 2013 and 2012 and the loans and allowance for loan losses by loan segment based on impairment evaluation method are as follows. Please read in conjunction with disclosures in the Bancorp’s 2012 Annual Report on Form 10-K.

 

    Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential
Real Estate
    Manufactured
Housing (1)
    Consumer     Mortgage
Warehouse
    Residual
Reserve
    Total  
    (dollars in thousands)  

Three months ended September 30, 2013

                 

Beginning Balance, July 1, 2013

  $ 2,485      $ 16,685      $ 4,317      $ 3,552      $ 678      $ 106      $ 56      $ 263      $ 28,142   

Charge-offs

    1,311        851        0        116        0        16        0        0        2,294   

Recoveries

    16        186        0        0        0        0        0        0        202   

Provision for loan losses

    2,029        (349     (1,163     (216     1        13        (14     449        750   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2013

  $ 3,219      $ 15,671      $ 3,154      $ 3,220      $ 679      $ 103      $ 42      $ 712      $ 26,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2013

                 

Beginning Balance, January 1, 2013

  $ 1,477      $ 15,439      $ 3,991      $ 3,233      $ 750      $ 154      $ 71      $ 722      $ 25,837   

Charge-offs

    1,407        2,742        1,470        315        0        16        0        0        5,950   

Recoveries

    181        246        0        7        0        9        0        0        443   

Provision for loan losses

    2,968        2,728        633        295        (71     (44     (29     (10     6,470   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2013

  $ 3,219      $ 15,671      $ 3,154      $ 3,220      $ 679      $ 103      $ 42      $ 712      $ 26,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2013

                 

Loans:

                 

Individually evaluated for impairment

  $ 20,162      $ 22,910      $ 3,978      $ 3,205      $ 0      $ 75      $ 0      $ 0      $ 50,330   

Collectively evaluated for impairment

    195,857        1,449,009        39,058        134,582        140,869        1,258        1,006        0        1,961,639   

Loans acquired with credit deterioration

    4,601        48,634        13,830        14,949        5,189        556        0        0        87,759   

Market discounts/premiums/valuation adjustments

                    59   
                 

 

 

 
                  $ 2,099,787   
                 

 

 

 

Allowance for loan losses:

                 

Individually evaluated for impairment

  $ 961      $ 2,233      $ 368      $ 187      $ 0      $ 1      $ 0      $ 0      $ 3,750   

Collectively evaluated for impairment

    1,991        8,315        241        1,115        80        40        42        712        12,536   

Loans acquired with credit deterioration

    267        5,123        2,545        1,918        599        62        0        0        10,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 3,219      $ 15,671      $ 3,154      $ 3,220      $ 679      $ 103      $ 42      $ 712      $ 26,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents
    Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential
Real Estate
    Manufactured
Housing (1)
    Consumer     Mortgage
Warehouse
    Residual
Reserve
    Total  
    (dollars in thousands)  

Three months ended September 30, 2012

                 

Beginning Balance, July 1, 2012

  $ 1,503      $ 8,266      $ 4,352      $ 1,080      $ 40      $ 75      $ 802      $ 0      $ 16,118   

Charge-offs

    266        283        475        365        0        27        0        0        1,416   

Recoveries

    98        33        3        0        0        22        0        0        156   

Provision for loan losses

    387        5,923        1,139        2,262        858        279        (732     0        10,116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2012

  $ 1,722      $ 13,939      $ 5,019      $ 2,977      $ 898      $ 349      $ 70      $ 0      $ 24,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2012

                 

Beginning Balance, January 1, 2012

  $ 1,441      $ 7,029      $ 4,656      $ 844      $ 18      $ 61      $ 929      $ 54      $ 15,032   

Charge-offs

    300        1,426        2,666        565        0        37        0        0        4,994   

Recoveries

    164        83        3        5        0        27        0        0        282   

Provision for loan losses

    417        8,253        3,026        2,693        880        298        (859     (54     14,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, September 30, 2012

  $ 1,722      $ 13,939      $ 5,019      $ 2,977      $ 898      $ 349      $ 70      $ 0      $ 24,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2012

                 

Loans:

                 

Individually evaluated for impairment

  $ 4,558      $ 37,250      $ 13,169      $ 4,540      $ 0      $ 273      $ 0      $ 0      $ 59,790   

Collectively evaluated for impairment

    79,448        543,772        11,056        100,751        150,876        11,356        9,321        0        906,580   

Loans acquired with credit deterioration

    5,774        70,915        18,904        15,819        13,113        2,125        0        0        126,650   

Market discounts/premiums/valuation adjustments

                    (5,921
                 

 

 

 
                  $ 1,087,099   
                 

 

 

 

Allowance for loan losses:

                 

Individually evaluated for impairment

  $ 349      $ 2,787      $ 2,450      $ 250      $ 0      $ 3      $ 0      $ 0      $ 5,839   

Collectively evaluated for impairment

    877        5,379        262        878        757        93        70        0        8,316   

Loans acquired with credit deterioration

    496        5,773        2,307        1,849        141        253        0        0        10,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,722      $ 13,939      $ 5,019      $ 2,977      $ 898      $ 349      $ 70      $ 0      $ 24,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The non-covered manufactured housing portfolio was purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the Purchase Agreement for defaults of the underlying borrower and other specified items. At September 30, 2013 and 2012, funds available for reimbursement, if necessary, were $2.9 million and $4.1 million, respectively. Quarterly, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.

 

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The changes in accretable yield related to purchased-credit-impaired loans for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

For the Three Months Ended September 30,

   2013     2012  
     (dollars in thousands)  

Accretable yield balance, beginning of period

   $ 27,649      $ 43,230   

Accretion to interest income

     (1,362     (7,384

Reclassification from nonaccretable difference and disposals, net

     (754     (147
  

 

 

   

 

 

 

Accretable yield balance, end of period

   $ 25,533      $ 35,699   
  

 

 

   

 

 

 

 

For the Nine Months Ended September 30,

   2013     2012  
     (dollars in thousands)  

Accretable yield balance, beginning of period

   $ 32,174      $ 45,358   

Accretion to interest income

     (5,034     (9,443

Reclassification from nonaccretable difference and disposals, net

     (1,607     (216
  

 

 

   

 

 

 

Accretable yield balance, end of period

   $ 25,533      $ 35,699   
  

 

 

   

 

 

 

NOTE 8 — FDIC LOSS SHARING RECEIVABLE

The following table summarizes the activity related to the FDIC loss sharing receivable for the three and nine months ended September 30, 2013 and 2012:

 

Three Months Ended September 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 14,169      $ 12,376   

Change in FDIC loss sharing receivable

     (125     3,796   

Reimbursement from the FDIC

     (3,006     (3,866
  

 

 

   

 

 

 

Balance, end of period

   $ 11,038      $ 12,306   
  

 

 

   

 

 

 

 

Nine Months Ended September 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 12,343      $ 13,077   

Change in FDIC loss sharing receivable

     4,829        4,537   

Reimbursement from the FDIC

     (6,134     (5,308
  

 

 

   

 

 

 

Balance, end of period

   $ 11,038      $ 12,306   
  

 

 

   

 

 

 

NOTE 9 — BORROWINGS

During July 2013 ($55.0 million) and August 2013 ($8.3 million), Customers Bancorp issued five-year senior unsecured notes aggregating $63.25 million at 6.375%. Interest on the debt is payable quarterly. Net proceeds to Customers Bancorp after issuance costs were $60.4 million.

NOTE 10 — SHAREHOLDERS’ EQUITY

During the nine months ended September 30, 2013, the Bancorp issued 23,413 shares of common stock under share-based compensation arrangements. In the third quarter of 2013, 31,904 shares of Class B Non-Voting common stock were issued upon exercise of outstanding warrants, and 3.7 million shares of Class B Non-Voting common stock were converted into 3.7 million shares of Voting common stock. In addition, warrants to purchase 17,227 shares of voting common stock and 17,227 shares of Class B Non-Voting stock were repurchased in the third quarter of 2013.

On May 22, 2013, the Bancorp sold 6,179,104 shares of new issue voting common stock at a price to the public of $16.75 per share. The net proceeds to Customers after deducting underwriting discounts and commissions and offering expenses were $97.5 million.

 

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During the third quarter of 2012, the Bancorp sold 7,111,819 shares of its common stock in private offerings. The net proceeds to Customers after deducting underwriting discounts and commissions and offering expenses were $94.8 million.

On May 8, 2012, the Bancorp announced that, due to market conditions, it had postponed its initial public offering of voting common stock. Costs related to this postponed offering in the amount of $1.4 million were expensed.

NOTE 11 — SHARE-BASED COMPENSATION

Stock Options

Options to purchase an aggregate of 617,910 and 92,687 shares of voting common stock, representing 10% and 1.5% of the number of shares issued in the May 2013 offering of voting common stock, were granted to the Chief Executive Officer and the Chief Operating Officer in connection with the completion of the offering pursuant to their existing employment agreements, respectively. The options will vest over five years from the date of grant, subject to a 50% increase in the value of the Bancorp’s Voting Common Stock and have a term of 10 years. In addition, in matters unrelated to the May 2013 offering, options to purchase an aggregate of 70,000 shares of Voting Common Stock were granted to certain other officers. The fair values of the options were estimated using the Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of an option.

 

     September 30, 2013     December 31, 2012  

Weighted-average risk-free interest rate

     1.41     1.15

Expected dividend yield

     0.00     0.00

Weighted-average expected volatility

     13.77     17.47

Expected life (in years)

     7.00        6.98   

Weighted-average fair value

   $ 3.16      $ 3.04   

The following table summarizes stock option activity for the nine months ended September 30, 2013.

 

     Number
of Options
    Weighted-
average
Exercise
Price
     Weighted-
average
Remaining
Contractual
Term in Years
     Aggregate
Intrinsic
Value
 
     (aggregate intrinsic value in thousands)  

Outstanding at January 1, 2013

     2,003,889      $ 12.49         

Granted

     780,597        16.67         

Forfeited

     (5,000     14.94         
  

 

 

         

Outstanding at September 30, 2013

     2,779,486      $ 13.66         8.16       $ 7,480   
  

 

 

         

Vested and expected to vest at September 30, 2013

     2,779,486      $ 13.66         8.16       $ 7,480   

Exercisable at September 30, 2013

     14,438        20.06         3.57         12   

NOTE 12 — REGULATORY MATTERS

The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bancorp’s consolidated financial statements. At September 30, 2013, the Bank and the Bancorp exceeded all capital adequacy requirements to which they are subject.

The Bank experienced rapid loan growth during the final days of 2012. During the standard closing process of the Bank’s December 2012 financial statements, management determined on January 30, 2013 that the rapid loan growth resulted in a reduction in the Bank’s capital ratios, causing the Bank to become adequately capitalized as of December 31, 2012. Management immediately transferred sufficient capital from the Bancorp to the Bank which returned the Bank to well-capitalized status. Sufficient cash is maintained at the Bancorp to ensure that the Bank remains well capitalized, and management remains committed to taking all steps necessary to ensure that both the Bancorp and the Bank remain well capitalized going forward. The Bank met the regulatory standards to be considered well capitalized as of September 30, 2013. Since the Bank was adequately capitalized at December 31, 2012, regulatory approval was required to accept, renew or roll over any brokered deposits. Effective January 1, 2013, the interest rate paid for deposits by institutions that are less than well capitalized was limited to 75 basis points above the national rate for similar products unless the institution can support to the FDIC that prevailing rates in its market area exceed the national average. This limitation on rates paid for deposits was removed effective with the Bank complying with the well capitalized thresholds, and as the Bank exceeds the well capitalized thresholds as of September 30, 2013, the Bank is not subject to any limits on interest rates paid for deposits.

 

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The Bancorp’s and the Bank’s capital amounts and ratios at September 30, 2013 and December 31, 2012 are as follows:

 

     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
 
(dollars in thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2013:

               

Total capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 413,900         13.60   $ 243,500         8.0     N/A         N/A   

Customers Bank

   $ 427,809         14.18   $ 241,298         8.0   $ 301,622         10.0

Tier 1 capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 386,517         12.70   $ 121,750         4.0     N/A         N/A   

Customers Bank

   $ 400,426         13.28   $ 120,649         4.0   $ 180,973         6.0

Tier 1 capital (to average assets)

               

Customers Bancorp, Inc.

   $ 386,517         10.63   $ 145,388         4.0     N/A         N/A   

Customers Bank

   $ 400,426         11.04   $ 145,043         4.0   $ 181,303         5.0

As of December 31, 2012:

               

Total capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 289,035         11.26   $ 205,443         8.0     N/A         N/A   

Customers Bank

   $ 244,710         9.53   $ 205,442         8.0   $ 256,802         10.0

Tier 1 capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 262,719         10.23   $ 102,722         4.0     N/A         N/A   

Customers Bank

   $ 218,394         8.50   $ 102,721         4.0   $ 154,081         6.0

Tier 1 capital (to average assets)

               

Customers Bancorp, Inc.

   $ 262,719         9.30   $ 112,939         4.0     N/A         N/A   

Customers Bank

   $ 218,394         7.74   $ 112,896         4.0   $ 141,120         5.0

NOTE 13 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bancorp uses fair value measurements to record fair value adjustments to certain assets and to disclose the fair value of its financial instruments. FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Bancorp, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair value disclosure purposes, the Bancorp utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurement, as explained below.

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate these assets’ fair values. These assets are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Investment Securities:

The fair value of investment securities available for sale and held to maturity are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are included as Level 1 and 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

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The carrying amount of FHLB, Federal Reserve Bank and other stock approximates fair value, and considers the limited marketability of such securities. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans held for sale:

The fair value of loans receivable held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans held for sale — Mortgage warehouse loans:

The Fair Value Option

The Bancorp elected the fair value option for warehouse lending transactions documented under a Master Repurchase Agreement originated after July 1, 2012 in order to more accurately represent the short-term nature of the transaction and its inherent credit risk. This adoption was in accordance with the parameters established by Accounting Standards Codification (“ASC”) 825-10-25, Financial Instruments-Overall-Recognition: The Fair Value Option. Warehouse lending transactions are classified as “Loans held for sale” on the balance sheet. The interest income from the warehouse lending transactions is classified in “Interest Income — Loans held for sale on the income statement. An allowance for loan losses is not recorded for the warehouse lending transactions when measured at fair value since the exit price (the repurchase price) for warehouse lending transactions considers the effect of expected credit losses.

The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by the mortgage company as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not expected to be recognized since at inception of the transaction the underlying loans have already been sold to an approved investor or they have been hedged by the mortgage company. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 17 days from purchase to sale. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Loans receivable, net:

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Impaired loans:

Impaired loans are those that are accounted for under FASB ASC 450, Contingencies, in which the Bancorp has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

FDIC loss sharing receivable:

The FDIC loss sharing receivable is measured separately from the related covered assets, as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. Fair value is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment. These cash flows are discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned:

The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs). All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”). Appraisals are certified to the Bancorp and performed by appraisers on the Bancorp’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

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Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Deposit liabilities:

The fair values disclosed for deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. These assets are included as Level 1 and 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Federal funds purchased:

For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other Borrowings:

The carrying amount of short-term FHLB borrowings approximates its fair value. Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Also included in Other Borrowings is long-term senior debt the fair value of which is determined using discounted cash flow analysis. Long-term senior debit is included in Level 3. These liabilities are included as Level 2 and 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Subordinated debt:

Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Derivatives (Assets and Liabilities):

The fair values of interest rate swaps are determined using models that incorporate readily observable market data into a market standard methodology. The methodology nets the discounted future fixed cash receipts and the discounted expected variable cash payments. The discounted variable cash payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Bancorp and its counterparties. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Off-balance-sheet financial instruments:

Fair values for the Bancorp’s off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

The following information should not be interpreted as an estimate of the fair value of the entire Bancorp since a fair value calculation is only provided for a limited portion of the Bancorp’s assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Bancorp’s disclosures and those of other companies may not be meaningful.

 

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Table of Contents

The estimated fair values of the Bancorp’s financial instruments were as follows at September 30, 2013 and December 31, 2012.

 

                   Fair Value Measurements at September 30, 2013  
     Carrying
Amount
     Estimated
Fair Value
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (dollars in thousands)  

Assets:

              

Cash and cash equivalents

   $ 255,653       $ 255,653       $ 255,653       $ 0       $ 0   

Investment securities, available for sale

     497,566         497,566         22,905         474,661         0   

Loans held for sale

     917,939         917,939         0         917,939         0   

Loans receivable, net

     2,072,987         2,088,789         0         0         2,088,789   

FHLB, Federal Reserve Bank and other stock

     19,113         19,113         0         19,113         0   

FDIC loss sharing receivable

     11,038         11,038         0         11,038         0   

Derivatives not designated as hedging instruments

     1,911         1,911         0         1,911         0   

Fraudulent loans receivable (1)

     669         669         0         0         669   

Accrued interest receivable

     7,866         7,866         7,866         0         0   

Liabilities:

              

Deposits

   $ 3,243,312       $ 3,247,129       $ 671,211       $ 2,575,918       $ 0   

Other borrowings

     235,250         238,251         0         238,251         0   

Subordinated debt

     2,000         2,000         0         2,000         0   

Derivatives not designated as hedging instruments

     1,871         1,871         0         1,871         0   

Accrued interest payable

     1,761         1,761         1,761         0         0   

 

(1) Included in Other Assets

 

                   Fair Value Measurements at December 31, 2012  
     Carrying
Amount
     Estimated
Fair Value
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (dollars in thousands)  

Assets:

              

Cash and cash equivalents

   $ 186,016       $ 186,016       $ 186,016       $ 0       $ 0   

Investment securities, available for sale

     129,093         129,093         6         129,087         0   

Loans held for sale

     1,439,889         1,439,889         0         1,439,889         0   

Loans receivable, net

     1,298,630         1,307,049         0         0         1,307,049   

FHLB, Federal Reserve Bank and other stock

     30,163         30,163         0         30,163         0   

FDIC loss sharing receivable

     12,343         12,343         0         12,343         0   

Accrued interest receivable

     5,790         5,790         5,790         0         0   

Liabilities:

              

Deposits

   $ 2,440,818       $ 2,674,765       $ 219,687       $ 2,455,078       $ 0   

Federal funds purchased

     5,000         5,000         5,000         0         0   

Other borrowings

     471,000         471,432         0         471,432         0   

Subordinated debt

     2,000         2,000         0         2,000         0   

Accrued interest payable

     1,530         1,530         1,530         0         0   

In accordance with FASB ASC 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bancorp’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

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The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

Level 1:    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:    Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:    Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 and December 31, 2012 were as follows:

 

    September 30, 2013  
    Fair Value Measurements at the End of the Reporting Period Using  
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
    (dollars in thousands)  

Measured at Fair Value on a Recurring Basis:

       

Assets

       

Available-for-sale securities:

       

Mortgage-backed securities

  $ 0      $ 449,521      $ 0      $ 449,521   

Corporate notes

    0        25,140        0        25,140   

Equity securities

    22,905        0        0        22,905   

Derivatives not designated as hedging instruments (1)

    0        1,911        0        1,911   

Mortgage warehouse loans held for sale

    0        840,425        0        840,425   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets - recurring fair value measurements

  $ 22,905      $ 1,316,997      $ 0      $ 1,339,902   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Derivatives not designated as hedging instruments (2)

  $ 0      $ 1,871      $ 0      $ 1,871   
 

 

 

   

 

 

   

 

 

   

 

 

 

Measured at Fair Value on a Nonrecurring Basis:

       

Assets

       

Impaired loans, net of specific reserves of $3,750

  $ 0      $ 0      $ 7,850      $ 7,850   

Other real estate owned

    0        0        10,259        10,259   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets - nonrecurring fair value measurements

  $ 0      $ 0      $ 18,109      $ 18,109   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included in Other Assets
(2) Included in Other Liabilities

 

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Table of Contents
    December 31, 2012  
    Fair Value Measurements at the End of the Reporting Period Using  
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Total  
    (dollars in thousands)  

Measured at Fair Value on a Recurring Basis:

       

Assets

       

Available-for-sale securities:

       

Mortgage-backed securities

  $ 0      $ 104,135      $ 0      $ 104,135   

Corporate notes

    0        24,952        0        24,952   

Equity securities

    6        0        0        6   

Mortgage warehouse loans held for sale

    0        1,248,935        0        1,248,935   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets - recurring fair value measurements

  $ 6      $ 1,378,022      $ 0      $ 1,378,028   
 

 

 

   

 

 

   

 

 

   

 

 

 

Measured at Fair Value on a Nonrecurring Basis:

       

Assets

       

Impaired loans, net of specific reserves of $4,625

  $ 0      $ 0      $ 11,004      $ 11,004   

Other real estate owned

    0        0        5,737        5,737   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets - nonrecurring fair value measurements

  $ 0      $ 0      $ 16,741      $ 16,741   
 

 

 

   

 

 

   

 

 

   

 

 

 

The changes in Level 3 assets measured at fair value on a recurring basis for the three months ended September 30, 2013 and 2012 are summarized as follows.

There were no Level 3 assets or liabilities measured at fair value on a recurring basis during the three months ended September 30, 2013.

 

     Mortgage-
backed
Securities
    Corporate
Notes
     Total  
     (dollars in thousands)  

Balance at July 1, 2012

   $ 2,632      $ 24,203       $ 26,835   

Total gains included in other comprehensive income (before taxes)

     0        469         469   

Amortization included in interest income

     (29     0         (29

Settlements

     (2,603     0         (2,603
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 0      $ 24,672       $ 24,672   
  

 

 

   

 

 

    

 

 

 

The changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2013 and 2012 are summarized as follows.

 

     Loans
Held for
Sale (1)
 
     (dollars in thousands)  

Balance at January 1, 2013

   $ 0   

Transfer from Level 2 to Level 3 (1)

     3,173   

Recoveries

     (1,463

Sales

     (1,013

Transfer from loans held for sale to other assets (1)

     (697
  

 

 

 

Balance at September 30, 2013

   $ 0   
  

 

 

 

 

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Table of Contents
     Mortgage-
backed
Securities
    Corporate
Notes
     Total  
     (dollars in thousands)  

Balance at January 1, 2012

   $ 2,894      $ 19,217       $ 22,111   

Total gains included in other comprehensive income (before taxes)

     0        455         455   

Amortization included in interest income

     (291     0         (291

Settlements

     (2,603     0         (2,603

Purchases

     0        5,000         5,000   
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 0      $ 24,672       $ 24,672   
  

 

 

   

 

 

    

 

 

 

 

(1) The Bancorp’s policy is to recognize transfers between levels when events or circumstances warrant transfers. During the first quarter of 2013, a suspected fraud was discovered in the Bank’s loans held-for-sale portfolio. Total loans involved in this fraud initially appeared to be $5.2 million, and management believed the range of possible loss to have been between $1.5 million and $3.2 million. Accordingly, management provided a loss contingency of $2.0 million at March 31, 2013. Due to the uncertainty surrounding the amount of loss, management transferred these loans and the related loss contingency from Level 2 to Level 3. During the second quarter of 2013, the Bank determined that an aggregate of $1.0 million of the loans were not involved in the fraud, and these loans were subsequently sold. In addition, the Bank recovered $1.5 million in cash from the alleged perpetrator. Since it was resolved that the loans no longer met the definition of “a loan,” and since the Bank is pursuing restitution through the involved parties, the Bank determined this to be a receivable. As a result, the remaining aggregate of $2.7 million of loans and the related $2.0 million reserve were transferred to Other assets.

The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2013 on a recurring and nonrecurring basis for which the Bancorp utilized Level 3 inputs to measure fair value. The valuation techniques, unobservable inputs, and ranges (weighted average) are the same as those disclosed at December 31, 2012.

 

     Quantitative Information about Level 3 Fair Value Measurements

September 30, 2013

   Fair Value
Estimate
    

Valuation Technique

  

Unobservable Input

   Range (Weighted
Average) (3)
     (dollars in thousands)

Impaired loans

   $ 7,850       Collateral appraisal (1)    Liquidation expenses (2)    -3% to -8% (-5.5%)

Other real estate owned

   $ 10,259       Collateral appraisal (1)    Liquidation expenses (2)    -3% to -8% (-5.5%)

 

(1) Obtained from independent third-parties approved appraisers. Appraisals are current and in compliance with credit policy. The Bancorp does not discount appraisals.
(2) Fair value is adjusted for costs to sell.
(3) Presented as a percentage of the value determined by appraisal.

NOTE 14 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Accounting Policy for Derivative Instruments and Hedging Activities

The Bancorp records all derivatives on the balance sheet at fair value. Currently, none of the derivatives are designated in qualifying hedging relationships. As such, all changes in fair value of the derivatives are recognized directly in earnings.

In accordance with U.S. GAAP, the Bancorp made an accounting policy election to measure credit risk of its derivative financial instruments that are subject to master netting agreements on a gross basis.

Risk Management Objectives of Using Derivatives

The Bancorp is exposed to certain risks arising from both its business operations and economic conditions. The Bancorp manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. The Bank’s existing interest-rate derivatives result from a service provided to certain qualifying customers, and therefore, are not used to manage interest-rate risk in assets or liabilities. The Bank manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

 

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Table of Contents

Derivatives Not Designated as Hedging Instruments

None of the Bancorp’s derivatives are designated in qualifying hedging relationships. The derivatives not designated as hedges are not speculative and result from a service implemented in the first quarter of 2013 that the Bank provides to certain customers. The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies (typically the loan customers will swap a floating rate loan to fixed rate loan). The customer interest rate swaps are simultaneously offset by interest rate swaps that the Bank executes with a third party in order to minimize risk exposure resulting from such transactions. Since the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting market swaps are recognized directly in earnings. At September 30, 2013, the Bancorp had 16 interest rate swaps with an aggregate notional amount of $99.9 million related to this program.

Fair Value of Derivative Instruments on the Balance Sheet

The following table presents the fair value of the Bancorp’s derivative financial instruments as well as the classification on the balance sheet.

 

     Fair Value of Derivative Instruments
September 30, 2013
 
     Asset Derivatives      Liability Derivatives  
     Balance sheet
location
   Fair value      Balance sheet
location
   Fair value  
    

(dollars in thousands)

 

Derivatives not designated as hedging instruments

           

Interest rate swap products

   Other assets    $ 1,911       Other liabilities    $ 1,871   
     

 

 

       

 

 

 

Effect of Derivative Instruments on Comprehensive Income

The following table presents the effect of the Bancorp’s derivative financial instruments on comprehensive income for the three and nine months ended September 30, 2013.

 

     Effect of Derivative Instruments on Comprehensive Income
Three Months Ended September 30, 2013
 
     Location of loss
recognized in income
on derivatives
   Amount of loss
recognized in income
on derivatives
 
     (dollars in thousands)  

Derivatives not designated as hedging instruments

     

Interest rate swap products

   Other non-interest income    $ 38   
     

 

 

 

 

     Effect of Derivative Instruments on Comprehensive Income
Nine Months Ended September 30, 2013
 
     Location of gain
recognized in income
on derivatives
   Amount of gain
recognized in income
on derivatives
 
     (dollars in thousands)  

Derivatives not designated as hedging instruments

     

Interest rate swap products

   Other non-interest income    $ 236   
     

 

 

 

Credit-risk-related Contingent Features

By entering into derivative contracts, the Bank is exposed to credit risk. The credit risk associated with derivatives executed with Bank customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, the Bancorp only enters into agreements with those that maintain credit ratings of high quality.

Agreements with major derivative dealer counterparties contain provisions whereby default on any of the Bancorp’s indebtedness would be considered a default on its derivative obligations. The Bancorp also has entered into agreements that contain provisions under which the counterparty could require the Bancorp to settle its obligations if the Bancorp fails to maintain its status as a well/adequately-capitalized institution. As of September 30, 2013, the termination value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $1.8 million. In addition, the Bancorp has minimum collateral posting thresholds with certain of these counterparties, and at September 30, 2013 had posted $2.2 million as collateral.

 

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Table of Contents

NOTE 15 — DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES

The following tables present derivative instruments that are subject to enforceable master netting arrangements. The Bancorp has not made a policy election to offset its derivative positions.

 

Offsetting of Financial Assets and Derivative Assets

For the Nine Months Ended September 30, 2013

 
                      Gross amounts not offset in
the consolidated balance sheet
 
    Gross amount of
recognized assets
    Gross amounts
offset in the
consolidated
balance sheet
    Net amounts of
assets presented
in the consolidated
balance sheet
    Financial
instruments
    Cash collateral
received
    Net amount  
    (dollars in thousands)  

Description

           

Interest rate swap derivatives with institutional counterparties

  $ 177      $ 0      $ 177      $ 177      $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Offsetting of Financial Liabilities and Derivative Liabilities

For the Nine Months Ended September 30, 2013

 
          Gross amounts not offset in
the consolidated balance sheet
 
    Gross amount of
recognized liabilities
    Gross amounts
offset in the
consolidated
balance sheet
    Net amounts of
liabilities presented
in the consolidated
balance sheet
    Financial
instruments
    Cash collateral
pledged
    Net amount  
    (dollars in thousands)  

Description

           

Interest rate swap derivatives with institutional counterparties

  $ 1,746      $ 0      $ 1,746      $ 177      $ 1,569      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 16 — LOSS CONTINGENCY

During the first quarter of 2013, a suspected fraud was discovered in the Bank’s loans held-for-sale portfolio. Total loans involved in this fraud initially appeared to be $5.2 million, and management believed the range of possible loss to have been between $1.5 million and $3.2 million. Accordingly, management provided a loss contingency of $2.0 million at March 31, 2013. During the second quarter of 2013, the Bank determined that an aggregate of $1.0 million of the loans were not involved in the fraud, and these loans were subsequently sold. In addition, the Bank recovered $1.5 million in cash from the alleged perpetrator. Since it was resolved that the loans no longer met the definition of “a loan,” and since the Bank is pursuing restitution through the involved parties, the Bank determined this to be a receivable. As a result, the remaining aggregate of $2.7 million of loans and the related $2.0 million reserve were transferred to Other assets.

 

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Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

This report and all attachments hereto as well as other written or oral communications made from time to time by Customers Bancorp may contain certain forward-looking information within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “plan,” “intend,” “anticipates,” “strategies” or the negative thereof or comparable terminology, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions and estimates regarding future events and circumstances and involve known and unknown risks, uncertainties and other factors, including the risks described under “Risk Factors” that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. This information is based on various assumptions that may not prove to be correct. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of the Bancorp and the Bank. Although the expectations reflected in the forward-looking statements are currently believed to be reasonable, future results, levels of activity, performance or achievements cannot be guaranteed. Accordingly, there can be no assurance that actual results will meet expectations or will not be materially lower than the results contemplated in this report and attachments hereto. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents referred to, the dates of those documents. Neither the Bancorp nor the Bank undertakes any obligation to release publicly or otherwise provide any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.

Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, a financial holding company, and its wholly owned subsidiaries, including Customers Bank. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers Bancorp’s financial condition and results of operations as of and for the three and nine months ended September 30, 2013. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for the year ended December 31, 2012 included in Customers Bancorp’s filing on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 31, 2012.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in “NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES” to our audited financial statements for the year ended December 31, 2012 included in our 2012 Form 10-K, as supplemented by “Note 3 – Significant Accounting Policies” to our unaudited financial statements for the three and nine months ended September 30, 2013.

Certain accounting policies involve significant judgments and assumptions by Customers Bancorp that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. Actual results could differ from these estimates. There have been no material changes in our critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to those disclosed in our 2012 Form 10-K.

Third Quarter Events of Note

On August 17, 2013, we acquired $1 million of Religare common stock from Religare Enterprises, Ltd. (“Religare”), and on September 18, 2013 we purchased $22 million of Religare common stock from one of its promoters. Religare is a diversified financial services company in India that is applying for a banking license. Customers Bancorp is considering acquiring a warrant providing for Customers to purchase an additional 3.3 million shares of Religare Enterprises while maintaining its ownership of Religare Enterprises below 5%. Customers Bancorp would be required to fund 25% of the warrant exercise price at the time the warrant is acquired, and the balance of the purchase price upon execution of the warrant. The warrant would expire in 18 months. The warrant would be accounted for as a derivative.

Working with Religare, we also plan to establish a small group of personnel at Customers Bank that will cater to professionals from South Asia living in the United States and U.S. domiciled businesses that want to take advantage of opportunities in South East Asia. This is a rapidly growing niche in our core markets from Boston to Washington. We also expect to refer business opportunities in India to Religare and expect that Religare will refer business opportunities within the United States to us. We expect this investment and collaboration to enhance our shareholder value.

 

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Table of Contents

Acquisition Activity

CMS Bancorp Acquisition

Customers Bancorp entered into an Amendment to Agreement and Plan of Merger (“Amendment”) to that certain Agreement and Plan of Merger, dated as of August 10, 2012 (“Merger Agreement”), by and between the Bancorp and CMS Bancorp, Inc. (“CMS”) on April 22, 2013.

The Amendment extended from April 30, 2013 to December 31, 2013 the initial date at which, if the merger of CMS with and into the Bancorp pursuant to the Merger Agreement, as amended, has not closed, either the Bancorp or CMS may terminate the Agreement, subject to the termination date being extended until March 31, 2014 under certain specified circumstances.

The Amendment also updated the definitions of “CMS Valuation” and “Customers Valuation,” establishing the valuation date for book value as of March 31, 2013. The exchange ratio will remain fixed until settlement, using the multiples of 0.95x for CMS common equity, and 1.25x for Customers common equity for purposes of calculating the exchange ratio.

Other key terms agreed to by the Bancorp and CMS under the Amendment provided for:

 

  CMS’s ability to have terminated the Merger Agreement, as amended, exercisable at any time after May 20, 2013, if either (i) the Bancorp had not made an investment in CMS of $1.5 million of CMS Preferred Stock, or (ii) the Bancorp and CMS had not agreed upon the terms of a $2.0 million senior secured lending facility that the Bancorp will make available to CMS;

 

  the Bancorp’s payment of $300,000 to CMS as partial reimbursement for merger-related expenses incurred as of March 31, 2013; and

 

  the Bancorp to pay to CMS a termination fee of $1.0 million in the event the Merger Agreement, as amended, is terminated under certain provisions primarily relating to failure to consummate the Parent Merger due to non-receipt of required government approvals.

On May 22, 2013, the Bancorp purchased $1.5 million (1,500 shares) of CMS Series A Noncumulative Perpetual Preferred Stock, satisfying the first obligation listed above. On April 23, 2013, the Bancorp paid to CMS $300,000, satisfying the second obligation listed above. The third obligation has not been triggered at this time.

Acacia Federal Savings Bank Acquisition

On April 4, 2013, Customers Bancorp, Acacia Life Insurance Company (“Acacia”) and Ameritas Life Insurance Corp. (together with Acacia, “Sellers”) announced a mutual decision, due to delays in the receipt of regulatory approvals, not to extend the term of that certain Stock Purchase Agreement, dated as of June 20, 2012, as amended by those certain Amendment to Stock Purchase Agreement, dated as of December 18, 2012, Amendment No. 2 to Stock Purchase Agreement dated as of January 30, 2013, and Amendment No. 3 to Stock Purchase Agreement dated as of February 28, 2013, by and among the Bancorp and Sellers (the “Purchase Agreement”). Instead, on April 4, 2013, the parties entered into a Termination and Non-Renewal Agreement to terminate the Purchase Agreement and the transactions contemplated thereby (the “Termination Agreement”). Each party will bear its own costs and expenses in connection with the terminated transaction, without penalties. The parties mutually agreed that the termination was in each company’s best interest. All of Bancorp’s costs related to this proposed transaction have been expensed.

New England Commercial Lending Acquisition

On March 28, 2013, Customers Bank completed the purchase of certain commercial loans from Michigan-based Flagstar Bank. Under the terms of the agreement, Customers Bank acquired $182.3 million in commercial loan commitments, of which $155.1 million had been drawn at March 28, 2013. Also, as part of the agreement, Customers Bank assumed the leases for two of Flagstar’s commercial lending offices in New England. The purchase price was 98.7% of loans outstanding.

 

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Table of Contents

Results of Operations

Third Quarter 2013 Compared to Third Quarter 2012

Customers reported net income of $8.2 million for the three months ended September 30, 2013 compared to net income of $6.6 million for the three months ended September 30, 2012, an increase of $1.6 million or 24.6%. Diluted earnings per share were $0.33 for the three months ended September 30, 2013 and $0.51 for the three months ended September 30, 2012, a decrease of $0.18 per share or 35.0%. The decrease in diluted earnings per share was primarily the result of the inclusion of the 6.2 million shares issued in the public offering in May 2013 and the 7.1 million shares issued in the private offering in the third quarter of 2012 in the 2013 calculations of earnings per share which combined, significantly increased the number of shares used to calculate earnings per share. See “NOTE 5 — EARNINGS PER SHARE.

Net Interest Income

Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with other banks, and interest paid on deposits and borrowings) is the primary source of our earnings. The following table summarizes net interest income and the related spread and margin for the periods indicated:

 

     Three Months Ended September 30,  
     2013     2012  
     Average
Balance
    Interest
Income or
Expense
     Average
Yield or
Cost
    Average
Balance
    Interest
Income or
Expense
     Average
Yield or
Cost
 
     (dollars in thousands)  
Assets               

Interest earning deposits

   $ 231,378      $ 148         0.26   $ 144,892      $ 91         0.25

Investment securities, taxable (A)

     235,913        1,423         2.41     129,848        805         2.48

Investment securities, non-taxable (A)

     0        0         0.00     2,061        21         4.15

Loans held for sale

     984,885        9,495         3.83     189,744        1,622         3.40

Loans, taxable (B)

     1,982,282        22,363         4.48     1,900,313        25,368         5.31

Loans, non-taxable (B)

     17,729        122         2.73     9,936        55         2.23

Less: Allowance for loan losses

     (27,725          (14,574     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest earning assets

     3,424,462        33,551         3.89     2,362,220        27,962         4.71
    

 

 

        

 

 

    

Non-interest earning assets

     208,819             117,195        
  

 

 

        

 

 

      

Total assets

   $ 3,633,281           $ 2,479,415        
  

 

 

        

 

 

      
Liabilities               

Interest checking

   $ 47,569        47         0.38   $ 36,253        47         0.51

Money market

     1,154,541        2,055         0.71     930,935        1,720         0.74

Other savings

     26,930        30         0.45     20,049        27         0.53

Certificates of deposit

     1,332,815        3,338         0.99     947,607        3,397         1.43
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing deposits

     2,561,855        5,470         0.85     1,934,844        5,191         1.07

Other borrowings

     244,149        1,077         1.75     164,163        216         0.52
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     2,806,004        6,547         0.93     2,099,007        5,407         1.02
    

 

 

        

 

 

    

Non-interest-bearing deposits

     439,271             190,977        
  

 

 

        

 

 

      

Total deposits & borrowings

     3,245,275           0.80     2,289,984           0.94

Other non-interest bearing liabilities

     4,998             11,098        
  

 

 

        

 

 

      

Total liabilities

     3,250,273             2,301,082        

Shareholders’ Equity

     383,008             178,333        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 3,633,281           $ 2,479,415        
  

 

 

        

 

 

      

Net interest earnings

       27,004             22,555      

Tax equivalent adjustment (C)

       66             41      
    

 

 

        

 

 

    

Net interest earnings

     $ 27,070           $ 22,596      
    

 

 

        

 

 

    

Interest spread

          3.09          3.77
       

 

 

        

 

 

 

Net interest margin

          3.13          3.80
       

 

 

        

 

 

 

Net interest margin tax equivalent (C)

          3.14          3.81
       

 

 

        

 

 

 

 

(A) For presentation in this table, balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(B) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(C) Full tax equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.

 

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Net interest income was $27.0 million for the three months ended September 30, 2013, compared to $22.6 million for the three months ended September 30, 2012, an increase of $4.4 million or 19.7%. This net increase was attributable to increases of $1.1 billion in average volume of average interest-earning assets, offset by an increase of $707,000 in average interest-bearing liabilities. The primary driver of the increase in net interest income was higher loan volume from the following:

 

    $368.9 million increase in average commercial loans primarily due to growth of the commercial real estate loan portfolio; and

 

    $614.4 million increase in average multi-family loans due to growth of the multi-family lending business.

The key measure of our net interest income is net interest margin. Our net interest margin decreased to 3.14% for the three months ended September 30, 2013 from 3.81% for the same period in 2012. The decrease was driven by a decrease in the average yield on loans from 4.71% to 3.89%, primarily due to interest income of $4.5 million recorded in the third quarter of 2012 attributable to the change in estimates of cash flows for purchased-credit-impaired loans. The effect of this decrease was somewhat offset by the decrease in the cost of deposits and borrowings which decreased from 0.94% to 0.80%.

Additionally, interest income from multi-family loans, and commercial real estate loans increased by $5.6 million and $1.1 million, respectively in addition to an increase in interest income from investment securities of $597.4 million. Driving the rise in interest income was higher average loan volume for multi-family loans of $614.4 million, and commercial loan volume of $368.9 million. The higher loan volume was a result of our strategy to grow our multi-family and commercial real estate businesses. The purchase of approximately $321.0 million of investment securities in the third quarter of 2013 led to their higher average volume in the third quarter of 2013 compared to the same quarter in 2012. Interest expense for borrowings increased by $861,000. The average balance of borrowings increased by $80.0 million which was primarily driven by the addition of the five year senior unsecured notes (“Senior Notes”) in the amount of $63.3 million during the third quarter of 2013. The Senior Notes carry a stated interest rate of 6.375% which led to the overall increase in borrowings costs of 1.23% when comparing the cost of 1.75% for the quarter ended September 30, 2013 versus 0.52% for the period ended September 30, 2012.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on the consolidated statement of income. The loan portfolio is reviewed quarterly to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. At September 30, 2013, approximately 2.69% of the loan portfolio was covered under loss sharing agreements with the FDIC. Charge-offs incurred above the original estimated value are taken as additional provisions, and a corresponding receivable due from the FDIC is recorded through non-interest income for the portion anticipated to be recovered under the loss sharing agreements.

The provision for loan losses decreased by $9.4 million to $750,000 for the three months ended September 30, 2013, compared to $10.1 million for the same period in 2012. The decrease in the 2013 provision compared to the same period in 2012 results primarily from (i) $7.5 million of impairment related to the purchased-credit-impaired adjustments made in 2012, and (ii) $1.4 million in the third quarter of 2013 due to reduced loss factors resulting from sustained asset-quality and market improvements.

For more information about our provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.

Non-Interest Income

The chart below shows our results in the various components of non-interest income for the three months ended September 30, 2013 and 2012.

 

     Three Months Ended September 30,  
     2013     2012  
     (dollars in thousands)  

Mortgage warehouse transactional fees

   $ 3,090      $ 3,346   

Bank-owned life insurance

     615        359   

Deposit fees

     198        124   

Gain on sale of investment securities, net

     0        0   

Accretion of FDIC loss sharing receivable

     0        1,296   

Loss on sale of loans

     (6     (71

Other

     958        4,723   
  

 

 

   

 

 

 

Total non-interest income

   $ 4,855      $ 9,777   
  

 

 

   

 

 

 

 

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Non-interest income was $4.9 million for the three months ended September 30, 2013, a decrease of $4.9 million from $9.8 million for the three months ended September 30, 2012. Mortgage warehouse transactional fees decreased by $256,000 due to a decline in this line of business which was driven by an increase in long-term rates in the market. This increase in rates resulted in a decrease in refinancing of mortgage loan volumes. Bank-owned life insurance (BOLI) income increased $256,000 from the third quarter ended September 30, 2012 to September 30, 2013. This was the direct result of additional earnings on BOLI which was initiated by several purchases of BOLI throughout 2013 for a total amount of $28.0 million. There was also a decrease in accretion of the FDIC loss sharing receivable in the amount of $1.3 million for the quarter ended September 30, 2013 compared to September 30, 2012. This was the result of a one-time benefit from FDIC indemnification of losses on loans in 2012. Lastly, the majority of the $3.8 million decrease in other non-interest income from $4.7 million for the quarter ended September 30, 2012 to $958,000 for the quarter ended September 30, 2013 was the result of $4.4 million related to the change in accounting estimate for the purchased-credit-impaired loans during the quarter ended September 30, 2012.

Non-Interest Expense

The below chart shows our results in the various components of non-interest expense for the three months ended September 30, 2013 and 2012.

 

     Three Months Ended September 30,  
     2013      2012  
     (dollars in thousands)  

Salaries and employee benefits

   $ 8,963       $ 5,978   

Occupancy

     2,289         1,709   

Professional services

     1,191         819   

Technology, communications and bank operations

     1,121         699   

FDIC assessments, taxes and regulatory fees

     1,105         669   

Loan workout

     928         617   

Advertising and promotion

     450         270   

Other real estate owned

     401         (276

Stock-offering expenses

     0         97   

Other

     1,899         1,424   
  

 

 

    

 

 

 

Total non-interest expenses

   $ 18,347       $ 12,006   
  

 

 

    

 

 

 

Non-interest expense was $18.3 million for the three months ended September 30, 2013, an increase of $6.3 million as compared to non-interest expense of $12.0 million for the same period in 2012.

Salaries and employee benefits, which represent the largest component of non-interest expense, increased by 49.9% or $3.0 million to $9.0 million in the third quarter of 2013 versus $6.0 million in the same period in 2012. The primary reason for this increase was the addition of 109 full-time equivalent employees since September 30, 2012. This was directly related to the need for additional employees to support our organic growth and the expansion into new markets. Specifically, the increased headcount is needed to support our growing commercial loan, commercial real estate, and mortgage banking businesses and the related administrative support.

Occupancy expense increased by 33.9%, or $580,000, rising from $1.7 million in the third quarter of 2012 to $2.3 million in the third quarter of 2013. The increase was related to building the infrastructure to support our growth as well as the cost of expansion into new markets.

Technology communication and bank operations increased by 60.4% or $422,000, from $699,000 in the third quarter of 2012 to $1.1 million in the third quarter of 2013. The primary reason for this increase was related to building the infrastructure to support the growth through increased technology improvements and upgrades as well as the costs related to expanding of technological platforms into new markets. This corresponds with our philosophy of “high touch, high tech”, whereby we provide an exceptional level of customer service supported by state-of-the-art technology.

Professional services expense increased to $1.2 million in the third quarter of 2013 from $819,000 for the same period of 2012. This increase was primarily attributable to higher legal and consulting expenses in 2013 related to regulatory filings and other matters resulting from a growing business.

FDIC assessments, taxes and regulatory fees increased by 65.1% or $436,000 from $669,000 in the third quarter of 2012 to $1.1 million in the third quarter of 2013. The primary reason for this increase was related to higher Pennsylvania bank shares tax expense that resulted from legislative changes to the tax calculation, in the amount of $585,000 during the third quarter of 2013 compared to $86,000 in the same period of 2012. This was offset in part by a decrease in state franchise and sales and use tax in the amount of $43,000 from the third quarter of 2012 as compared to the same quarter of 2013. Lastly, other regulatory and filing fees decreased by $23,000 to $15,000 in the third quarter of 2013 as compared to $38,000 during the third quarter of 2012.

 

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Loan workout expenses increased $311,000 to $928,000 in the third quarter of 2013 from $617,000 in the third quarter of 2012 as a result of certain unreimbursed costs incurred to pursue collection and recovery of non-performing assets.

Other expenses increased to $1.9 million in the third quarter of 2013 compared to $1.4 million in the third quarter of 2012. Loan origination expense increased by $355,000 for the three months ended September 30, 2013, compared to the same period in 2012. This increase correlates to the growth in the commercial real estate and multi-family portfolios. Business development, which includes travel and entertainment expenses, also increased ratably to $382,000 in the third quarter of 2013 from $219,000 in the third quarter of 2012, $162,000 period over period increase. In addition, postage and shipping costs were $289,000 in the third quarter ended 2013 compared to $144,000, a $145,000 increase. This was offset by a decrease of $301,000, $31,000 and $35,000 in loan insurance expense, supplies and uninsured loss expenses, respectively, for the quarter ended September 30, 2013 in contrast to the quarter ended September 30, 2012.

Income Taxes

The income tax expense was $4.5 million and $3.6 million for the three months ended September 30, 2013 and 2012, respectively. The increase in the income tax provision is primarily due to the increase in net income before taxes of approximately $2.6 million.

The effective tax rate for the three months ended September 30, 2013 and 2012 was approximately 35 percent.

 

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Nine months ended September 30, 2013 compared to the nine months ended September 30, 2012

We had net income of $23.7 million for the nine months ended September 30, 2013 and net income of $16.3 million for the nine months ended September 30, 2012, an increase of $7.4 million or 45.7%. Diluted earnings per share were $1.07 for the nine months ended September 30, 2013 and $1.35 per share for the nine months ended September 30, 2012, a comparative decrease of $0.28 per share or 21.1%. The decrease in diluted earnings per share was primarily the result of the inclusion of the 6.2 million shares issued in the public offering in May 2013 and the 7.1 million shares issued in the private offering in the third quarter of 2012 in the 2013 calculations of earnings per share. See “NOTE 5 — EARNINGS PER SHARE.

Net-Interest Income

Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with other banks, and interest paid on deposits and borrowings) is the primary source of our earnings. The following table summarizes net interest income and the related spread and margin for the periods indicated:

 

     For the Nine Months Ended September 30,  
     2013     2012  
     Average
Balance
    Interest
Income
or
Expense
     Average
Yield or
Cost
    Average
Balance
    Interest
Income
or
Expense
     Average
Yield or
Cost
 
     (dollars in thousands)  
Assets               

Interest earning deposits

   $ 195,164      $ 370         0.25   $ 117,326      $ 225         0.26

Investment securities, taxable (A)

     187,173        3,334         2.37     255,804        5,936         3.09

Investment securities, non taxable (A)

     0        0         0.00     2,065        64         4.15

Loans held for sale

     1,088,585        31,536         3.87     151,518        4,113         3.63

Loans, taxable (B)

     1,688,372        57,489         4.55     1,522,979        55,850         4.90

Loans, non-taxable (B)

     14,604        291         2.66     6,581        110         2.24

Less: Allowance for loan losses

     (26,858          (15,262     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest earning assets

     3,147,040        93,020         3.95     2,041,011        66,298         4.34
    

 

 

        

 

 

    

Non-interest earning assets

     180,150             115,109        
  

 

 

        

 

 

      

Total assets

   $ 3,327,190           $ 2,156,120        
  

 

 

        

 

 

      
Liabilities               

Interest checking

   $ 42,561        131         0.41   $ 35,162        146         0.55

Money market

     1,072,581        5,623         0.70     814,935        5,717         0.94

Other savings

     24,359        86         0.47     19,561        86         0.59

Certificates of deposit

     1,268,529        9,902         1.04     859,036        9,738         1.51
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest bearing deposits

     2,408,030        15,742         0.87     1,728,694        15,687         1.21

Other borrowings

     258,021        1,757         0.91     98,699        494         0.67
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     2,666,051        17,499         0.88     1,827,393        16,181         1.18
    

 

 

        

 

 

    

Non-interest-bearing deposits

     321,925             158,839        
  

 

 

        

 

 

      

Total deposits & borrowings

     2,987,976           0.78     1,986,232           1.09

Other non-interest bearing liabilities

     10,908             8,506        
  

 

 

        

 

 

      

Total liabilities

     2,998,884             1,994,738        

Shareholders’ Equity

     328,306             161,382        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 3,327,190           $ 2,156,120        
  

 

 

        

 

 

      

Net interest earnings

       75,521             50,117      

Tax equivalent adjustment (C)

       157             94      
    

 

 

        

 

 

    

Net interest earnings

     $ 75,678           $ 50,211      
    

 

 

        

 

 

    

Interest spread

          3.17          3.25
       

 

 

        

 

 

 

Net interest margin (D)

          3.21          3.28
       

 

 

        

 

 

 

Net interest margin tax equivalent (C)

          3.21          3.29
       

 

 

        

 

 

 

 

(A) For presentation in this table, balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(B) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(C) Full tax equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.

 

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Net interest income was $75.5 million for the nine months ended September 30, 2013, compared to $50.1 million for the three months ended September 30, 2012, an increase of $25.4 million or 50.1%. This net increase was attributable to increases of $1.1 billion in level of average interest-earning assets, offset in part by an increase of $839,000 in average interest-bearing liabilities. The primary driver of the increase in net interest income was from higher loan volume from the following:

 

    $368.9 million increase in average commercial loans primarily due to growth of the commercial real estate loan portfolio, and

 

    $614.4 million increase in average multi-family loans due to growth of the multi-family lending business.

The key measure of our net interest income is net interest margin. Our net interest margin decreased to 3.21% for the nine months ended September 30, 2013 from 3.29% for the same period in 2012. The decrease was driven by a decrease in the average yield on loans from 4.34% to 3.95%, primarily due to interest income of $4.5 million recorded in the third quarter of 2012 attributable to the change in estimates of cash flows for purchased-credit-impaired loans. The effect of this decrease was somewhat offset by the decrease in the cost of deposits and borrowings which decreased from 1.09% to 0.78%.

Additionally, interest income from multi-family loans, and commercial real estate loans increased by $12.9 million and $7.9 million, respectively, offset by a decrease in interest income from investment securities of $2.7 million. The reduction in investment interest income was the result of the sale of investment securities in the amount of $306.6 million for the nine months ended September 30, 2012. Driving the rise in interest income was higher average loan volume for multi-family loans of $614.4 million, and commercial loan volume of $368.9 million. The higher loan volume was a result of our strategy to grow our multi-family and commercial real estate businesses. The purchase of approximately $321.0 million of investment securities during the quarter ended September 30, 2013 had minimal effect on average volume for the nine months ended September 30, 2013 as compared to the same period in 2012. Interest expense for borrowings increased by $1.3 million. The average balance of borrowings increased by $80.0 million which was primarily driven by the addition of the Senior Notes in the amount of $63.3 million during the third quarter of 2013. The Senior Notes carry a stated interest rate of 6.375% which led to an overall increase in borrowings costs of 0.24% when comparing the cost of 0.91% for the nine months ended September 30, 2013 to 0.67% for the period ended September 30, 2012. The increased borrowing cost was offset in part by a $339,000 decrease in short-term borrowed funds during the nine months ended September 30, 2013.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on the statement of income. The loan portfolio is reviewed quarterly to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. At September 30, 2013, approximately 2.69% of the loan portfolio was covered under loss sharing agreements with the FDIC. Charge-offs incurred above the original estimated value are taken as additional provisions and a corresponding receivable due from the FDIC is recorded through non-interest income for the portion anticipated to be recovered under the loss sharing agreements.

The provision for loan losses decreased by $8.2 million to $6.5 million for the nine months ended September 30, 2013, compared to $14.7 million for the same period in 2012. The decrease in the 2013 provision compared to the same period in 2012 results primarily from (i) $7.5 million of impairment related to the purchased-credit-impaired adjustments made in 2012, and (ii) $1.4 million in the third quarter of 2013 due to reduced loss factors resulting from sustained asset-quality and market improvements.

Non-Interest Income

The chart below shows our results in the various components of non-interest income for the nine months ended September 30, 2013 and 2012.