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 March 31, 2014
¨ | Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
001-35542
(Commission File number)
(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
(Registrants 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 May 1, 2014, 23,274,409 shares of Voting Common Stock and 1,019,755 shares of Class B Non-Voting Common Stock were issued and outstanding.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Customers Bancorp, Inc.
Part I |
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Item 1. |
Customers Bancorp, Inc. Consolidated Financial Statements as of March 31, 2014 and for the three month period ended March 31, 2014 (unaudited) |
3 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 39 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 54 | ||||
Item 4. |
Controls and Procedures | 54 | ||||
Item 1. |
Legal Proceedings | 54 | ||||
Item 1A. |
Risk Factors | 55 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 55 | ||||
Item 3. |
Defaults Upon Senior Securities | 55 | ||||
Item 4. |
Mine Safety Disclosures | 55 | ||||
Item 5. |
Other Information | 55 | ||||
Item 6. |
Exhibits | 56 | ||||
57 | ||||||
Ex-31.1 |
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Ex-31.2 |
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Ex-32.1 |
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Ex-32.2 |
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Ex-101 |
2
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET UNAUDITED
(dollars in thousands, except share data)
March 31, 2014 |
December 31, 2013 |
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ASSETS | ||||||||
Cash and due from banks |
$ | 73,544 | $ | 59,339 | ||||
Interest-earning deposits |
216,923 | 173,729 | ||||||
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Cash and cash equivalents |
290,467 | 233,068 | ||||||
Investment securities available for sale, at fair value |
458,302 | 497,573 | ||||||
Loans held for sale, at fair value |
697,532 | 747,593 | ||||||
Loans receivable not covered under Loss Sharing Agreements with the FDIC |
3,294,908 | 2,398,353 | ||||||
Loans receivable covered under Loss Sharing Agreements with the FDIC |
61,639 | 66,725 | ||||||
Allowance for loan losses |
(26,704 | ) | (23,998 | ) | ||||
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Total loans receivable, net of allowance for loan losses |
3,329,843 | 2,441,080 | ||||||
FHLB, Federal Reserve Bank, and other restricted stock |
50,430 | 42,424 | ||||||
Accrued interest receivable |
9,629 | 8,362 | ||||||
FDIC loss sharing receivable |
8,272 | 10,046 | ||||||
Bank premises and equipment, net |
11,234 | 11,625 | ||||||
Bank-owned life insurance |
105,303 | 104,433 | ||||||
Other real estate owned (includes $9,329 and $6,953, respectively, covered under Loss Sharing Agreements with the FDIC) |
15,670 | 12,265 | ||||||
Goodwill and other intangibles |
3,673 | 3,676 | ||||||
Other assets |
33,876 | 41,028 | ||||||
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Total assets |
$ | 5,014,231 | $ | 4,153,173 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Liabilities: |
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Deposits: |
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Demand, non-interest bearing |
$ | 634,578 | $ | 478,103 | ||||
Interest bearing |
2,971,754 | 2,481,819 | ||||||
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Total deposits |
3,606,332 | 2,959,922 | ||||||
Federal funds purchased |
0 | 13,000 | ||||||
FHLB advances |
905,000 | 706,500 | ||||||
Other borrowings |
65,250 | 65,250 | ||||||
Accrued interest payable and other liabilities |
36,711 | 21,878 | ||||||
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Total liabilities |
4,613,293 | 3,766,550 | ||||||
Shareholders equity: |
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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; 24,826,424 and 24,756,411 shares issued as of March 31, 2014 and December 31, 2013; 24,294,164 and 24,224,151 shares outstanding as of March 31, 2014 and December 31, 2013 |
24,826 | 24,756 | ||||||
Additional paid in capital |
308,820 | 307,231 | ||||||
Retained earnings |
79,144 | 71,008 | ||||||
Accumulated other comprehensive loss, net |
(3,598 | ) | (8,118 | ) | ||||
Treasury stock, at cost (532,260 shares, respectively) |
(8,254 | ) | (8,254 | ) | ||||
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Total shareholders equity |
400,938 | 386,623 | ||||||
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Total liabilities and shareholders equity |
$ | 5,014,231 | $ | 4,153,173 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
3
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME UNAUDITED
(dollars in thousands, except share data)
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Interest income: |
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Loans receivable |
$ | 28,355 | $ | 16,099 | ||||
Loans held for sale |
5,083 | 10,884 | ||||||
Investment securities |
3,040 | 829 | ||||||
Other |
116 | 108 | ||||||
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Total interest income |
36,594 | 27,920 | ||||||
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Interest expense: |
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Deposits |
5,415 | 5,136 | ||||||
Other borrowings |
1,171 | 21 | ||||||
FHLB advances |
496 | 238 | ||||||
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Total interest expense |
7,082 | 5,395 | ||||||
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Net interest income |
29,512 | 22,525 | ||||||
Provision for loan losses |
4,368 | (117 | ) | |||||
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Net interest income after provision for loan losses |
25,144 | 22,642 | ||||||
Non-interest income: |
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Gain on sale of investment securities |
2,832 | 0 | ||||||
Mortgage warehouse transactional fees |
1,759 | 3,668 | ||||||
Bank-owned life insurance |
835 | 476 | ||||||
Mortgage banking income |
409 | 0 | ||||||
Deposit fees |
214 | 130 | ||||||
Other |
1,541 | 624 | ||||||
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Total non-interest income |
7,590 | 4,898 | ||||||
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Non-interest expense: |
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Salaries and employee benefits |
9,351 | 7,397 | ||||||
Occupancy |
2,637 | 1,910 | ||||||
Professional services |
2,282 | 706 | ||||||
FDIC assessments, taxes, and regulatory fees |
2,131 | 1,347 | ||||||
Technology, communications and bank operations |
1,560 | 841 | ||||||
Loan workout |
441 | 674 | ||||||
Advertising and promotion |
414 | 115 | ||||||
Other real estate owned |
351 | 36 | ||||||
Loss contingency |
0 | 2,000 | ||||||
Other |
2,002 | 1,454 | ||||||
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Total non-interest expense |
21,169 | 16,480 | ||||||
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Income before income tax expense |
11,565 | 11,060 | ||||||
Income tax expense |
3,429 | 3,871 | ||||||
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Net income |
$ | 8,136 | $ | 7,189 | ||||
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Basic earnings per share |
$ | 0.34 | $ | 0.39 | ||||
Diluted earnings per share |
0.32 | 0.38 |
See accompanying notes to the unaudited consolidated financial statements.
4
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME UNAUDITED
(in thousands)
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Net income |
$ | 8,136 | $ | 7,189 | ||||
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Unrealized gains (losses) on securities: |
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Unrealized holding gain (loss) on securities arising during the period (1) |
9,121 | (1,093 | ) | |||||
Income tax effect (1) |
(3,193 | ) | 383 | |||||
Less: reclassification adjustment for gains on securities included in net income |
(2,832 | ) | 0 | |||||
Income tax effect |
992 | 0 | ||||||
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Net unrealized gains/ (losses) |
4,088 | (710 | ) | |||||
Unrealized gains on cash flow hedges: |
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Unrealized gain on cash flow hedges arising during the period |
664 | 0 | ||||||
Income tax effect |
(232 | ) | 0 | |||||
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Net unrealized gains |
432 | 0 | ||||||
Other comprehensive income (loss), net of tax |
4,520 | (710 | ) | |||||
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Comprehensive income |
$ | 12,656 | $ | 6,479 | ||||
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(1) | Includes immaterial gains on foreign currency items for the first quarter 2014. |
See accompanying notes to the unaudited consolidated financial statements.
5
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY UNAUDITED
(dollars in thousands, except share data)
For the Three Months Ended March 31, 2014 | ||||||||||||||||||||||||||||
Shares of Common Stock |
Common Stock |
Additional Paid in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance, January 1, 2014 |
24,224,151 | $ | 24,756 | $ | 307,231 | $ | 71,008 | $ | (8,118 | ) | $ | (8,254 | ) | $ | 386,623 | |||||||||||||
Net income |
8,136 | 8,136 | ||||||||||||||||||||||||||
Other comprehensive income |
4,520 | 4,520 | ||||||||||||||||||||||||||
Share-based compensation expense |
955 | 955 | ||||||||||||||||||||||||||
Issuance of common stock under share-based compensation arrangements |
70,013 | 70 | 634 | 704 | ||||||||||||||||||||||||
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Balance, March 31, 2014 |
24,294,164 | $ | 24,826 | $ | 308,820 | $ | 79,144 | $ | (3,598 | ) | $ | (8,254 | ) | $ | 400,938 | |||||||||||||
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For the Three Months Ended March 31, 2013 | ||||||||||||||||||||||||||||
Shares of Common Stock |
Common Stock |
Additional Paid in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Treasury Stock |
Total | ||||||||||||||||||||||
Balance, January 1, 2013 |
18,459,502 | $ | 18,507 | $ | 212,090 | $ | 38,314 | $ | 1,064 | $ | (500 | ) | $ | 269,475 | ||||||||||||||
Net income |
7,189 | 7,189 | ||||||||||||||||||||||||||
Other comprehensive loss |
(710 | ) | (710 | ) | ||||||||||||||||||||||||
Share-based compensation expense |
704 | 704 | ||||||||||||||||||||||||||
Issuance of common stock under share-based compensation arrangements |
23,411 | 24 | 228 | 252 | ||||||||||||||||||||||||
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Balance, March 31, 2013 |
18,482,913 | $ | 18,531 | $ | 213,022 | $ | 45,503 | $ | 354 | $ | (500 | ) | $ | 276,910 | ||||||||||||||
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See accompanying notes to the unaudited consolidated financial statements.
6
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
(in thousands)
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Cash Flows from Operating Activities |
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Net income |
$ | 8,136 | $ | 7,189 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses, net of change to FDIC receivable |
4,368 | (117 | ) | |||||
Loss contingency |
0 | 2,000 | ||||||
Provision for depreciation and amortization |
890 | 628 | ||||||
Share-based compensation |
955 | 704 | ||||||
Deferred taxes |
2,215 | 1 | ||||||
Net amortization of investment securities premiums and discounts |
177 | 108 | ||||||
Gain on sale of investment securities |
(2,832 | ) | 0 | |||||
Gain on sale of loans |
(498 | ) | (50 | ) | ||||
Origination of loans held for sale |
(2,819,236 | ) | (6,035,469 | ) | ||||
Proceeds from the sale of loans held for sale |
2,869,796 | 6,113,541 | ||||||
Increase in FDIC loss sharing receivable |
(990 | ) | (723 | ) | ||||
Amortization (accretion) of fair value discounts |
(129 | ) | 41 | |||||
Net loss (gain) on sales of other real estate owned |
47 | (29 | ) | |||||
Valuation and other adjustments to other real estate owned |
127 | 89 | ||||||
Earnings on investment in bank-owned life insurance |
(835 | ) | (476 | ) | ||||
Decrease (increase) in accrued interest receivable and other assets |
1,552 | (176 | ) | |||||
Increase in accrued interest payable and other liabilities |
15,562 | 778 | ||||||
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Net Cash Provided by Operating Activities |
79,305 | 88,039 | ||||||
Cash Flows from Investing Activities |
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Proceeds from maturities, calls and principal repayments of investment securities available for sale |
10,264 | 4,902 | ||||||
Proceeds from sales of investment securities available for sale |
187,891 | 0 | ||||||
Purchases of investment securities available for sale |
(149,940 | ) | (35,620 | ) | ||||
Net increase in loans |
(608,672 | ) | (141,965 | ) | ||||
Purchase of loan portfolios |
(288,253 | ) | (155,306 | ) | ||||
Proceeds from sales of SBA loans |
424 | 436 | ||||||
Purchases of bank-owned life insurance |
0 | (10,000 | ) | |||||
Net purchases of FHLB, Federal Reserve Bank, and other restricted stock |
(8,006 | ) | (3,918 | ) | ||||
Reimbursements from the FDIC on loss sharing agreements |
1,297 | 2,370 | ||||||
Purchases of bank premises and equipment |
(207 | ) | (290 | ) | ||||
Proceeds from sales of other real estate owned |
1,376 | 445 | ||||||
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Net Cash Used In Investing Activities |
(853,826 | ) | (338,946 | ) | ||||
Cash Flows from Financing Activities |
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Net increase in deposits |
646,420 | 95,031 | ||||||
Net increase in short-term borrowed funds |
185,500 | 101,000 | ||||||
Proceeds from long-term FHLB borrowings |
0 | 50,000 | ||||||
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Net Cash Provided by Financing Activities |
831,920 | 246,031 | ||||||
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Net Increase (Decrease) in Cash and Cash Equivalents |
57,399 | (4,876 | ) | |||||
Cash and Cash Equivalents Beginning |
233,068 | 186,016 | ||||||
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Cash and Cash Equivalents Ending |
$ | 290,467 | $ | 181,140 | ||||
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Supplementary Cash Flows Information |
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Interest paid |
$ | 7,017 | $ | 5,383 | ||||
Income taxes paid |
2,082 | 337 | ||||||
Non-cash items: |
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Transfer of loans to other real estate owned |
$ | 4,955 | $ | 1,935 | ||||
Issuance of common stock under share-based compensation arrangements |
704 | 252 | ||||||
Securities purchased not settled |
0 | 3,421 |
See accompanying notes to the unaudited consolidated financial statements.
7
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the Bancorp, Customers Bancorp, or the Company) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the Bank). Customers Bancorp also has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
Customers Bancorp, Inc. and its wholly owned subsidiary, Customers Bank, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties), Rye, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; and Providence, Rhode Island. The Bank has 14 branches and provides commercial and consumer banking products, primarily loans and deposits. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Customers Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities.
NOTE 2 ACQUISITION ACTIVITY
Acquisition Activity
New England Lending Acquisitions
On January 15, 2014, Customers Bank purchased $277.9 million of residential adjustable-rate jumbo mortgage loans (indexed to one-year LIBOR) from Michigan-based Flagstar Bank. The purchase price was 100.75% of loans outstanding.
On March 28, 2013, Customers Bank completed the purchase of certain commercial loans from Flagstar Bank. Under the terms of the agreement, Customers Bank acquired $182.3 million in commercial loan and related 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 Flagstars commercial lending offices in New England. The purchase price was 98.7% of loans outstanding.
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp, Inc. and subsidiaries have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 2013 consolidated balance sheet presented in this report has been derived from Customers Bancorps audited 2013 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2013 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 12, 2014. That Form 10-K describes Customers Bancorps significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents; Restrictions on Cash and Amounts due from Banks; Investment Securities, Loan Accounting Framework; Allowance for Loan Losses; Goodwill; FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable; Bank Owned Life Insurance; Bank Premises and Equipment; Treasury Stock; Income Taxes; Share-Based Compensation; Comprehensive Income; Earnings per Share; Segment Information; and Accounting Changes. Certain prior period amounts have been reclassified to conform to current period presentation. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year. Presented below are Customers Bancorps significant accounting policies that were updated during the three months ended March 31, 2014 to address new or evolving activities and recently issued accounting standards and updates that were issued or effective during first quarter 2014.
8
Derivative Instruments and Hedging Activities
The Financial Accounting Standards Board (FASB) ASC 815, Derivatives and Hedging (ASC 815), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Bancorps objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Customers Bancorp records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether Customers has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Bancorp may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Prior to first quarter 2014, none of Customer Bancorps financial derivatives were designated in qualifying hedge relationships in accordance with the applicable accounting guidance. As such, all changes in fair value of the financial derivatives were recognized directly in earnings. In March 2014, Customers Bancorp entered into a $150.0 million notional balance forward starting pay fixed interest rate swap to hedge the variable cash flows associated with the forecasted issuance of debt. The Bancorp documented and designated this swap as a cash flow hedge. The effective portion of changes in the fair value of financial derivatives designated and qualifying as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivatives is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to financial derivatives will be reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
Customers Bancorp purchased credit derivatives with a notional balance of $13.4 million to hedge the performance risk of one of its counterparties during first quarter 2014. These derivatives were not designated in hedge relationships for accounting purposes and are being recorded at their fair value, with fair value changes recorded directly in earnings.
In accordance with the FASBs fair value measurement guidance, Customers Bancorp made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Recently Issued Accounting Standards
In January 2014, the FASB issued Accounting Standard Update (ASU) 2014-06, Technical Corrections and Improvements Related to Glossary Terms. This ASU is limited to amendments related to the Master Glossary, including technical corrections related to glossary links, glossary term deletions, and glossary term name changes. The amendments in this ASU apply to all reporting entities within the scope of the affected accounting guidance and were effective upon issuance. This ASU has not had a significant impact on the Bancorps financial condition or results of operation.
In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU also requires additional related interim and annual disclosures. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2014. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.
9
In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, a consensus of the FASB Emerging Issues Task Force. The ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The guidance in this ASU is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The Bancorp does not expect this ASU to have a significant impact on its financial condition or results of operation.
In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, a consensus of the FASB Emerging Issues Task Force. The guidance in this USU requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU was effective in first quarter 2014. This ASU has not had a significant impact on the Bancorps financial condition or results of operation.
NOTE 4 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (1)
The following table presents the changes in accumulated other comprehensive income by component for the three months ended March 31, 2014 and 2013.
Unrealized Gains | ||||||||||||
and Losses on | Unrealized Gains | |||||||||||
Available-for-sale | on | |||||||||||
(amounts in thousands) | Securities | Cash Flow Hedges | Total | |||||||||
Beginning balance - January 1, 2014 |
$ | (8,118 | ) | $ | 0 | $ | (8,118 | ) | ||||
|
|
|
|
|
|
|||||||
Other comprehensive income before reclassifications |
5,929 | 432 | 6,361 | |||||||||
Amounts reclassified from accumulated other comprehensive loss to net income (2) |
(1,841 | ) | 0 | (1,841 | ) | |||||||
|
|
|
|
|
|
|||||||
Net current-period other comprehensive (loss) income |
4,088 | 432 | 4,520 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance - March 31, 2014 |
$ | (4,030 | ) | $ | 432 | $ | (3,598 | ) | ||||
|
|
|
|
|
|
Unrealized Gains | ||||
and Losses on | ||||
Available-for-sale | ||||
(amounts in thousands) | Securities (3) | |||
Beginning balance - January 1, 2013 |
$ | 1,064 | ||
|
|
|||
Other comprehensive loss before reclassifications |
(710 | ) | ||
Amounts reclassified from accumulated other comprehensive loss to net income |
0 | |||
|
|
|||
Net current-period other comprehensive (loss) income |
(710 | ) | ||
|
|
|||
Ending balance - March 31, 2013 |
$ | 354 | ||
|
|
(1) | All amounts are net of tax. Amounts in parentheses indicate debits. |
(2) | Reclassification amount reported as gain on sale of investment securities on the Consolidated Statements of Income. |
(3) | Prior to first quarter 2014, all amounts deferred in accumulated other comprehensive income were related to available-for-sale securities. |
10
NOTE 5 EARNINGS PER SHARE
The following are the components and results of the Bancorps earnings per share calculation for the periods presented:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands, except per share data) | ||||||||
Net income available to common shareholders |
$ | 8,136 | $ | 7,189 | ||||
|
|
|
|
|||||
Weighted-average number of common shares outstanding - basic |
24,260,518 | 18,471,207 | ||||||
Share-based compensation plans |
769,001 | 283,580 | ||||||
Warrants |
220,509 | 155,152 | ||||||
|
|
|
|
|||||
Weighted-average number of common shares - diluted |
25,250,028 | 18,909,939 | ||||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.34 | $ | 0.39 | ||||
Diluted earnings per share |
$ | 0.32 | $ | 0.38 |
The following is a summary of securities that could potentially dilute basic earnings per share in future periods 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 March 31, |
||||||||
2014 | 2013 | |||||||
Anti-dilutive securities: |
||||||||
Share-based compensation awards |
122,438 | 102,684 | ||||||
Warrants |
118,745 | 129,946 | ||||||
|
|
|
|
|||||
Total anti-dilutive securities |
241,183 | 232,630 | ||||||
|
|
|
|
NOTE 6 INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of March 31, 2014 and December 31, 2013 are summarized in the tables below:
March 31, 2014 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Available for Sale: |
||||||||||||||||
Mortgage-backed securities (1) |
$ | 416,428 | $ | 1,314 | $ | (6,661 | ) | $ | 411,081 | |||||||
Corporate notes |
25,000 | 278 | (2 | ) | 25,276 | |||||||||||
Equity securities (2) |
23,074 | 0 | (1,129 | ) | 21,945 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 464,502 | $ | 1,592 | $ | (7,792 | ) | $ | 458,302 | ||||||||
|
|
|
|
|
|
|
|
11
December 31, 2013 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Available for Sale: |
||||||||||||||||
Mortgage-backed securities (1) |
$ | 461,988 | $ | 207 | $ | (10,659 | ) | $ | 451,536 | |||||||
Corporate notes |
25,000 | 344 | (21 | ) | 25,323 | |||||||||||
Equity securities(2) |
23,074 | 0 | (2,360 | ) | 20,714 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 510,062 | $ | 551 | $ | (13,040 | ) | $ | 497,573 | ||||||||
|
|
|
|
|
|
|
|
(1) | Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA. |
(2) | Comprised primarily of equity securities in a foreign entity. |
The following table presents proceeds from the sale of available-for-sale investment securities and gross gains and gross losses realized on those sales for the three months ended March 31, 2014 and 2013:
Three months ended March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Proceeds from sale of available-for-sale securities |
$ | 187,891 | $ | 0 | ||||
|
|
|
|
|||||
Gross gains |
$ | 2,832 | $ | 0 | ||||
Gross losses |
0 | 0 | ||||||
|
|
|
|
|||||
Net gains |
$ | 2,832 | $ | 0 | ||||
|
|
|
|
These gains and losses were determined using the specific identification method and were included in non-interest income.
The following table presents 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:
March 31, 2014 | ||||||||
Amortized Cost |
Fair Value |
|||||||
(dollars in thousands) | ||||||||
Due in one year or less |
$ | 0 | $ | 0 | ||||
Due after one year through five years |
25,000 | 25,276 | ||||||
Due after five years through ten years |
0 | 0 | ||||||
Due after ten years |
0 | 0 | ||||||
Mortgage-backed securities |
416,428 | 411,081 | ||||||
|
|
|
|
|||||
Total debt securities |
$ | 441,428 | $ | 436,357 | ||||
|
|
|
|
The Bancorps 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 March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014 | ||||||||||||||||||||||||
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 (1) |
$ | 234,566 | $ | (4,990 | ) | $ | 21,429 | $ | (1,671 | ) | $ | 255,995 | $ | (6,661 | ) | |||||||||
Corporate notes |
0 | 0 | 4,998 | (2 | ) | 4,998 | (2 | ) | ||||||||||||||||
Equity securities (2) |
21,945 | (1,129 | ) | 0 | 0 | 21,945 | (1,129 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 256,511 | $ | (6,119 | ) | $ | 26,427 | $ | (1,673 | ) | $ | 282,938 | $ | (7,792 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
12
December 31, 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 (1) |
$ | 425,623 | $ | (10,061 | ) | $ | 5,274 | $ | (598 | ) | 430,897 | $ | (10,659 | ) | ||||||||||
Corporate notes |
4,982 | (18 | ) | 4,997 | (3 | ) | 9,979 | (21 | ) | |||||||||||||||
Equity securities (2) |
20,714 | (2,360 | ) | 0 | 0 | 20,714 | (2,360 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 451,319 | $ | (12,439 | ) | $ | 10,271 | $ | (601 | ) | $ | 461,590 | $ | (13,040 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA |
(2) | Comprised primarily of equity securities in a foreign entity. |
At March 31, 2014, there were twenty-two available-for-sale investment securities in the less-than-twelve-month category and ten available-for-sale investment securities in the twelve-month-or-more category. At December 31, 2013, there were thirty-six 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. Customers has analyzed these investments for other than temporary impairment. The unrealized losses on the mortgage backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. All amounts are expected to be recovered when market prices recover or at maturity. The unrealized losses on the equity securities reflect decreases in market price or foreign currency exchange rates. Customers evaluated the financial condition and capital strength of the issuer of these securities and concluded that the decline in fair value was temporary and would recover by way of changes in market prices or foreign currency exchange rates. The Company intends to hold these securities for the foreseeable future, and does not intend to sell the securities before the price recovers. Customers considers it more likely than not that it will not be required to sell the securities. Accordingly, Customers has concluded that the securities are not other-than-temporarily impaired.
At March 31, 2014 and December 31, 2013, Customers Bank had pledged investment securities aggregating $410.6 million and $451.1 million fair value, respectively, as collateral that the counterparties do not have the ability to sell or repledge.
NOTE 7 LOANS HELD FOR SALE
The composition of loans held for sale was as follows:
March 31, 2014 |
December 31, 2013 |
|||||||
(in thousands) | ||||||||
Mortgage warehouse loans at fair value |
$ | 693,405 | $ | 740,694 | ||||
Residential mortgage loans at fair value |
4,127 | 6,899 | ||||||
|
|
|
|
|||||
Loans held for sale |
$ | 697,532 | $ | 747,593 | ||||
|
|
|
|
13
NOTE 8 LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of March 31, 2014 and December 31, 2013:
March 31, 2014 |
December 31, 2013 |
|||||||
(in thousands) | ||||||||
Construction |
$ | 12,775 | $ | 14,627 | ||||
Commercial real estate |
23,176 | 24,258 | ||||||
Commercial and industrial |
6,131 | 5,814 | ||||||
Residential real estate |
16,324 | 18,733 | ||||||
Manufactured housing |
3,233 | 3,293 | ||||||
|
|
|
|
|||||
Total loans receivable covered under FDIC loss sharing agreements (1) |
61,639 | 66,725 | ||||||
Construction |
36,132 | 36,901 | ||||||
Commercial real estate |
2,470,589 | 1,835,186 | ||||||
Commercial and industrial |
240,099 | 239,509 | ||||||
Mortgage warehouse |
655 | 866 | ||||||
Manufactured housing |
136,952 | 139,471 | ||||||
Residential real estate |
408,417 | 145,188 | ||||||
Consumer |
1,822 | 2,144 | ||||||
|
|
|
|
|||||
Total loans receivable not covered under FDIC loss sharing agreements |
3,294,666 | 2,399,265 | ||||||
|
|
|
|
|||||
Total loans receivable |
3,356,305 | 2,465,990 | ||||||
Deferred (fees) costs, net |
242 | (912 | ) | |||||
Allowance for loan losses |
(26,704 | ) | (23,998 | ) | ||||
|
|
|
|
|||||
Loans receivable, net |
$ | 3,329,843 | $ | 2,441,080 | ||||
|
|
|
|
(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. |
14
Non-Covered Loans
The following tables summarize non-covered loans by class and performance status as of March 31, 2014 and December 31, 2013:
March 31, 2014 | ||||||||||||||||||||||||||||
30-89 Days Past Due (1) |
90 Days Or More Past Due(1) |
Total Past Due (1) |
Non- Accrual |
Current (2) | Purchased- Credit- Impaired Loans (3) |
Total Loans (4) |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 1,607 | $ | 0 | $ | 1,607 | $ | 1,697 | $ | 235,031 | $ | 1,764 | $ | 240,099 | ||||||||||||||
Commercial real estate |
717 | 0 | 717 | 9,448 | 2,425,015 | 35,409 | 2,470,589 | |||||||||||||||||||||
Construction |
0 | 0 | 0 | 451 | 34,991 | 690 | 36,132 | |||||||||||||||||||||
Residential real estate |
853 | 0 | 853 | 454 | 397,054 | 10,056 | 408,417 | |||||||||||||||||||||
Consumer |
0 | 0 | 0 | 0 | 1,433 | 389 | 1,822 | |||||||||||||||||||||
Mortgage warehouse |
0 | 0 | 0 | 0 | 655 | 0 | 655 | |||||||||||||||||||||
Manufactured housing (5) |
7,091 | 3,938 | 11,029 | 562 | 120,697 | 4,664 | 136,952 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 10,268 | $ | 3,938 | $ | 14,206 | $ | 12,612 | $ | 3,214,876 | $ | 52,972 | $ | 3,294,666 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||||||||||
30-89 Days Past Due (1) |
90 Days Or More Past Due(1) |
Total Past Due (1) |
Non- Accrual |
Current (2) | Purchased- Credit- Impaired Loans (3) |
Total Loans (4) |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 10 | $ | 0 | $ | 10 | $ | 123 | $ | 237,453 | $ | 1,923 | $ | 239,509 | ||||||||||||||
Commercial real estate |
0 | 0 | 0 | 9,924 | 1,788,144 | 37,118 | 1,835,186 | |||||||||||||||||||||
Construction |
0 | 0 | 0 | 2,049 | 33,922 | 930 | 36,901 | |||||||||||||||||||||
Residential real estate |
555 | 0 | 555 | 969 | 133,158 | 10,506 | 145,188 | |||||||||||||||||||||
Consumer |
0 | 0 | 0 | 0 | 1,728 | 416 | 2,144 | |||||||||||||||||||||
Mortgage warehouse |
0 | 0 | 0 | 0 | 866 | 0 | 866 | |||||||||||||||||||||
Manufactured housing (5) |
7,921 | 3,772 | 11,693 | 448 | 122,416 | 4,914 | 139,471 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 8,486 | $ | 3,772 | $ | 12,258 | $ | 13,513 | $ | 2,317,687 | $ | 55,807 | $ | 2,399,265 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes past due loans that are accruing interest because collection is considered probable. |
(2) | Loans where next payment due is less than 30 days from the report date. |
(3) | Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans. |
(4) | Amounts exclude deferred costs and fees and the allowance for loan losses. |
(5) | Manufactured housing loans purchased in 2010 are subject to cash reserves held at the Bank that are used to fund past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers delinquencies. |
15
Covered Loans
The following tables summarize covered loans by class and performance status as of March 31, 2014 and December 31, 2013:
March 31, 2014 | ||||||||||||||||||||||||||||
30-89 Days Past Due (1) |
90 Days Or More Past Due (1) |
Total Past Due (1) |
Non- Accrual |
Current (2) | Purchased - Credit Impaired Loans (3) |
Total Loans (4) |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 39 | $ | 0 | $ | 39 | $ | 219 | $ | 3,461 | $ | 2,412 | $ | 6,131 | ||||||||||||||
Commercial real estate |
243 | 0 | 243 | 1,279 | 13,130 | 8,524 | 23,176 | |||||||||||||||||||||
Construction |
0 | 0 | 0 | 3,382 | 530 | 8,863 | 12,775 | |||||||||||||||||||||
Residential real estate |
750 | 0 | 750 | 561 | 13,231 | 1,782 | 16,324 | |||||||||||||||||||||
Manufactured housing |
71 | 0 | 71 | 16 | 3,018 | 128 | 3,233 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,103 | $ | 0 | $ | 1,103 | $ | 5,457 | $ | 33,370 | $ | 21,709 | $ | 61,639 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||||||||||||||
30-89 Days Past Due (1) |
90 Days Or More Past Due (1) |
Total Past Due (1) |
Non- Accrual |
Current (2) | Purchased- Credit Impaired Loans (3) |
Total Loans (4) |
||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 295 | $ | 0 | $ | 295 | $ | 2 | $ | 3,172 | $ | 2,345 | $ | 5,814 | ||||||||||||||
Commercial real estate |
245 | 0 | 245 | 1,691 | 13,586 | 8,736 | 24,258 | |||||||||||||||||||||
Construction |
0 | 0 | 0 | 3,382 | 1,967 | 9,278 | 14,627 | |||||||||||||||||||||
Residential real estate |
90 | 0 | 90 | 564 | 14,108 | 3,971 | 18,733 | |||||||||||||||||||||
Manufactured housing |
56 | 0 | 56 | 11 | 3,081 | 145 | 3,293 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 686 | $ | 0 | $ | 686 | $ | 5,650 | $ | 35,914 | $ | 24,475 | $ | 66,725 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes past due loans that are accruing interest because collection is considered probable. |
(2) | Purchased loans in FDIC assisted transactions with no evidence of credit deterioration since origination. |
(3) | Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans. |
(4) | Amounts exclude deferred costs and fees and allowance for loan losses. |
16
Allowance for Loan Losses and FDIC Loss Sharing Receivable
Prospective losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans are subject to evaluation. Decreases in the present value of expected cash flows are recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time the FDIC indemnification asset is increased reflecting an estimated future collection from the FDIC with a related credit to the provision for loan losses. If the expected cash flows on the covered loans increase such that a previously recorded impairment can be reversed, the Bancorp records a reduction in the allowance for loan losses with a related credit to the provision for loan losses accompanied by a reduction in the FDIC receivable and a charge to the provision for loan losses. Increases in expected cash flows of purchased loans and decreases in expected cash flows of the FDIC loss sharing receivable, when there are no previously recorded impairments, are considered together and recognized over the remaining life of the loans as interest income.
The following table presents changes in the allowance for loan losses and the FDIC loss sharing receivable for the three months ended March 31, 2014 and 2013.
Allowance for Loan Losses | ||||||||
For the Three Months Ended March 31, | ||||||||
(amounts in thousands) | 2014 | 2013 | ||||||
Beginning balance |
$ | 23,998 | $ | 25,837 | ||||
Provision for loan losses (1) |
2,901 | 1,100 | ||||||
Charge-offs |
(536 | ) | (563 | ) | ||||
Recoveries |
341 | 65 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 26,704 | $ | 26,439 | ||||
|
|
|
|
FDIC Loss Sharing Receivable | ||||||||
For the Three Months Ended March 31, | ||||||||
(amounts in thousands) | 2014 | 2013 | ||||||
Beginning balance |
$ | 10,046 | $ | 12,343 | ||||
(Decreased)/Increased estimated cash flows (2) |
(1,467 | ) | 1,217 | |||||
Other activity, net (3) |
990 | 853 | ||||||
Cash receipts from FDIC |
(1,297 | ) | (2,370 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 8,272 | $ | 12,043 | ||||
|
|
|
|
|||||
(1) Provision for loan losses |
$ | 2,901 | $ | 1,100 | ||||
(2) Effect attributable to FDIC loss share arrangements |
1,467 | (1,217 | ) | |||||
|
|
|
|
|||||
Net amount reported as provision for loan losses |
$ | 4,368 | $ | (117 | ) | |||
|
|
|
|
(3) | Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, that qualify for reimbursement under loss sharing arrangements. |
17
Impaired Loans Covered and Non-Covered
The following tables present a summary of impaired loans as of March 31, 2014 and December 31, 2013 and the average recorded investment and interest income recognized for the three months ended March 31, 2014 and 2013. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.
March 31, 2014 | For the Three Months Ended March 31, 2014 |
|||||||||||||||||||
Recorded Investment Net of Charge Offs |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | 10,909 | $ | 12,241 | $ | 12,003 | $ | 99 | ||||||||||||
Commercial real estate |
19,881 | 20,733 | 17,139 | 274 | ||||||||||||||||
Construction |
2,325 | 3,594 | 2,551 | 0 | ||||||||||||||||
Consumer |
5 | 5 | 3 | 0 | ||||||||||||||||
Residential real estate |
1,951 | 1,951 | 2,391 | 13 | ||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
836 | 734 | $ | 588 | 1,653 | 8 | ||||||||||||||
Commercial real estate |
2,438 | 3,328 | 1,093 | 2,350 | 1 | |||||||||||||||
Construction |
1,568 | 1,568 | 347 | 1,350 | 15 | |||||||||||||||
Consumer |
64 | 5 | 14 | 64 | 1 | |||||||||||||||
Residential real estate |
250 | 250 | 197 | 251 | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 40,227 | $ | 44,409 | $ | 2,239 | $ | 39,755 | $ | 412 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2013 | For the Three Months EndedMarch 31, 2013 |
|||||||||||||||||||
Recorded Investment Net of Charge Offs |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
$ | 13,097 | $ | 13,159 | $ | 4,796 | $ | 56 | ||||||||||||
Commercial real estate |
14,397 | 15,249 | 23,627 | 198 | ||||||||||||||||
Construction |
2,777 | 4,046 | 7,320 | 2 | ||||||||||||||||
Consumer |
0 | 0 | 103 | 0 | ||||||||||||||||
Residential real estate |
2,831 | 2,831 | 2,463 | 8 | ||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Commercial and industrial |
2,469 | 3,739 | $ | 829 | 671 | 7 | ||||||||||||||
Commercial real estate |
2,261 | 3,167 | 946 | 8,585 | 11 | |||||||||||||||
Construction |
1,132 | 1,132 | 351 | 6,307 | 49 | |||||||||||||||
Consumer |
64 | 64 | 17 | 53 | 1 | |||||||||||||||
Residential real estate |
252 | 252 | 199 | 1,103 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 39,280 | $ | 43,639 | $ | 2,342 | $ | 55,028 | $ | 334 | ||||||||||
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|
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Troubled Debt Restructurings
At March 31, 2014 and 2013, there were $5.1 million and $6.4 million, respectively, in loans reported as troubled debt restructurings (TDRs). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, the Bancorp requires sustained performance for nine months before returning a TDR to accrual status.
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.
18
The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three months ended March 31, 2014 and 2013. 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 | ||||||||||
(in thousands) | ||||||||||||
Three months ended March 31, 2014 |
||||||||||||
Extended under forbearance |
$ | 0 | $ | 0 | $ | 0 | ||||||
Multiple extensions resulting from financial difficulty |
0 | 0 | 0 | |||||||||
Interest-rate reductions |
247 | 127 | 374 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 247 | $ | 127 | $ | 374 | ||||||
|
|
|
|
|
|
|||||||
Three months ended March 31, 2013 |
||||||||||||
Extended under forbearance |
$ | 0 | $ | 0 | $ | 0 | ||||||
Multiple extensions resulting from financial difficulty |
0 | 0 | 0 | |||||||||
Interest-rate reductions |
0 | 257 | 257 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 0 | $ | 257 | $ | 257 | ||||||
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|
|
|
|
|
19
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 months ended March 31, 2014 and 2013.
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 March 31, 2014 |
||||||||||||||||
Commercial and industrial |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Commercial real estate |
0 | 0 | 0 | 0 | ||||||||||||
Construction |
0 | 0 | 0 | 0 | ||||||||||||
Manufactured housing |
1 | 47 | 2 | 127 | ||||||||||||
Residential real estate |
3 | 200 | 0 | 0 | ||||||||||||
Consumer |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
4 | $ | 247 | 2 | $ | 127 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Three months ended March 31, 2013 |
||||||||||||||||
Commercial and industrial |
0 | $ | 0 | 0 | $ | 0 | ||||||||||
Commercial real estate |
0 | 0 | 0 | 0 | ||||||||||||
Construction |
0 | 0 | 0 | 0 | ||||||||||||
Manufactured housing |
0 | 0 | 3 | 257 | ||||||||||||
Residential real estate |
0 | 0 | 0 | 0 | ||||||||||||
Consumer |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
0 | $ | 0 | 3 | $ | 257 | ||||||||||
|
|
|
|
|
|
|
|
At March 31, 2014 and 2013, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructuring.
For the three months ended March 31, 2014 and 2013, the recorded investment of loan determined to be TDRs was $0.4 million and $0.3 million, respectively, both before and after restructuring. During the three month period ended March 31, 2014, two TDR loans defaulted with a recorded investment of $0.1 million. During the three month period ended March 31, 2013, three TDR loans defaulted with a recorded investment of $0.3 million.
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 were no specific allowances resulting from TDR modifications during the three months ended March 31, 2014 and 2013.
Credit Quality Indicators
Commercial and industrial, commercial real estate, residential real estate and construction loans are rated based on an internally assigned risk rating system which is 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 based on the payment activity of the loan.
To facilitate the monitoring of credit quality within the commercial and industrial, commercial real estate, construction, 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 (includes risk rating 1 through 6), 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 who do not have identified potential or well-defined weaknesses and for whom 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. Consumer loans are not assigned a risk rating. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to managing the loans.
20
The risk rating grades are defined as follows:
1 Pass/Excellent
Loans rated 1 represent a credit extension of the highest quality. The borrowers historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.
2 Pass/Superior
Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, borrowers are virtually immune to local economies in stable growing industries, and where management is well respected and the company has ready access to public markets.
3 Pass/Strong
Loans rated 3 are those loans for which the borrower has above average financial condition and flexibility; more than satisfactory debt service coverage, balance sheet and operating ratios are consistent with or better than industry peers, have little industry risk, move in diversified markets and are experienced and competent in their industry. These borrowers access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.
4 Pass/Good
Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.
5 Satisfactory
Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrowers historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.
6 Satisfactory/Bankable with Care
Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.
7 Special Mention
Loans rated Special Mention are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event that potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.
8 Substandard
Loans are classified Substandard when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the weaknesses are not corrected.
21
9 Doubtful
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.
10 Loss
The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.
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 upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and nonperforming.
The following table presents the credit ratings of the non-covered loan portfolio as of March 31, 2014 and December 31, 2013:
March 31, 2014 | ||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
|||||||||||||
(in thousands) | ||||||||||||||||
Pass/Satisfactory |
$ | 229,557 | $ | 2,442,494 | $ | 35,652 | $ | 406,515 | ||||||||
Special Mention |
8,487 | 15,173 | 29 | 864 | ||||||||||||
Substandard |
2,055 | 12,922 | 451 | 1,038 | ||||||||||||
Doubtful |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans receivable, non-covered |
$ | 240,099 | $ | 2,470,589 | $ | 36,132 | $ | 408,417 | ||||||||
|
|
|
|
|
|
|
|
Consumer | Mortgage Warehouse |
Manufactured Housing |
||||||||||
(in thousands) | ||||||||||||
Performing |
$ | 1,822 | $ | 655 | $ | 125,361 | ||||||
Nonperforming (1) |
0 | 0 | 11,591 | |||||||||
|
|
|
|
|
|
|||||||
Total loans receivable, non-covered |
$ | 1,822 | $ | 655 | $ | 136,952 | ||||||
|
|
|
|
|
|
(1) | Includes loans that are on nonaccrual status at March 31, 2014. |
22
December 31, 2013 | ||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
|||||||||||||
(in thousands) | ||||||||||||||||
Pass/Satisfactory |
$ | 228,748 | $ | 1,808,804 | $ | 34,822 | $ | 142,588 | ||||||||
Special Mention |
10,314 | 12,760 | 29 | 940 | ||||||||||||
Substandard |
447 | 13,622 | 2,050 | 1,660 | ||||||||||||
Doubtful |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans receivable, non-covered |
$ | 239,509 | $ | 1,835,186 | $ | 36,901 | $ | 145,188 | ||||||||
|
|
|
|
|
|
|
|
Consumer | Mortgage Warehouse |
Manufactured Housing |
||||||||||
(in thousands) | ||||||||||||
Performing |
$ | 2,144 | $ | 866 | $ | 127,330 | ||||||
Nonperforming (1) |
0 | 0 | 12,141 | |||||||||
|
|
|
|
|
|
|||||||
Total loans receivable, non-covered |
$ | 2,144 | $ | 866 | $ | 139,471 | ||||||
|
|
|
|
|
|
(1) | Includes loans that are on nonaccrual status at December 31, 2013. |
The following table presents the credit ratings of the covered loan portfolio as of March 31, 2014 and December 31, 2013:
March 31, 2014 | ||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
|||||||||||||
(in thousands) | ||||||||||||||||
Pass/Satisfactory |
$ | 4,027 | $ | 13,630 | $ | 531 | $ | 13,914 | ||||||||
Special Mention |
0 | 3,205 | 0 | 455 | ||||||||||||
Substandard |
2,104 | 6,341 | 12,244 | 1,955 | ||||||||||||
Doubtful |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans receivable, covered |
$ | 6,131 | $ | 23,176 | $ | 12,775 | $ | 16,324 | ||||||||
|
|
|
|
|
|
|
|
Manufactured Housing |
||||
(in thousands) | ||||
Performing |
$ | 3,146 | ||
Nonperforming (1) |
87 | |||
|
|
|||
Total loans receivable, covered |
$ | 3,233 | ||
|
|
(1) | Includes loans that are on nonaccrual status at March 31, 2014. |
23
December 31, 2013 | ||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
|||||||||||||
(in thousands) | ||||||||||||||||
Pass/Satisfactory |
$ | 3,688 | $ | 14,330 | $ | 1,967 | $ | 14,137 | ||||||||
Special Mention |
223 | 2,989 | 0 | 455 | ||||||||||||
Substandard |
1,903 | 6,939 | 12,660 | 4,141 | ||||||||||||
Doubtful |
0 | 0 | 0 | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans receivable, covered |
$ | 5,814 | $ | 24,258 | $ | 14,627 | $ | 18,733 | ||||||||
|
|
|
|
|
|
|
|
Manufactured Housing |
||||
(in thousands) | ||||
Performing |
$ | 3,226 | ||
Nonperforming (1) |
67 | |||
|
|
|||
Total loans receivable, covered |
$ | 3,293 | ||
|
|
(1) | Includes loans that are on nonaccrual status at December 31, 2013. |
24
Allowance for loan losses
The changes in the allowance for loan losses for the three months ended March 31, 2014 and 2013 and the loans and allowance for loan losses by loan class based on impairment evaluation method are as follows. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
Manufactured Housing |
Consumer | Mortgage Warehouse |
Residual Reserve |
Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2014 |
||||||||||||||||||||||||||||||||||||
Beginning Balance, January 1, 2014 |
$ | 2,638 | $ | 15,705 | $ | 2,385 | $ | 2,490 | $ | 614 | $ | 130 | $ | 36 | $ | 0 | $ | 23,998 | ||||||||||||||||||
Charge-offs |
0 | (248 | ) | 0 | (288 | ) | 0 | 0 | 0 | 0 | (536 | ) | ||||||||||||||||||||||||
Recoveries |
90 | 25 | 0 | 224 | 0 | 2 | 0 | 0 | 341 | |||||||||||||||||||||||||||
Provision for loan losses |
(285 | ) | 3,370 | (43 | ) | (119 | ) | (21 | ) | (5 | ) | 4 | 0 | 2,901 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance, March 31, 2014 |
$ | 2,443 | $ | 18,852 | $ | 2,342 | $ | 2,307 | $ | 593 | $ | 127 | $ | 40 | $ | 0 | $ | 26,704 | ||||||||||||||||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|||||||||||||||||||
At March 31, 2014 |
||||||||||||||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 11,745 | $ | 22,319 | $ | 3,893 | $ | 2,201 | $ | 0 | $ | 69 | $ | 0 | $ | 0 | $ | 40,227 | ||||||||||||||||||
Collectively evaluated for impairment |
230,309 | 2,427,513 | 35,461 | 410,702 | 135,393 | 1,364 | 655 | 0 | 3,241,397 | |||||||||||||||||||||||||||
Loans acquired with credit deterioration |
4,176 | 43,933 | 9,553 | 11,838 | 4,792 | 389 | 0 | 0 | 74,681 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
$ | 3,356,305 | |||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 588 | $ | 1,093 | $ | 347 | $ | 197 | $ | 0 | $ | 14 | $ | 0 | $ | 0 | $ | 2,239 | ||||||||||||||||||
Collectively evaluated for impairment |
1,670 | 12,532 | 241 | 791 | 86 | 35 | 40 | 0 | 15,395 | |||||||||||||||||||||||||||
Loans acquired with credit deterioration |
185 | 5,227 | 1,754 | 1,319 | 507 | 78 | 0 | 0 | 9,070 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
$ | 2,443 | $ | 18,852 | $ | 2,342 | $ | 2,307 | $ | 593 | $ | 127 | $ | 40 | $ | 0 | $ | 26,704 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
25
Commercial and Industrial |
Commercial Real Estate |
Construction | Residential Real Estate |
Manufactured Housing |
Consumer | Mortgage Warehouse |
Residual Reserve |
Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, 2013 |
||||||||||||||||||||||||||||||||||||
Beginning Balance, January 1, 2013 |
$ | 1,477 | $ | 15,439 | $ | 3,991 | $ | 3,233 | $ | 750 | $ | 154 | $ | 71 | $ | 722 | $ | 25,837 | ||||||||||||||||||
Charge-offs |
(20 | ) | (410 | ) | 0 | (133 | ) | 0 | 0 | 0 | 0 | (563 | ) | |||||||||||||||||||||||
Recoveries |
11 | 52 | 0 | (3 | ) | 0 | 5 | 0 | 0 | 65 | ||||||||||||||||||||||||||
Provision for loan losses |
522 | 142 | 288 | 151 | 96 | (18 | ) | (17 | ) | (64 | ) | 1,100 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance, March 31, 2013 |
$ | 1,990 | $ | 15,223 | $ | 4,279 | $ | 3,248 | $ | 846 | $ | 141 | $ | 54 | $ | 658 | $ | 26,439 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|||||||||||||||||||
At March 31, 2013 |
||||||||||||||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 4,828 | $ | 32,835 | $ | 11,935 | $ | 3,480 | $ | 0 | $ | 201 | $ | 0 | $ | 0 | $ | 53,279 | ||||||||||||||||||
Collectively evaluated for impairment |
180,530 | 975,651 | 34,086 | 110,588 | 148,016 | 1,145 | 7,220 | 0 | 1,457,236 | |||||||||||||||||||||||||||
Loans acquired with credit deterioration |
5,710 | 62,783 | 17,187 | 15,875 | 5,693 | 478 | 0 | 0 | 107,726 | |||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
$ | 1,618,241 | |||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 420 | $ | 2,207 | $ | 1,490 | $ | 364 | $ | 0 | $ | 14 | $ | 0 | $ | 0 | $ | 4,495 | ||||||||||||||||||
Collectively evaluated for impairment |
1,322 | 8,459 | 374 | 955 | 72 | 50 | 54 | 658 | 11,944 | |||||||||||||||||||||||||||
Loans acquired with credit deterioration |
248 | 4,557 | 2,415 | 1,929 | 774 | 77 | 0 | 0 | 10,000 | |||||||||||||||||||||||||||
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|
|||||||||||||||||||
$ | 1,990 | $ | 15,223 | $ | 4,279 | $ | 3,248 | $ | 846 | $ | 141 | $ | 54 | $ | 658 | $ | 26,439 | |||||||||||||||||||
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26
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 March 31, 2014 and 2013, funds available for reimbursement, if necessary, were $3.2 million and $3.1 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.
The changes in accretable yield related to purchased-credit-impaired loans for the three months ended March 31, 2014 and 2013 were as follows:
For the Three Months Ended March 31, |
2014 | 2013 | ||||||
(in thousands) | ||||||||
Accretable yield balance, beginning of period |
$ | 22,557 | $ | 32,174 | ||||
Accretion to interest income |
(1,080 | ) | (2,071 | ) | ||||
Reclassification from nonaccretable difference and disposals, net |
(858 | ) | (438 | ) | ||||
|
|
|
|
|||||
Accretable yield balance, end of period |
$ | 20,619 | $ | 29,665 | ||||
|
|
|
|
NOTE 9 SHARE-BASED COMPENSATION
Stock Options
In February 2014, options to purchase an aggregate of 88,000 shares of voting common stock were granted to certain officers and team members. The options are subject to five-year cliff vesting. 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 the options granted.
March 31, 2014 | ||||
Weighted-average risk-free interest rate |
2.20 | % | ||
Expected dividend yield |
0.00 | % | ||
Weighted-average expected volatility |
17.61 | % | ||
Weighted-average expected life (in years) |
7.00 | |||
Weighted-average fair value of each option granted |
$ | 4.88 |
The following table summarizes stock option activity for the three months ended March 31, 2014.
Number of Options |
Weighted- average Exercise Price |
Weighted- average Remaining Contractual Term in Years |
Aggregate Intrinsic Value |
|||||||||||||
(dollars in thousands, except Weighted-average exercise price) | ||||||||||||||||
Outstanding at January 1, 2014 |
2,779,486 | $ | 13.66 | |||||||||||||
Granted |
88,000 | 19.42 | ||||||||||||||
Forfeited |
(5,000 | ) | 14.94 | |||||||||||||
|
|
|||||||||||||||
Outstanding at March 31, 2014 |
2,862,486 | $ | 13.84 | 7.93 | $ | 20,183 | ||||||||||
|
|
|
|
|||||||||||||
Exercisable at March 31, 2014 |
14,438 | $ | 20.06 | 3.07 | $ | 59 | ||||||||||
|
|
|
|
27
Also in February 2014, 142,395 restricted stock units were granted to certain officers and team members. Of the aggregate restricted stock units, 47,760 were granted under the Bonus Recognition and Retention Program and are subject to five-year cliff vesting. The remainders are subject to three-year cliff vesting. The following table summarizes restricted stock activity for the three months ended March 31, 2014.
Restricted Stock Units |
Weighted- average grant- date fair value |
|||||||
Outstanding and unvested at January 1, 2014 |
613,464 | $ | 13.00 | |||||
Granted |
142,395 | 19.42 | ||||||
Vested |
(34,414 | ) | 12.00 | |||||
|
|
|||||||
Outstanding and unvested at March 31, 2014 |
721,445 | $ | 14.30 | |||||
|
|
Total share-based compensation expense for the three months ended March 31, 2014 and 2013 was $1.0 million and $0.7 million, respectively.
Customers Bancorp has a policy that permits its directors to elect to receive shares of voting common stock in lieu of their cash retainers. In January 2014, Customers Bancorp issued 25,541 shares of voting common stock with a fair value of $0.5 million to the directors as compensation for their services during 2013. In March 2014, Customers Bancorp issued 10,058 shares of voting common stock with a fair value of $0.2 million to directors as compensation for their services during first quarter 2014. The fair values were determined based on the opening price of the common stock on the day the shares were issued.
NOTE 10 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 Bancorps financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and Bancorp to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations). At March 31, 2014 and December 31, 2013, the Bank and Bancorp met all capital adequacy requirements to which they were subject.
28
To be categorized as well capitalized, an institution must maintain minimum total risk based, Tier 1 risk based and Tier 1 leveraged ratios as set forth in the following table:
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 March 31, 2014: |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 424,941 | 11.62 | % | $ | 292,570 | 8.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 448,604 | 12.36 | % | $ | 290,307 | 8.0 | % | $ | 362,884 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 398,237 | 10.89 | % | $ | 146,285 | 4.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 421,900 | 11.63 | % | $ | 145,154 | 4.0 | % | $ | 217,731 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 398,237 | 9.10 | % | $ | 174,957 | 4.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 421,900 | 9.71 | % | $ | 173,813 | 4.0 | % | $ | 217,266 | 5.0 | % | ||||||||||||
As of December 31, 2013: |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 411,527 | 13.21 | % | $ | 249,196 | 8.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 435,432 | 14.11 | % | $ | 246,936 | 8.0 | % | $ | 308,670 | 10.0 | % | ||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 387,529 | 12.44 | % | $ | 124,598 | 4.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 411,434 | 13.33 | % | $ | 123,468 | 4.0 | % | $ | 185,202 | 6.0 | % | ||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Customers Bancorp, Inc. |
$ | 387,529 | 10.11 | % | $ | 153,310 | 4.0 | % | N/A | N/A | ||||||||||||||
Customers Bank |
$ | 411,434 | 10.81 | % | $ | 152,191 | 4.0 | % | $ | 190,239 | 5.0 | % |
NOTE 11 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bancorp uses fair value measurements to record fair value adjustments to certain assets and liabilities to disclose the fair value of its financial instruments. FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entitys 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 these 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 Measurements and Disclosures, as explained below.
Cash and cash equivalents:
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those 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 are determined by obtaining quoted market prices on nationally recognized and foreign 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, 2, or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The carrying amount of FHLB and Federal Reserve 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.
29
Loans held for sale - Residential mortgage loans:
The Bancorp generally estimates the fair values of loans held for sale 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 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 mortgage companies 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 held for investment 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 ASC 450, Contingencies, in which the Bancorp has measured impairment generally based on the fair value of the loans collateral. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, 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 estimated losses to be incurred on the loans and the expected reimbursements for losses using the applicable loss share percentages. These cash flows are discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC. This asset is included as Level 3 fair value, 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 managements 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 Bancorps 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.
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 deposit 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 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
30
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.
Borrowings:
Borrowings consist of long-term and short-term FHLB advances, five-year senior unsecured notes, and subordinated debt. For the short-term borrowings, the carrying amount is considered a reasonable estimate of 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. The 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. The five-year senior unsecured notes are traded on The NASDAQ Stock Market, and their price can be obtained daily. 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 liabilities 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 and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This 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 and liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. The Bancorp uses commitments on hand from third party investors to estimate an exit price, and adjusts for the probability of the commitment being exercised based on the Bancorps internal experience (i.e., pull-through rate). These assets and liabilities are included as Level 3 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 Bancorps 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 financial instruments are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements. At March 31, 2014 and December 31, 2013, there were no off-balance-sheet financial instruments in excess of their contract value.
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 Bancorps assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between the Bancorps disclosures and those of other companies may not be meaningful.
31
The estimated fair values of the Bancorps financial instruments were as follows at March 31, 2014 and December 31, 2013.
Fair Value Measurements at March 31, 2014 | ||||||||||||||||||||
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) |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 290,467 | $ | 290,467 | $ | 290,467 | $ | 0 | $ | 0 | ||||||||||
Investment securities, available for sale |
458,302 | 458,302 | 21,945 | 436,357 | 0 | |||||||||||||||
Loans held for sale |
697,532 | 697,532 | 0 | 697,532 | 0 | |||||||||||||||
Loans receivable, net |
3,329,843 | 3,374,676 | 0 | 0 | 3,374,676 | |||||||||||||||
FHLB, Federal Reserve Bank and other stock |
50,430 | 50,430 | 0 | 50,430 | 0 | |||||||||||||||
Accrued interest receivable |
9,629 | 9,629 | 0 | 9,629 | 0 | |||||||||||||||
FDIC loss sharing receivable |
8,272 | 8,272 | 0 | 0 | 8,272 | |||||||||||||||
Derivatives |
5,160 | 5,160 | 0 | 5,057 | 103 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Deposits |
$ | 3,606,332 | $ | 3,569,597 | $ | 634,578 | $ | 2,935,019 | $ | 0 | ||||||||||
Borrowings |
970,250 | 974,599 | 0 | 974,599 | 0 | |||||||||||||||
Derivatives |
4,346 | 4,346 | 0 | 4,346 | 0 | |||||||||||||||
Accrued interest payable |
1,740 | 1,740 | 0 | 1,740 | 0 |
Fair Value Measurements at December 31, 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) |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 233,068 | $ | 233,068 | $ | 233,068 | $ | 0 | $ | 0 | ||||||||||
Investment securities, available for sale |
497,573 | 497,573 | 20,714 | 476,859 | 0 | |||||||||||||||
Loans held for sale |
747,593 | 747,593 | 0 | 747,593 | 0 | |||||||||||||||
Loans receivable, net |
2,441,080 | 2,444,900 | 0 | 0 | 2,444,900 | |||||||||||||||
FHLB, Federal Reserve Bank and other stock |
42,424 | 42,424 | 0 | 42,424 | 0 | |||||||||||||||
Accrued interest receivable |
8,362 | 8,362 | 0 | 8,362 | 0 | |||||||||||||||
FDIC loss sharing receivable |
10,046 | 10,046 | 0 | 0 | 10,046 | |||||||||||||||
Derivatives |
3,763 | 3,763 | 0 | 3,523 | 240 | |||||||||||||||
Liabilities: |
||||||||||||||||||||
Deposits |
$ | 2,959,922 | $ | 2,919,935 | $ | 478,103 | $ | 2,441,832 | $ | 0 | ||||||||||
Federal funds purchased |
13,000 | 13,000 | 13,000 | 0 | 0 | |||||||||||||||
Borrowings |
771,750 | 774,793 | 0 | 774,793 | 0 | |||||||||||||||
Derivatives |
3,537 | 3,537 | 0 | 3,537 | 0 | |||||||||||||||
Accrued interest payable |
1,675 | 1,675 | 0 | 1,675 | 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 Bancorps 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.
32
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). |
A financial instruments 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 March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014 | ||||||||||||||||
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 | |||||||||||||
(in thousands) | ||||||||||||||||
Measured at Fair Value on a Recurring Basis: |
||||||||||||||||
Assets |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Mortgage-backed securities |
$ | 0 | $ | 411,081 | $ | 0 | $ | 411,081 | ||||||||
Corporate notes |
0 | 25,276 | 0 | 25,276 | ||||||||||||
Equity securities |
21,945 | 0 | 0 | 21,945 | ||||||||||||
Derivatives (1) |
0 | 5,057 | 103 | 5,160 | ||||||||||||
Loans held for sale fair value option |
0 | 697,532 | 0 | 697,532 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets - recurring fair value measurements |
$ | 21,945 | $ | 1,138,946 | $ | 103 | $ | 1,160,994 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives (2) |
$ | 0 | $ | 4,346 | $ | 0 | $ | 4,346 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Measured at Fair Value on a Nonrecurring Basis: |
||||||||||||||||
Assets |
||||||||||||||||
Impaired loans, net of specific reserves of $2,239 |
$ | 0 | $ | 0 | $ | 2,917 | $ | 2,917 | ||||||||
Other real estate owned |
0 | 0 | 504 | 504 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets - nonrecurring fair value measurements |
$ | 0 | $ | 0 | $ | 3,421 | $ | 3,421 | ||||||||
|
|
|
|
|
|
|
|
33
December 31, 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 | |||||||||||||
(in thousands) | ||||||||||||||||
Measured at Fair Value on a Recurring Basis: |
||||||||||||||||
Assets |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Mortgage-backed securities |
$ | 0 | $ | 451,536 | $ | 0 | $ | 451,536 | ||||||||
Corporate notes |
0 | 25,323 | 0 | 25,323 | ||||||||||||
Equity securities |
20,714 | 0 | 0 | 20,714 | ||||||||||||
Derivatives (1) |
0 | $ | 3,523 | 240 | $ | 3,736 | ||||||||||
Loans held for sale fair value option |
0 | 747,593 | 0 | 747,593 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets - recurring fair value measurements |
$ | 20,714 | $ | 1,227,975 | $ | 240 | $ | 1,248,929 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives (2) |
0 | $ | 3,537 | 0 | $ | 3,537 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Measured at Fair Value on a Nonrecurring Basis: |
||||||||||||||||
Assets |
||||||||||||||||
Impaired loans, net of specific reserves of $2,342 |
$ | 0 | $ | 0 | $ | 3,836 | $ | 3,836 | ||||||||
Other real estate owned |
0 | 0 | 335 | 335 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets - nonrecurring fair value measurements |
$ | 0 | $ | 0 | $ | 4,171 | $ | 4,171 | ||||||||
|
|
|
|
|
|
|
|
(1) | Included in Other Assets |
(2) | Included in Other Liabilities |
The changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2014 and 2013 are summarized as follows.
Residential Mortgage Loan Commitments |
||||
(in thousands) | ||||
Balance at January 1, 2014 |
$ | 240 | ||
Issuances |
103 | |||
Settlements |
(240 | ) | ||
|
|
|||
Balance at March 31, 2014 |
$ | 103 | ||
|
|
Loans Held for Sale (1) |
||||
(in thousands) | ||||
Balance at January 1, 2013 |
$ | 0 | ||
Transfer from Level 2 to Level 3 (1) |
3,173 | |||
|
|
|||
Balance at March 31, 2013 |
$ | 3,173 | ||
|
|
(1) | The Bancorps policy is to recognize transfers between levels when events or circumstances warrant transfers. During first quarter 2013, a suspected fraud was discovered in the Banks 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 |
34
2 to Level 3. During second quarter 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 determined that these assets 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 $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 March 31, 2014 and December 31, 2013 on a recurring and nonrecurring basis for which the Bancorp utilized Level 3 inputs to measure fair value.
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
March 31, 2014 |
Fair Value Estimate |
Valuation Technique |
Unobservable Input |
Range (Weighted | ||||||
(dollars in thousands) | ||||||||||
Impaired loans |
$ | 2,917 | Collateral appraisal (1) | Liquidation expenses (2) | -3% to -8% (-5.5%) | |||||
Other real estate owned |
$ | 504 | Collateral appraisal (1) | Liquidation expenses (2) | -3% to -8% (-5.5%) | |||||
Residential mortgage loan commitments |
$ | 103 | Adjusted market bid | Pull-through rate | 80% | |||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
December 31, 2013 |
Fair Value Estimate |
Valuation Technique |
Unobservable Input |
Range (Weighted | ||||||
(dollars in thousands) | ||||||||||
Impaired loans |
$ | 3,836 | Collateral appraisal (1) | Liquidation expenses (2) | -3% to -8% (-5.5%) | |||||
Other real estate owned |
$ | 335 | Collateral appraisal (1) | Liquidation expenses (2) | -3% to -8% (-5.5%) | |||||
Residential mortgage loan commitments |
$ | 240 | Adjusted market bid | Pull-through rate | 80% |
(1) | Obtained from approved independent 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 12 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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. Specifically, the Bancorp enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bancorps derivative financial instruments are used to manage differences in the amount, timing, and duration of the Bancorps known or expected cash receipts and its known or expected cash payments principally related to certain fixed-rate borrowings. The Bancorp also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they 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.
Cash Flow Hedges of Interest Rate Risk
The Bancorps objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Bancorp primarily uses interest rate swaps as part of its interest-rate-risk management strategy. Interest-rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Bancorp making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2014, such derivatives were used to hedge the variable cash flows associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2014, the Bancorp did not record any hedge ineffectiveness.
35
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Bancorps variable-rate debt. The Bancorp does not expect to reclassify any amounts from accumulated other comprehensive income to interest expense during the next 12 months as the Bancorps derivatives are effective after April 2016.
The Bancorp is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At March 31, 2014, the Bancorp had one outstanding interest rate derivative with a notional amount of $150.0 million that was designated as a cash flow hedge of interest rate risk.
Derivatives Not Designated as Hedging Instruments
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 a 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 third-party market swaps are recognized directly in earnings. At March 31, 2014, the Bancorp had 32 interest rate swaps with an aggregate notional amount of $201.0 million related to this program. At December 31, 2013, the Bancorp had 28 interest rate swaps with an aggregate notional amount of $150.3 million related to this program.
The Bank enters into residential mortgage loan commitments in connection with its mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly to earnings. At March 31, 2014, the Bank had an outstanding notional balance of residential mortgage loan commitments of $5.9 million. At December 31, 2013, the Bank had an outstanding notional balance of residential mortgage loan commitments of $7.1 million.
During first quarter 2014, the Bank purchased credit derivatives to hedge the performance risk associated with one of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly in earnings. At March 31, 2014, the Bank had an outstanding notional balance of credit derivatives of $13.4 million.
Fair Value of Derivative Instruments on the Balance Sheet
The following table presents the fair value of the Bancorps derivative financial instruments as well as the classification on the balance sheet as of March 31, 2014 and December 31, 2013.
March 31, 2014 | ||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | |||||||||
(in thousands) | ||||||||||||
Derivatives designated as cash flow hedges: |
||||||||||||
Interest rate swaps |
Other assets | $ | 664 | Other liabilities | $ | 0 | ||||||
|
|
|
|
|||||||||
Total |
$ | 664 | $ | 0 | ||||||||
|
|
|
|
|||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Interest rate swaps |
Other assets | $ | 4,274 | Other liabilities | $ | 4,346 | ||||||
Credit contracts |
Other assets | 119 | Other liabilities | 0 | ||||||||
Residential mortgage loan commitments |
Other assets | 103 | Other liabilities | 0 | ||||||||
|
|
|
|
|||||||||
Total |
$ | 4,496 | $ | 4,346 | ||||||||
|
|
|
|
36
December 31, 2013 | ||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||
Balance Sheet Location |
Fair Value | Balance Sheet Location |
Fair Value | |||||||||
(in thousands) | ||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Interest rate swaps |
Other assets | $ | 3,523 | Other liabilities | $ | 3,537 | ||||||
Residential mortgage loan commitments |
Other assets | 240 | Other liabilities | 0 | ||||||||
|
|
|
|
|||||||||
Total |
$ | 3,763 | $ | 3,537 | ||||||||
|
|
|
|
Effect of Derivative Instruments on Comprehensive Income
The following table presents the effect of the Bancorps derivative financial instruments on comprehensive income for the three months ended March 31, 2014 and 2013.
Three Months Ended March 31, 2014 | ||||||
Income Statement Location | Amount of income (loss) recognized in earnings |
|||||
(in thousands) | ||||||
Derivatives not designated as hedging instruments: |
||||||
Interest rate swaps |
Other non-interest income | $ | (59 | ) | ||
Credit contracts |
Other non-interest income | (149 | ) | |||
Residential mortgage loan commitments |
Mortgage banking income | (137 | ) | |||
|
|
|||||
Total |
$ | (345 | ) | |||
|
|
Three Months Ended March 31, 2013 | ||||||
Income Statement Location | Amount of income (loss) recognized in earnings |
|||||
(in thousands) | ||||||
Derivatives not designated as hedging instruments: |
||||||
Interest rate swaps |
Other non-interest income | $ | 43 | |||
|
|
Three Months Ended March 31, 2014 | ||||||||||
Location of Gain | Amount of Gain | |||||||||
Amount of Gain | Reclassified from | Reclassified from | ||||||||
Recognized in OCI on | Accumulated OCI into | Accumulated OCI into | ||||||||
Derivatives (Effective Portion) (1) | Income (Effective Portion) | Income (Effective Portion) | ||||||||
(in thousands) | ||||||||||
Derivative in cash flow hedging relationships: |
||||||||||
Interest rate swaps |
$ | 432 | Interest expense | $ | 0 | |||||
|
|
|
|
(1) | Net of taxes |
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 Bancorps 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 March 31, 2014, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $4.1 million. In addition, the Bancorp has minimum collateral posting thresholds with certain of these counterparties, and at March 31, 2014 had posted $4.8 million as collateral. The Bancorp records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
37
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. The Bancorps interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. The Bancorp has not made a policy election to offset its derivative positions.
Offsetting of Financial Assets and Derivative Assets
At March 31, 2014
Gross Amounts | Net Amounts of | Gross Amounts not Offset in the | ||||||||||||||||||||||
Offset in the | Assets Presented | Consolidated Balance Sheet | ||||||||||||||||||||||
Gross Amount of | Consolidated | in the Consolidated | Financial | Cash Collateral | ||||||||||||||||||||
Recognized Assets | Balance Sheet | Balance Sheet | Instruments | Received | Net Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Description |
||||||||||||||||||||||||
Interest rate swap derivatives with institutional counterparties |
$ | 229 | $ | 0 | $ | 229 | $ | 229 | $ | 0 | $ | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities At March 31, 2014 |
| |||||||||||||||||||||||
Gross Amounts | Net Amounts of | Gross Amounts not Offset in the | ||||||||||||||||||||||
Offset in the | Liabilities Presented | Consolidated Balance Sheet | ||||||||||||||||||||||
Gross Amount of | Consolidated | in the Consolidated | Financial | Cash Collateral | ||||||||||||||||||||
Recognized Liabilities | Balance Sheet | Balance Sheet | Instruments | Pledged | Net Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Description |
||||||||||||||||||||||||
Interest rate swap derivatives with institutional counterparties |
$ | 4,144 | $ | 0 | $ | 4,144 | $ | 229 | $ | 4,772 | $ | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Offsetting of Financial Assets and Derivative Assets At December 31, 2013 |
| |||||||||||||||||||||||
Gross Amounts | Net Amounts of | Gross Amounts not Offset in the | ||||||||||||||||||||||
Offset in the | Assets Presented | Consolidated Balance Sheet | ||||||||||||||||||||||
Gross Amount of | Consolidated | in the Consolidated | Financial | Cash Collateral | ||||||||||||||||||||
Recognized Assets | Balance Sheet | Balance Sheet | Instruments | Received | Net Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Description |
||||||||||||||||||||||||
Interest rate swap derivatives with institutional counterparties |
$ | 392 | $ | 0 | $ | 392 | $ | 392 | $ | 0 | $ | 0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities At December 31, 2013 |
| |||||||||||||||||||||||
Gross Amounts | Net Amounts of | Gross Amounts not Offset in the | ||||||||||||||||||||||
Offset in the | Liabilities Presented | Consolidated Balance Sheet | ||||||||||||||||||||||
Gross Amount of | Consolidated | in the Consolidated | Financial | Cash Collateral | ||||||||||||||||||||
Recognized Liabilities | Balance Sheet | Balance Sheet | Instruments | Pledged | Net Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Description |
||||||||||||||||||||||||
Interest rate swap derivatives with institutional counterparties |
$ | 3,191 | $ | 0 | $ | 3,191 | $ | 392 | $ | 2,799 | $ | 0 | ||||||||||||
|
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|
|
|
|
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|
|
|
|
38
ITEM 2. Managements 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.
Managements 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 Bancorps financial condition and results of operations as of and for the three months ended March 31, 2014. All quarterly information in this Managements Discussion and Analysis is unaudited. You should read this section in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operation included in Customers Bancorps filing on Form 10-K for the fiscal year ended December 31, 2013.
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 AND BASIS OF PRESENTATION to our audited financial statements included in our 2013 Form 10-K and updated in this quarterly report on Form 10-Q for the three months ended March 31, 2014.
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. 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 2013 Form 10-K.
First Quarter Events of Note
Following a successful 2013, Customers Bancorp continued its strong performance in first quarter 2014. Most notably, total assets were $5.0 billion as of March 31, 2014, an increase of 21% from December 31, 2013 and a record high. During first quarter 2014, the Bancorp achieved significant organic loan growth in its multi-family loans (up $495 million) and commercial real estate and commercial and industrial loans (up $135 million). Additionally, the Company acquired $278 million of residential adjustable-rate jumbo mortgage loans from Michigan-based Flagstar Bank. Asset quality remained high and capital ratios exceeded levels established for well capitalized banks. First quarter financial results for 2014 included strong earnings of $8.1 million, or $0.32 per diluted share.
39
Results of Operations
First Quarter 2014 Compared to First Quarter 2013
Net income available to common shareholders increased $0.9 million (13.2%) to $8.1 million for the three months ended March 31, 2014, compared to $7.2 million for the three months ended March 31, 2013. The increased net income resulted from increased net interest income of $7.0 million, increased non-interest income of $2.7 million, and reduced income tax expense of $0.4 million, partially offset by increased non-interest expense of $4.7 million and increased provision for loan losses of $4.5 million.
Net interest income increased $7.0 million (31.0%) for the three months ended Month 31, 2014 to $29.5 million, compared to $22.5 million for the three months ended March 31, 2013. This increase resulted principally from an increase in average loan balances (loans held for sale and loans receivable) of $894.4 million to $3.4 billion, offset in part by a 37 basis point decrease in average yields on loans to 3.92% net of a 3 basis point decrease in the cost of funding. The reduced yields are primarily driven by a decrease in market interest rates on loans, payoffs on maturing higher yielding loans and growth of multi-family loans, which have high credit quality but yield below the current loan portfolio average yield.
The provision for loan losses increased by $4.5 million to $4.4 million for the three months ended March 31, 2014, compared to $(0.1) million for the same period in 2013. The increase in the provision for loan losses during first quarter 2014 is primarily related to first quarter loan growth and reduced estimated benefits from the FDIC loss sharing receivable.
Non-interest income increased $2.7 million during the three months ended March 31, 2014 to $7.6 million, compared to $4.9 million for the three months ended March 31, 2013. The increase in 2014 is attributable to gains realized from sales of investment securities ($2.8 million), management advisory fees earned in conjunction with an equity investment in a foreign entity ($0.5 million), mortgage banking income ($0.4 million), increased fees earned by executing interest rate swaps with commercial banking customers (up $0.4 million), increased income from bank owned life insurance (up $0.4 million), offset in part by decreased mortgage warehouse transactional fees (down $1.9 million).
Non-interest expense increased $4.7 million during the three months ended March 31, 2014 to $21.2 million, compared to $16.5 million during the three months ended March 31, 2013. Expenses increased in 2014 compared to 2013 principally for salaries and employee benefits as staffing levels grew to support the growing business (up $2.0 million), professional services for loan workout, litigation, and development of materials to respond to increased regulatory inquiries triggered by increasing levels of growth and complexity (up $1.6 million), assessment for FDIC insurance and other regulatory fees as the bank grew and other costs were incurred (up $0.8 million), technology, communication and bank operation to further support and build infrastructure (up $0.7 million) and occupancy as the business expansion into new markets and increased activity in existing markets required additional facilities (up $0.7 million). These increases were offset in part by a provision for loss contingency recorded during first quarter 2013 as a result of a fraud perpetrated on a loan to fund a residential mortgage warehouse line of credit (down $2.0 million).
Income tax expense decreased $0.4 million in the three months ended March 31, 2014 to $3.4 million compared to $3.9 million in the same period of 2013. The decrease in the income tax expense is primarily due to an out of period adjustment of $0.6 million recorded in first quarter 2014 that related to the period ended December 31, 2013.
40
Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers Bancorps earnings. The following table summarizes the Bancorps net interest income and related spread and margin for the periods indicated.
Three Months Ended March 31, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
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 |
$ | 187,085 | $ | 116 | 0.25 | % | $ | 174,637 | $ | 108 | 0.25 | % | ||||||||||||
Investment securities, taxable (A) |
516,902 | 3,040 | 2.35 | % | 143,028 | 829 | 2.32 | % | ||||||||||||||||
Loans held for sale |
566,535 | 5,083 | 3.64 | % | 1,123,420 | 10,884 | 3.93 | % | ||||||||||||||||
Loans, taxable (B) |
2,818,023 | 28,188 | 4.05 | % | 1,379,228 | 16,027 | 4.71 | % | ||||||||||||||||
Loans, non-taxable (B) |
24,027 | 167 | 2.83 | % | 11,491 | 72 | 2.53 | % | ||||||||||||||||
Less: Allowance for loan losses |
(24,524 | ) | (26,299 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
4,088,048 | 36,594 | 3.62 | % | 2,805,505 | 27,920 | 4.03 | % | ||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Non-interest-earning assets |
282,192 | 156,969 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 4,370,240 | $ | 2,962,474 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Interest checking |
$ | 57,067 | 115 | 0.81 | % | $ | 35,892 | 39 | 0.43 | % | ||||||||||||||
Money market deposit accounts |
1,397,299 | 2,155 | 0.63 | % | 999,525 | 1,704 | 0.69 | % | ||||||||||||||||
Other savings |
38,312 | 40 | 0.43 | % | 21,638 | 26 | 0.49 | % | ||||||||||||||||
Certificates of deposit |
1,252,871 | 3,105 | 1.01 | % | 1,192,330 | 3,367 | 1.15 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest bearing deposits |
2,745,549 | 5,415 | 0.80 | % | 2,249,385 | 5,136 | 0.93 | % | ||||||||||||||||
Borrowings |
551,339 | 1,667 | 1.22 | % | 171,333 | 259 | 0.61 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
3,296,888 | 7,082 | 0.87 | % | 2,420,718 | 5,395 | 0.90 | % | ||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Non-interest-bearing deposits |
666,775 | 254,859 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total deposits & borrowings |
3,963,663 | 0.72 | % | 2,675,577 | 0.82 | % | ||||||||||||||||||
Other non-interest-bearing liabilities |
11,619 | 12,550 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities |
3,975,282 | 2,688,127 | ||||||||||||||||||||||
Shareholders Equity |
394,958 | 274,347 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 4,370,240 | $ | 2,962,474 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest earnings |
29,512 | 22,525 | ||||||||||||||||||||||
Tax-equivalent adjustment (C) |
90 | 39 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest earnings |
$ | 29,602 | $ | 22,564 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Interest spread |
2.90 | % | 3.21 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin |
2.92 | % | 3.25 | % | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest margin tax equivalent (C) |
2.93 | % | 3.26 | % | ||||||||||||||||||||
|
|
|
|
(A) | For presentation in this table, average 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. |
41
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Three Months Ended March 31, | ||||||||||||
2014 vs. 2013 | ||||||||||||
Increase (decrease) due to change in |
||||||||||||
Rate | Volume | Total | ||||||||||
(in thousands) | ||||||||||||
Interest income: |
||||||||||||
Interest earning deposits |
$ | (1 | ) | $ | 9 | $ | 8 | |||||
Investment securities |
48 | 2,163 | 2,211 | |||||||||
Loans held for sale |
(3,267 | ) | (2,534 | ) | (5,801 | ) | ||||||
Loans, taxable |
(9,085 | ) | 21,246 | 12,161 | ||||||||
Loans, non-taxable |
34 | 61 | 95 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
(12,271 | ) | 20,945 | 8,674 | ||||||||
|
|
|
|
|
|
|||||||
Interest expense: |
||||||||||||
Interest checking |
135 | (60 | ) | 75 | ||||||||
Money market deposit accounts |
(662 | ) | 1,122 | 460 | ||||||||
Savings |
(19 | ) | 25 | 6 | ||||||||
Certificates of deposit |
(1,668 | ) | 1,406 | (262 | ) | |||||||
|
|
|
|
|
|
|||||||
Total interest bearing deposits |
(2,214 | ) | 2,493 | 279 | ||||||||
Borrowings |
(2,835 | ) | 4,243 | 1,408 | ||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
(5,049 | ) | 6,736 | 1,687 | ||||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | (7,222 | ) | $ | 14,209 | $ | 6,987 | |||||
|
|
|
|
|
|
Net interest income was $29.5 million for the three months ended March 31, 2014, compared to $22.5 million for the three months ended March 31, 2013, an increase of $7.0 million or 31.0%. This net increase was attributable to an increase of $1.3 billion in the average balance of interest-earning assets, offset in part by an increase of $0.9 billion in the average balance of interest-bearing liabilities. The primary driver of the increase in net interest income was higher loan volume from the following:
| $756.8 million increase in the average balance of multi-family loans due to growth of the multi-family lending business; and |
| $439.3 million increase in the average balance of commercial loans primarily due to growth of the commercial and industrial loan portfolio including owner occupied commercial real estate loans. |
The key measure of our net interest income is net interest margin. Our net interest margin decreased to 2.92% for the three months ended March 31, 2014 from 3.25% for the same period in 2013. The decrease was driven by a decrease in the average yield on loans from 4.29% to 3.92%, primarily due to the maturity of higher yielding loans, and the growth of multi-family loan products with higher credit quality but yields below the portfolio average yield. The effect of this decrease was marginally offset by the decrease in the cost of deposits and borrowings from 0.90% to 0.87%.
In addition to an increase in interest income from investment securities of $2.2 million, interest income from multi-family loans, and commercial and industrial loans increased by $7.1 million and $3.3 million, respectively, partially offset by a decrease of $5.9 million of interest income from warehouse lending. Driving the rise in interest income was higher average loan volume for multi-family loans of $756.8 million, and commercial loan volume of $439.3 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 first quarter of 2014 compared to the same quarter in 2013. In the three months ended March 31, 2014 interest expense for borrowings increased by $1.4 million. The average balance of borrowings increased by $380.0 million which was primarily driven by the increase in average FHLB advances of $322.1 million in the first quarter of 2014 compared to the same quarter in 2013, and 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 contributed to the overall increase in borrowings costs of 0.60% when comparing the cost of 1.22% for the quarter ended March 31, 2014 versus 0.61% for the period ended March 31, 2013.
42
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 statements 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 March 31, 2014, approximately 1.52% 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 as a reduction to the provision for loan losses for the portion anticipated to be recovered under the loss sharing agreements. Conversely, if the estimated cash flows on the covered loans increase, all or a portion of the previously recorded provision for loan losses will be reversed, and the corresponding receivable due from the FDIC will be written down as an increase to the provision for loan losses.
The provision for loan losses increased by $4.5 million to $4.4 million for the three months ended March 31, 2014, compared to $(0.1) million for the same period in 2013. The increase in the 2014 provision compared to the same period in 2013 was principally a result of a provision of $2.9 million recorded mainly to reflect first quarter 2014 loan growth and $1.5 million for reduced estimated benefits to be derived from the FDIC loss sharing receivable.
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 March 31, 2014 and 2013.
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Gain on sale of investment securities, net |
$ | 2,832 | $ | 0 | ||||
Mortgage warehouse transactional fees |
1,759 | 3,668 | ||||||
Bank-owned life insurance |
835 | 476 | ||||||
Mortgage banking income |
409 | 0 | ||||||
Deposit fees |
214 | 130 | ||||||
Other |
1,541 | 624 | ||||||
|
|
|
|
|||||
Total non-interest income |
$ | 7,590 | $ | 4,898 | ||||
|
|
|
|
Non-interest income was $7.6 million for the three months ended March 31, 2014, an increase of $2.7 million from non-interest income of $4.9 million for the three months ended March 31, 2013. The increase was primarily the result of $2.8 million of gains realized from sales of available-for-sale investment securities (executed to shorten the duration of the asset portfolio), $0.5 million of management advisory fees earned in conjunction with an equity investment in a foreign entity that was made during third quarter 2013 and mortgage banking income of $0.4 million as Customers launched its mortgage banking activities in the latter half of 2013. There were also increased fees earned by executing interest rate swaps with commercial banking customers of $0.4 million and increased bank owned life insurance income of $0.4 million due to additional policies purchased during 2013. Partially offsetting these items was a decrease in mortgage warehouse transactional fees of $1.9 million as lending to mortgage companies to finance their inventories prior to sale of the loans has significantly decreased since this same period last year.
Non-Interest Expense
The table below presents the components of non-interest expense for the three months ended March 31, 2014 and 2013.
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Salaries and employee benefits |
$ | 9,351 | $ | 7,397 | ||||
Occupancy |
2,637 | 1,910 | ||||||
Professional services |
2,282 | 706 | ||||||
FDIC assessments, taxes and regulatory fees |
2,131 | 1,347 | ||||||
Technology, communications and bank operations |
1,560 | 841 | ||||||
Loan workout |
441 | 674 | ||||||
Advertising and promotion |
414 | 115 | ||||||
Other real estate owned |
351 | 36 | ||||||
Loss contingency |
0 | 2,000 | ||||||
Other |
2,002 | 1,454 | ||||||
|
|
|
|
|||||
Total non-interest expense |
$ | 21,169 | $ | 16,480 | ||||
|
|
|
|
43
Non-interest expense was $21.2 million for the three months ended March 31, 2014, an increase of $4.7 million from non-interest expense of $16.5 million for the three months ended March 31, 2013.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $2.0 million (26.4%) to $9.4 million for the three months ended March 31, 2014 from $7.4 million for the three months ended March 31, 2013. The primary reason for this increase was an increase in the number of employees from 283 full-time equivalents at March 31, 2013 to 387 full-time equivalents at March 31, 2014. This was directly related to the need for additional employees to support our organic growth and expansion into new markets. More specifically, the increased headcount is needed to support the growing multi-family, commercial real estate and commercial and industrial loan portfolios.
Professional services expense increased by 223.2%, or $1.6 million, to $2.3 million for the three months ended March 31, 2014 from $0.7 million for the three months ended March 31, 2013. This increase was primarily attributable to higher legal and consulting expenses in 2014 related to loan workout, litigation and other general regulatory matters.
Occupancy expense increased by 38.1%, or $0.7 million, rising to $2.6 million for the three months ended March 31, 2014 from $1.9 million for the three months ended March 31, 2013. The increase was related to building the infrastructure to support growth and expansion into new markets.
FDIC assessments, taxes and regulatory fees increased by 58.2%, or $0.8 million to $2.1 million for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2013. The primary reasons for this increase were related to higher Pennsylvania bank shares tax expense that resulted from legislative changes to the tax calculation, increased deposit premiums and other regulatory and filing fees.
Technology, communication and bank operations increased by 85.5%, or $0.7 million, rising to $1.6 million for the three months ended March 31, 2014 from $0.8 million for the three months ended March 31, 2013. The primary reason for this increase was related to building the infrastructure to support growth through increased technology improvements and upgrades as well as the costs related to expanding 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.
In March 2013, a suspected fraud was discovered in the Banks loans held-for-sale portfolio. Total loans involved in this fraud initially appeared to be $5.2 million. 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 during 2013. In addition, the Bank recovered $1.5 million in cash from the alleged perpetrator in 2013. During 2013, a loss contingency expense of $2.0 million was provided, resulting in a net amount of $0.7 million classified in other assets as of March 31, 2014.
Other expenses increased by 37.7%, or $0.5 million, to $2.0 million for the three months ended March 31, 2014, compared to $1.5 million for the three months ended March 31, 2013 reflecting increased general expenses to support a rapidly growing business.
Income Taxes
Income tax expense was $3.4 million and $3.9 million, respectively, for the three months ended March 31, 2014 and 2013. The decrease in the income tax expense was primarily due to an out of period adjustment of $0.6 million recorded in first quarter 2014 that related to 2013.
The effective tax rate for the three months ended March 31, 2014 and 2013 was approximately 30 percent and 35 percent, respectively. The decrease in the effective tax rate for first quarter 2014 was primarily due to the out of period adjustment noted above.
Financial Condition
General
Total assets were $5.0 billion at March 31, 2014. This represented an $861.1 million, or 20.7% increase from $4.2 billion at December 31, 2013. The major change in our financial position occurred as the result of the growth in loans receivable not covered by loss sharing agreements with the FDIC, which increased by 37.4% or $0.9 billion to $3.3 billion at March 31, 2013, from $2.4 billion at December 31, 2013.
44
The main driver of the increase in assets was primarily from the expansion of multi-family loans, which increased by $495.3 million (46.7%) to $1.6 billion at March 31, 2014 from $1.1 billion at December 31, 2013. Adjustable rate 1-4 family residential mortgage loans increased $260.3 million (83.3%) to $572.8 million at March 31, 2014 from $312.5 million at December 31, 2013; this increase was due to the purchased loan portfolio on January 15, 2014. Additionally, commercial real estate and commercial and industrial loans increased by $134.6 million (12.6%) to $1.2 billion at March 31, 2014 from $1.1 billion at December 31, 2013.
Total liabilities were $4.6 billion at March 31, 2014. This represented a $0.8 billion, or 22.5%, increase from $3.8 billion at December 31, 2013. The increase in total liabilities was due to a higher level of deposits at March 31, 2014 compared to December 31, 2013. Total deposits grew by $0.6 billion (21.8%) to $3.6 billion at March 31, 2014 from $3.0 billion at December 31, 2013. Deposits are obtained primarily from within the Banks geographic service area and through wholesale and broker networks. These networks provide low-cost funding alternatives to retail deposits and diversity to the Banks sources of funds. The increase in bank deposits was primarily due to the seasonal inflow of student deposits and the growth in brokered money market deposit accounts.
The following table sets forth certain key condensed balance sheet data:
March 31, 2014 |
December 31, 2013 |
|||||||
(in thousands) | ||||||||
Cash and cash equivalents |
$ | 290,467 | $ | 233,068 | ||||
Investment securities, available for sale |
458,302 | 497,573 | ||||||
Loans held for sale |
697,532 | 747,593 | ||||||
Loans receivable not covered under FDIC Loss Sharing Agreements |
3,294,908 | 2,398,353 | ||||||
Loans receivable covered under FDIC Loss Sharing Agreements |
61,639 | 66,725 | ||||||
Total loans receivable, net of the allowance for loan losses |
3,329,843 | 2,441,080 | ||||||
Total assets |
5,014,231 | 4,153,173 | ||||||
Total deposits |
3,606,332 | 2,959,922 | ||||||
Federal funds purchased |
0 | 13,000 | ||||||
FHLB advances |
905,000 | 706,500 | ||||||
Other borrowings |
65,250 | 65,250 | ||||||
Total liabilities |
4,613,293 | 3,766,550 | ||||||
Total shareholders equity |
400,938 | 386,623 | ||||||
Total liabilities and shareholders equity |
5,014,231 | 4,153,173 |
Cash and Cash Equivalents
Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled $73.5 million at March 31, 2014. This represents a $14.2 million increase from $59.3 million at December 31, 2013. These balances vary from day to day, primarily due to variations in customers deposits with the Bank.
Investment Securities
Our investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed securities (principally guaranteed by an agency of the United States government), domestic corporate debt and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, provide collateral for other borrowings, and diversify the credit risk of earning assets. The portfolio is structured to maximize net interest income, given changes in the economic environment, liquidity position, and balance sheet mix.
At March 31, 2014, our investment securities were $458.3 million compared to $497.6 million in December 31, 2013. The decrease is primarily the result of our sale of securities to strategically reduce interest rate risk in the investment portfolio, shortening the duration of the investment securities term.
Unrealized gains and losses on available-for-sale securities are included in other comprehensive income and reported as a separate component of shareholders equity, net of the related tax effect.
Loans
Existing lending relationships are primarily with small businesses and individual consumers primarily in Bucks, Berks, Chester, Montgomery, Delaware, and Philadelphia Counties, Pennsylvania; Camden and Mercer Counties, New Jersey; and Westchester County and New York City, New York; and the New England area. The loan portfolio is primarily comprised of loans to support mortgage banking companies funding needs, multi-family/commercial real estate, construction, and commercial and industrial loans.
45
Mortgage warehouse loans and certain residential loans expected to be sold are classified as loans held for sale. Loans held for sale totaled $0.7 billion at March 31, 2014 and December 31, 2013. Loans held for sale are not included in the loan receivable amounts. The mortgage warehouse product line provides financing to mortgage companies nationwide from the time of the home purchase or refinancing of a mortgage loan through the sale of the loan by the mortgage originator into the secondary market, either through a repurchase facility or the purchase of the underlying mortgages. As a mortgage warehouse lender, we provide a form of financing to mortgage bankers by purchasing for resale the underlying residential mortgages on a short-term basis under a master repurchase agreement. We are subject to the risks associated with such lending, including, but not limited to, the risks of fraud, bankruptcy and default of the mortgage banker or of the underlying residential borrower, any of which could result in credit losses. The mortgage warehouse lending employees monitor these mortgage originators by obtaining financial and other relevant information to reduce these risks during the lending period.
Loans receivable, net, increased by $0.9 billion to $3.3 billion at March 31, 2014 from $2.4 billion at December 31, 2013. The multi-family/commercial real estate loan balance is increasing due to the focus on this element of Customers organic growth strategy. Offsetting these increases in part was the loan runoff for purchased-credit-impaired and covered loans. The composition of loan receivable as of March 31, 2014 and December 31, 2013 was as follows:
March 31, 2014 |
December 31, 2013 |
|||||||
(in thousands) | ||||||||
Construction |
$ | 12,775 | $ | 14,627 | ||||
Commercial real estate |
23,176 | 24,258 | ||||||
Commercial and industrial |
6,131 | 5,814 | ||||||
Residential real estate |
16,324 | 18,733 | ||||||
Manufactured housing |
3,233 | 3,293 | ||||||
|
|
|
|
|||||
Total loans receivable covered under FDIC loss sharing agreements (1) |
61,639 | 66,725 | ||||||
Construction |
36,132 | 36,901 | ||||||
Commercial real estate |
2,470,589 | 1,835,186 | ||||||
Commercial and industrial |
240,099 | 239,509 | ||||||
Mortgage warehouse |
655 | 866 | ||||||
Manufactured housing |
136,952 | 139,471 | ||||||
Residential real estate |
408,417 | 145,188 | ||||||
Consumer |
1,822 | 2,144 | ||||||
|
|
|
|
|||||
Total loans receivable not covered under FDIC loss sharing agreements |
3,294,666 | 2,399,265 | ||||||
|
|
|
|
|||||
Total loans receivable |
3,356,305 | 2,465,990 | ||||||
Deferred (fees) costs, net |
242 | (912 | ) | |||||
Allowance for loan losses |
(26,704 | ) | (23,998 | ) | ||||
|
|
|
|
|||||
Loans receivable, net |
$ | 3,329,843 | $ | 2,441,080 | ||||
|
|
|
|
(1) | Loans that were acquired in two FDIC assisted transactions and are covered under loss sharing arrangements with the FDIC are referred to as covered loans throughout this Managements Discussion and Analysis. |
Credit Risk
Customers Bancorp manages credit risk by maintaining diversification in its loan portfolio, by establishing and enforcing prudent underwriting standards, by collection efforts and by continuous and periodic loan classification reviews. Management also considers the effect of credit risk on financial performance by maintaining an adequate allowance for loan losses. Credit losses are charged when they are identified, and provisions are added, to the allowance for loan losses when and as appropriate, but at least quarterly. The allowance for loan losses is evaluated at least quarterly.
The provision for loan losses was $4.4 million and $(0.1) million for the three months ended March 31, 2014 and 2013, respectively. The allowance for loan losses maintained for loans receivable (excludes loans held for sale as estimable credit losses are embedded in the fair values at which the loans are reported) was $26.7 million, or 0.8% of total non-covered loans, at March 31, 2014, and $26.4 million, or 1.7% of total non-covered loans, at March 31, 2013. The coverage ratio declined largely due to the decrease in non-performing loans as a result of net-charge-offs ($6.6 million for the twelve months ended March 31, 2014), transfers to other real estate owned, sustained performance improvements that led to lower reserve factors for commercial, multi-family and residential mortgage loans, and the growth of the multi-family loan portfolio which draws only a 40 basis point reserve level due to its historical
46
payment experience. Net charge-offs were $0.2 million for the three months ended March 31, 2014, a decrease of $0.3 million compared to the same period in 2013. The Bank had approximately $61.6 million in loans that were covered under loss share arrangements with the FDIC as of March 31, 2014 compared to $66.7 million as of December 31, 2013. The Bank considers the covered loans in estimating the allowance for loan losses and considers recovery of estimated credit losses from the FDIC in the FDIC indemnification asset.
The chart below depicts changes in Customers Bancorps allowance for loan losses for the periods indicated.
Analysis of the Allowance for Loan Losses
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Balance at the beginning of the period |
$ | 23,998 | $ | 25,837 | ||||
Loan charge-offs |
||||||||
Construction |
0 | 0 | ||||||
Commercial real estate |
248 | 410 | ||||||
Commercial and industrial |
0 | 20 | ||||||
Residential real estate |
288 | 133 | ||||||
Consumer and other |
0 | 0 | ||||||
|
|
|
|
|||||
Total Charge-offs |
536 | 563 | ||||||
|
|
|
|
|||||
Loan recoveries |
||||||||
Construction |
0 | 0 | ||||||
Commercial real estate |
25 | 52 | ||||||
Commercial and industrial |
90 | 11 | ||||||
Residential real estate |
224 | (3 | ) | |||||
Consumer and other |
2 | 5 | ||||||
|
|
|
|
|||||
Total Recoveries |
341 | 65 | ||||||
|
|
|
|
|||||
Total net charge-offs |
195 | 498 | ||||||
Provision for loan losses |
2,901 | 1,100 | ||||||
|
|
|
|
|||||
Balance at the end of the period |
$ | 26,704 | $ | 26,439 | ||||
|
|
|
|
The allowance for loan losses is based on a periodic evaluation of the loan portfolio and is maintained at a level that management considers adequate to absorb potential losses. All commercial loans are assigned credit risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans timely. Management considers a variety of factors, and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate the appropriate level of allowance for loan losses. See Asset Quality for further discussion of the allowance for loan losses.
Customers methodology includes an evaluation of loss potential from individual problem credits, as well as a general reserve for the portfolio considering anticipated specific and general economic factors that may positively or adversely affect collectability. This assessment includes a review of changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions that may affect borrowers ability to repay, and other factors that may warrant consideration in estimating the reserve. In addition, the Bancorps internal auditors, loan review, and various regulatory agencies periodically review the adequacy of the allowance as an integral part of their work responsibilities or examination process. Customers Bancorp may be asked to recognize additions or reductions to the allowance for loan losses based on their judgments of information available at the time of their examination.
Nearly 90% of the Banks commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, the real estate portfolio). The Banks lien position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the collateral. Current appraisals providing current value estimates of the property are received when the Banks credit group determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real estate values have deteriorated. The
47
credit committee and loan officers review loans that are fifteen or more days delinquent and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a borrower of interest are discussed to determine if additional analysis is necessary to apply the risk rating criteria properly. The risk ratings for the real estate loan portfolio are determined based upon the current information available, including but not limited to discussions with the borrower, updated financial information, economic conditions within the geographic area and other factors that may affect the cash flow of the loan. On a quarterly basis, if necessary, the collateral values or discounted cash flow models are used to determine the estimated fair value of the underlying collateral for the quantification of a specific reserve for impaired loans. Appraisals used within this evaluation process do not typically age more than two years before a new appraisal is obtained. For loans where real estate is not the primary source of collateral, updated financial information is obtained, including accounts receivable and inventory aging reports and relevant supplemental financial data to determine the fair value of the underlying collateral.
These evaluations, however, are inherently subjective as they require material estimates, including, among other estimates, the amounts and timing of expected future cash flows on impaired loans, estimated losses in the loan portfolio, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change. Pursuant to ASC 450 Contingencies and ASC 310-40 Troubled Debt Restructurings by Creditors, impaired loans, consisting of non-accrual and restructured loans, are considered in the methodology for determining the allowance for credit losses. Impaired loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the sale or operation of such collateral.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers further divides originated loans into two categories: those originated prior to the current underwriting standards in 2009 and those originated subject to those standards post 2009, and purchased loans into two categories: those purchased credit impaired, and those not acquired credit impaired. Management believes that this additional information provides for a better understanding of the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may arise in future periods. Credit losses from originated loans are absorbed by the allowance for loan loss reserves. Credit losses from acquired loans are absorbed by the allowance for loan losses and cash reserves, as described below. This schedule includes both loans held for sale and loans held for investment.
48
Asset Quality at March 31, 2014 | ||||||||||||||||||||||||||||||||||||||||
Loan Type |
Total Loans |
PCI Loans (1) |
Current | 30-90 Days |
Greater than 90 Days and Accruing |
Non- accrual/ NPL (a) |
OREO (b) |
NPA (a)+(b) |
NPL to Loan Type (%) |
NPA to Loans + OREO (%) |
||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
New Century Orig. Loans |
||||||||||||||||||||||||||||||||||||||||
Legacy |
$ | 67,244 | $ | 0 | $ | 56,729 | $ | 1,569 | $ | 0 | $ | 8,946 | $ | 5,197 | $ | 14,143 | 13.30 | 19.52 | ||||||||||||||||||||||
TDRs |
1,738 | 0 | 1,080 | 0 | 0 | 658 | 0 | 658 | 37.86 | 37.86 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total Originated Loans |
68,982 | 0 | 57,809 | 1,569 | 0 | 9,604 | 5,197 | 14,801 | 13.92 | 19.95 | ||||||||||||||||||||||||||||||
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|||||||||||||||||||||||||
Originated Loans |
||||||||||||||||||||||||||||||||||||||||
Warehouse Repo |
5,386 | 0 | 5,386 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Manufactured |
4,303 | 0 | 4,281 | 22 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Commercial |
958,709 | 0 | 956,609 | 1,607 | 0 | 493 | 0 | 493 | 0.05 | 0.05 | ||||||||||||||||||||||||||||||
Multi-family |
1,553,426 | 0 | 1,553,426 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Consumer/Mortgage |
112,687 | 0 | 112,687 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
CRA |
15,872 | 0 | 15,872 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
TDRs |
320 | 0 | 320 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
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Total Originated Loans |
2,650,703 | 0 | 2,648,581 | 1,629 | 0 | 493 | 0 | 493 | 0.02 | 0.02 | ||||||||||||||||||||||||||||||
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Acquired Loans |
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Berkshire |
11,054 | 0 | 9,091 | 0 | 0 | 1,963 | 813 | 2,776 | 17.76 | 23.39 | ||||||||||||||||||||||||||||||
FDIC Covered |
39,386 | 0 | 32,826 | 1,103 | 0 | 5,457 | 9,329 | 14,786 | 13.86 | 30.35 | ||||||||||||||||||||||||||||||
FDIC Non-covered |
15 | 0 | 15 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Manufactured Housing 2010 |
73,428 | 0 | 68,971 | 4,457 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Manufactured Housing 2011 |
0 | 0 | 0 | 0 | 0 | 0 | 331 | 331 | 0.00 | 100.0 | ||||||||||||||||||||||||||||||
Manufactured Housing 2012 |
52,184 | 0 | 45,694 | 2,552 | 3,938 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Flagstar (Commercial) |
128,883 | 0 | 128,883 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
Flagstar (Residential) |
254,447 | 0 | 254,447 | 0 | 0 | 0 | 0 | 0 | 0.00 | 0.00 | ||||||||||||||||||||||||||||||
TDRs |
3,074 | 0 | 2,461 | 61 | 0 | 552 | 0 | 552 | 17.96 | 17.96 | ||||||||||||||||||||||||||||||
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Total Acquired Loans |
562,471 | 0 | 542,388 | 8,173 | 3,938 | 7,972 | 10,473 | 18,445 | 1.42 | 3.22 | ||||||||||||||||||||||||||||||
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Acquired PCI Loans |
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Berkshire |
47,797 | 47,797 | 43,322 | 239 | 4,236 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
FDIC Covered |
21,709 | 21,709 | 4,426 | 0 | 17,283 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
Manufactured Housing 2011 |
5,175 | 5,175 | 2,389 | 575 | 2,211 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
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Total Acquired PCI Loans |
74,681 | 74,681 | 50,137 | 814 | 23,730 | 0 |