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CUBI > SEC Filings for CUBI > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for CUSTOMERS BANCORP, INC.

Form 10-Q for CUSTOMERS BANCORP, INC.


9-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Note Regarding Forward-Looking Statements

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

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

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in "NOTE 3 - "SIGNIFICANT ACCOUNTING POLICIES" to our audited financial statements for the year ended December 31, 2012 included in our 2012 Form 10-K.

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

Second Quarter Events of Note

On May 22, 2013, we announced the closing of our underwritten public offering of voting common stock ("the May 2013 Offering"). We raised $103.5 million in gross proceeds by issuing 6,179,104 shares of our voting common stock at a price to the public of $16.75 per share. Our net proceeds after deducting underwriting discounts and commissions and estimated offering expenses were approximately $97.7 million. We also issued options to purchase 710,597 shares of our common stock to our CEO and COO exercisable at the public offering price pursuant to their respective employment agreements in connection with the May 2013 Offering.

On June 26, 2013, we announced the formation of a business collaboration with and plans to invest up to $51 million in Religare Enterprises Limited ("Religare"), which is a diversified financial services company in India that is applying for a banking license in India. We have agreed, subject to completion of definitive agreements and the receipt of any necessary approvals, to purchase $22


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million of Religare common stock from one of its promoters, $1 million of Religare common stock from Religare, and warrants to purchase $28 million of Religare common stock. We will be required to pay 25% of the total value of the warrants ($7 million) in advance, and this amount is non-refundable. These transactions are being negotiated and may change. We expect to fund the Religare investments with cash currently on hand and dividends from Customers Bank.

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

The initial investment is expected to be completed during the third quarter of 2013, and the warrants must be exercised within 18 months of our initial investment.

Subsequent Events

On July 30, 2013, we completed an underwritten public offering of $55.0 million non-callable five-year senior unsecured notes, with interest at 6.375% payable quarterly. We granted the underwriters a 30-day option to purchase up to an additional 15% of the aggregate principal amount of the senior notes ($8.25 million) sold in the offering, solely to cover over-allotments, if any. Net proceeds were estimated to be $52.6 million, or $60.6 million, if the underwriters were to exercise the over-allotment option in full.

We intend to use the net proceeds from the offering to invest in our subsidiary, Customers Bank, to fund our organic growth, and for working capital and other general corporate purposes. We may also use a portion of the net proceeds to pursue acquisitions or investments in our current and prospective markets.

Acquisition Activity

CMS Bancorp Acquisition

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

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

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

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

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

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

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

On May 22, 2013, the Bancorp purchased $1.5 million (1,500 shares) of CMS Series A Noncumulative Perpetual Preferred Stock, satisfying the first obligation listed above.

On April 23, 2013, the Bancorp paid to CMS $300,000, satisfying the second obligation listed above.


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Acacia Federal Savings Bank Acquisition

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

New England Commercial Lending Acquisition

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

Results of Operations

Second Quarter 2013 Compared to Second Quarter 2012

We had net income of $8.2 million for the three months ended June 30, 2013 and net income of $6.5 million for the three months ended June 30, 2012, an increase of $1.7 million or 26.5%. Diluted earnings per share were $0.38 and $0.56 for the three months ended June 30, 2013 and June 30, 2012, respectively, a comparative decrease of $0.18 per share or 32.6%. The decrease in diluted earnings per share is primarily the result of the inclusion of the 6.2 million shares issued in the public offering in May 2013 and the 7.1 million shares issued in the private offering in the third quarter of 2012 in the 2013 calculations of earnings per share. See "NOTE 5 - EARNINGS PER SHARE."


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Net Interest Income

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



                                                                              Three Months Ended June 30,
                                                                2013                                              2012
                                                               Interest        Average                          Interest         Average
                                               Average         Income or       Yield or         Average         Income or       Yield  or
                                               Balance          Expense          Cost           Balance          Expense          Cost
                                                                                (dollars in thousands)
                  Assets
Interest earning deposits                    $   178,853      $       114           0.25 %    $   106,206      $        69            0.26 %
Investment securities, taxable (A)               181,573            1,082           2.38 %        294,143            2,219            3.02 %
Investment securities, non-taxable (A)                 0                0           0.00 %          2,065               21            4.16 %
Loans held for sale                            1,158,974           11,157           3.86 %        156,169            1,469            3.78 %
Loans, taxable (B)                             1,696,979           19,099           4.51 %      1,409,862           15,881            4.53 %
Loans, non-taxable (B)                            14,525               97           2.68 %          7,308               41            2.25 %
Less: Allowance for loan losses                  (26,533 )                                        (15,705 )

Total interest earning assets                  3,204,371           31,549           3.95 %      1,960,048           19,700            4.04 %

Non-interest earning assets                      174,076                                          116,505

Total assets                                 $ 3,378,447                                      $ 2,076,553

               Liabilities
Interest checking                            $    44,094               47           0.42 %    $    34,714               49            0.57 %
Money market                                   1,061,972            1,864           0.70 %        780,689            1,919            0.99 %
Other savings                                     24,451               29           0.47 %         19,830               29            0.59 %
Certificates of deposit                        1,278,898            3,196           1.00 %        886,137            3,427            1.56 %

Total interest bearing deposits                2,409,415            5,136           0.86 %      1,721,370            5,424            1.27 %
Other borrowings                                 357,780              421           0.47 %         39,951              124            1.26 %

Total interest-bearing liabilities             2,767,195            5,557           0.81 %      1,761,321            5,548            1.27 %

Non-interest-bearing deposits                    269,618                                          152,885

Total deposits & borrowings                    3,036,813                            0.73 %      1,914,206                             1.17 %
Other non-interest bearing liabilities            15,266                                            6,452

Total liabilities                              3,052,079                                        1,920,658
Shareholders' Equity                             326,368                                          155,895

Total liabilities and shareholders' equity   $ 3,378,447                                      $ 2,076,553

Net interest earnings                                              25,992                                           14,152
Tax equivalent adjustment (C)                                          52                                               34

Net interest earnings                                         $    26,044                                      $    14,186

Interest spread                                                                     3.21 %                                            2.87 %

Net interest margin                                                                 3.25 %                                            2.90 %

Net interest margin tax equivalent (C)                                              3.26 %                                            2.91 %


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(A) For presentation in this table, balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(B) Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.

(C) Full tax equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.

Net interest income increased by $11.8 million, or 83.7% for the three months ended June 30, 2013 to $26.0 million, from $14.2 million for the three months ended June 30, 2012. This net increase was attributable to increases of $1.2 billion in average volume of average interest-earning assets, offset by an increase of $1.0 billion in average interest-bearing liabilities. The primary driver of the increase in net interest income was from higher loan volume from the following:

$392.8 million increase in average mortgage warehouse loans due to growth of the mortgage warehouse lending business;

$342.3 million increase in average commercial loans primarily due to growth of the commercial real estate loan portfolio; and

$457.2 million increase in average multi-family loans due to growth of the multi-family lending business.

The key measure of our net interest income is net interest margin. Our net interest margin increased to 3.26% for the three months ended June 30, 2013 from 2.91% for the same period in 2012. The changes in yields were secondary to the changes in loan volume.

Additionally, interest income from mortgage warehouse loans, and commercial real estate loans increased by $3.6 million and $2.9 million, respectively offset by a decrease from investment securities of $115,000. Driving the rise in interest income was higher average loan volume for mortgage warehouse loans of $392.8 million, and commercial loan volume of $342.3 million. The higher loan volume was a result of our strategy to grow our mortgage warehouse lending and commercial real estate businesses. Sales of investment securities in the second quarter of 2012 lead to their lower average volume in the second quarter of 2013 compared to the same quarter in 2012. Interest expense for borrowings increased by $318,000, due to the increase in the level of borrowings.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on the statement of income. The loan portfolio is reviewed quarterly to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. At June 30, 2013, approximately 2.81% of the loan portfolio was covered under loss sharing agreements with the FDIC. Charge-offs incurred above the original estimated value are taken as additional provisions, and a corresponding receivable due from the FDIC is recorded through non-interest income for the portion anticipated to be recovered under the loss sharing agreements.

The provision for loan losses increased by $1.9 million to $4.6 million for the three months ended June 30, 2013, compared to $2.7 million for the same period in 2012. The increase in the 2013 provision is attributable to several different factors that include an increase in specific reserve requirements for loans not covered under FDIC loss share agreements as well as increased reserves due to the cash flow re-estimation process for the PCI loans which occurs on a quarterly basis. Additional reserves were also needed for new loan growth in the portfolio.

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


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Non-Interest Income

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



                                                    Three Months Ended June 30,
                                                     2013                2012
                                                      (dollars in thousands)
    Deposit fees                                 $        159       $          117
    Mortgage warehouse transactional fees               3,868                3,384
    Bank-owned life insurance                             567                  323
    Gain on sale of investment securities, net              0                8,797
    Accretion of FDIC loss sharing receivable           2,505                    0
    Gain on sale of loans                                 358                  339
    Other                                                 721                  278

    Total non-interest income                    $      8,178       $       13,238

Non-interest income was $8.2 million for the three months ended June 30, 2013, a decrease of $5.1 million from $13.2 million for the three months ended June 30, 2012. This decrease was due to security gains in the amount of $8.8 million during the three months ended June 30, 2012 compared to the same quarter ended June 30, 2013 when there were $0 security gains. This was offset by accretion of the FDIC loss sharing receivable in the amount of $2.5 million for the quarter ended June 30, 2013.

Non-Interest Expense

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



                                                     Three Months Ended June 30,
                                                      2013                 2012
                                                       (dollars in thousands)
 Salaries and employee benefits                  $        8,508       $        5,598
 Occupancy                                                2,110                1,849
 Technology, communication and bank operations            1,061                  691
 Advertising and promotion                                  408                  301
 Professional services                                    1,252                  769
 FDIC assessments, taxes and regulatory fees              1,058                  867
 Other real estate owned                                    525                  709
 Loan workout                                                72                  543
 Loss contingency                                             0                    0
 Stock-offering expenses                                      0                1,340
 Other                                                    1,901                1,907

 Total non-interest expenses                     $       16,895       $       14,574

Non-interest expense was $16.9 million for the three months ended June 30, 2013, an increase of approximately $2.3 million as compared to non-interest expense of $14.6 million for the same period in 2012.

Salaries and employee benefits, which represent the largest component of non-interest expense, increased by 52.0% or $2.9 million to $8.5 million in the second quarter of 2013 versus $5.6 million in the same period in 2012. The primary reason for this increase was the addition of 80 full-time equivalent employees since June 30, 2012. This was directly related to the need for additional employees to support our organic growth and the expansion into new markets and lines of business.

Occupancy expense increased by 14.1%, or $261,000, rising from $1.8 million in the second quarter of 2012 to $2.1 million in the second quarter of 2013. The increase was related to building the infrastructure to support our growth as well as the cost of expansion into new markets.


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Technology, communication and bank operations increased by 53.6% or $370,000 from $691,000 in the second quarter of 2012 to $1.1 million in the second quarter of 2013. The primary reason for this increase was related to building the infrastructure to support the growth through increased technology improvements and upgrades as well as the costs related to expanding of technological platforms into new markets. This corresponds with our philosophy of "high touch, high tech", whereby we provide an exceptional level of customer service supported by state-of-the-art technology.

Professional services expense increased to $1.3 million in the second quarter of 2013 from $769,000 for the same period of 2012. This increase was primarily attributable to higher legal and consulting expenses in 2013 related to regulatory filings and other matters.

FDIC assessments, taxes and regulatory fees increased by 22.0% or $191,000 from $867,000 in the second quarter of 2012 to $1.1 million in the second quarter of 2013. The primary reason for this increase was related to increased FDIC assessments for the second quarter of 2013 compared to the same period ended 2012 which approximated $264,000. This was offset by a decrease in state franchise and sales and use tax in the amount of $71,000 from the second quarter of 2012 as compared to the same quarter of 2013.Other expenses remained constant at $1.9 million in the second quarter of 2013 compared to $1.9 million in the second quarter of 2012. In general, there was an overall increase in most categories within other expense as a result of the growth and expansion of the franchise. Loan origination expense increased by $350,000 for the three months ended June 30, 2013, compared to the same period in 2012. This was offset by a decrease of $317,000 and $150,000 in loan insurance expense and other miscellaneous expenses, respectively, for the quarter ended June 30, 2013 in contrast to the quarter ended June 30, 2012.

Income Taxes

The income tax expense was $4.4 million and $3.6 million for the three months ended June 30, 2013 and 2012, respectively. The increase in the income tax . . .

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