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CUBI > SEC Filings for CUBI > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for CUSTOMERS BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CUSTOMERS BANCORP, INC.


7-Nov-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 nine months ended September 30, 2013. All quarterly information in this Management's Discussion and Analysis is unaudited. You should read this section in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" for the year ended December 31, 2012 included in Customers Bancorp's filing on Form 10-K/A (Amendment No. 1) for the fiscal year ended December 31, 2012.

Critical Accounting Policies

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

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

Third Quarter Events of Note

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

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


Table of Contents

Acquisition Activity

CMS Bancorp Acquisition

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

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

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

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

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

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

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

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

Acacia Federal Savings Bank Acquisition

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

New England Commercial Lending Acquisition

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


Table of Contents

Results of Operations

Third Quarter 2013 Compared to Third Quarter 2012

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

Net Interest Income

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



                                                                           Three Months Ended September 30,
                                                                2013                                             2012
                                                               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                    $   231,378      $       148           0.26 %    $   144,892      $        91           0.25 %
Investment securities, taxable (A)               235,913            1,423           2.41 %        129,848              805           2.48 %
Investment securities, non-taxable (A)                 0                0           0.00 %          2,061               21           4.15 %
Loans held for sale                              984,885            9,495           3.83 %        189,744            1,622           3.40 %
Loans, taxable (B)                             1,982,282           22,363           4.48 %      1,900,313           25,368           5.31 %
Loans, non-taxable (B)                            17,729              122           2.73 %          9,936               55           2.23 %
Less: Allowance for loan losses                  (27,725 )                                        (14,574 )

Total interest earning assets                  3,424,462           33,551           3.89 %      2,362,220           27,962           4.71 %

Non-interest earning assets                      208,819                                          117,195

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

               Liabilities
Interest checking                            $    47,569               47           0.38 %    $    36,253               47           0.51 %
Money market                                   1,154,541            2,055           0.71 %        930,935            1,720           0.74 %
Other savings                                     26,930               30           0.45 %         20,049               27           0.53 %
Certificates of deposit                        1,332,815            3,338           0.99 %        947,607            3,397           1.43 %

Total interest bearing deposits                2,561,855            5,470           0.85 %      1,934,844            5,191           1.07 %
Other borrowings                                 244,149            1,077           1.75 %        164,163              216           0.52 %

Total interest-bearing liabilities             2,806,004            6,547           0.93 %      2,099,007            5,407           1.02 %

Non-interest-bearing deposits                    439,271                                          190,977

Total deposits & borrowings                    3,245,275                            0.80 %      2,289,984                            0.94 %
Other non-interest bearing liabilities             4,998                                           11,098

Total liabilities                              3,250,273                                        2,301,082
Shareholders' Equity                             383,008                                          178,333

Total liabilities and shareholders' equity   $ 3,633,281                                      $ 2,479,415

Net interest earnings                                              27,004                                           22,555
Tax equivalent adjustment (C)                                          66                                               41

Net interest earnings                                         $    27,070                                      $    22,596

Interest spread                                                                     3.09 %                                           3.77 %

Net interest margin                                                                 3.13 %                                           3.80 %

Net interest margin tax equivalent (C)                                              3.14 %                                           3.81 %

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

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

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


Table of Contents

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

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

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

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

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

Provision for Loan Losses

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

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

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

Non-Interest Income

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



                                                        Three Months Ended September 30,
                                                        2013                        2012
                                                             (dollars in thousands)
Mortgage warehouse transactional fees              $         3,090             $         3,346
Bank-owned life insurance                                      615                         359
Deposit fees                                                   198                         124
Gain on sale of investment securities, net                       0                           0
Accretion of FDIC loss sharing receivable                        0                       1,296
Loss on sale of loans                                           (6 )                       (71 )
Other                                                          958                       4,723

Total non-interest income                          $         4,855             $         9,777


Table of Contents

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

Non-Interest Expense

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



                                                        Three Months Ended September 30,
                                                          2013                   2012
                                                             (dollars in thousands)
Salaries and employee benefits                       $         8,963        $         5,978
Occupancy                                                      2,289                  1,709
Professional services                                          1,191                    819
Technology, communications and bank operations                 1,121                    699
FDIC assessments, taxes and regulatory fees                    1,105                    669
Loan workout                                                     928                    617
Advertising and promotion                                        450                    270
Other real estate owned                                          401                   (276 )
Stock-offering expenses                                            0                     97
Other                                                          1,899                  1,424

Total non-interest expenses                          $        18,347        $        12,006

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

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

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

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

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

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


Table of Contents

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

. . .

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