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CUBI > SEC Filings for CUBI > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CUSTOMERS BANCORP, INC.

Form 10-Q for CUSTOMERS BANCORP, INC.


8-May-2014

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 months ended March 31, 2014. 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" included in Customers Bancorp's 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.


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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.


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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 Bancorp's earnings. The following table summarizes the Bancorp's net
interest income and related spread and margin for the periods indicated.



                                                                             Three Months Ended March 31,
                                                                2014                                             2013
                                                               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                    $   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.


Table of Contents

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.


Table of Contents

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


Table of Contents

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 . . .

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