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

Show all filings for CUSTOMERS BANCORP, INC.

Form 10-Q for CUSTOMERS BANCORP, INC.


8-Aug-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 Customers 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, 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 report on Form 10-Q for the quarterly period ended June 30, 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.

Second Quarter Events of Note

Following a successful 2013 and first quarter of 2014, Customers Bancorp continued its strong performance through second quarter 2014. Most notably, total assets were $5.6 billion as of June 30, 2014, an increase of $0.6 billion from March 31, 2014 and $1.5 billion from December 31, 2013. During second quarter 2014, the Bancorp achieved significant organic loan growth in its multi-family loans (up $246 million) and commercial real estate and commercial and industrial loans (up $157 million). Loans held for sale grew $364 million during second quarter 2014 driven by increased lending to mortgage companies as home sales and refinancing activity rebounded nationally. Asset quality remained high and capital ratios exceeded levels established for "well-capitalized" banks. During second quarter 2014, the Bank issued $110 million in fixed-to-floating rate subordinated debt, which increased the Tier 2 capital for the Bank and the Bancorp, and the Bancorp issued $25 million in senior unsecured debt. Financial results for second quarter 2014 included strong earnings of $10.2 million, a record high, or $0.37 per diluted share. Customers Bancorp also declared a 10 percent stock dividend on May 15, 2014 which was issued on June 30, 2014. Amounts reported in common stock, additional paid in capital and retained earnings as of June 30, 2014, as well as all per share amounts in this Form 10-Q for the quarterly period ended June 30, 2014, have been adjusted to give effect to this stock dividend.


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Results of Operations

Second Quarter 2014 Compared to Second Quarter 2013

Net income available to common shareholders increased $2.0 million (24.4%) to $10.2 million for the three months ended June 30, 2014, compared to $8.2 million for the three months ended June 30, 2013. The increased net income resulted from increased net interest income of $10.8 million and increased non-interest income of $1.4 million, partially offset by increased non-interest expense of $8.3 million, increased income tax expense of $1.1 million, and increased provision for loan losses of $0.8 million.

Net interest income increased $10.8 million (41.4%) for the three months ended June 30, 2014 to $36.9 million, compared to $26.1 million for the three months ended June 30, 2013. This increase resulted principally from an increase in average loan balances of $1.8 billion, offset in part by a 33 basis point decrease in average yields on interest earning assets to 3.60% net of a 5 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 less than the average yield on the current loan portfolio.

The provision for loan losses increased by $0.8 million to $2.9 million for the three months ended June 30, 2014, compared to $2.1 million for the same period in 2013. The increase in the provision for loan losses during second quarter 2014 was primarily driven by growth in the portfolio of loans held for investment and reduced estimated benefits from the FDIC loss sharing receivable.

Non-interest income increased $1.4 million during the three months ended June 30, 2014 to $6.9 million, compared to $5.6 million for the three months ended June 30, 2013. The increase in 2014 was attributable to mortgage loan and banking income, which includes a gain realized from the sale of loans acquired from Flagstar Bank (up $1.6 million), management advisory fees earned in conjunction with an equity investment in a foreign entity (up $0.5 million), gains realized from sales of investment securities (up $0.4 million), increased income from bank owned life insurance (up $0.3 million), and increased gains realized from sales of SBA loans (up $0.2 million), offset in part by decreased mortgage warehouse transactional fees (down $1.7 million).

Non-interest expense increased $8.3 million during the three months ended June 30, 2014 to $25.2 million, compared to $16.9 million during the three months ended June 30, 2013. Expenses increased in 2014 principally for salaries and employee benefits as staffing levels grew to support the growing business (up $3.1 million), assessment for FDIC insurance and other regulatory fees as the bank grew and other costs were incurred (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 $1.0 million), technology, communication and bank operations to further support and build infrastructure (up $0.6 million), occupancy as the business expansion into new markets and increased activity in existing markets required additional facilities (up $0.5 million), and increased expenses associated with other real estate owned (up $0.4 million).

Income tax expense increased $1.1 million in the three months ended June 30, 2014 to $5.5 million compared to $4.4 million in the same period of 2013. The increase in the income tax expense was primarily due to an increase of $3.1 million in net income before taxes over the same period in 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 June 30,
                                                                2014                                             2013
                                                               Interest        Average                          Interest        Average
                                               Average         Income or       Yield or         Average         Income or       Yield or
                                               Balance          Expense          Cost           Balance          Expense          Cost
(amounts in thousands)
                  Assets
Interest earning deposits                    $   211,438      $       133           0.25 %    $   178,628      $       114           0.25 %
Investment securities, taxable (A)               448,059            2,543           2.27 %        181,557            1,082           2.38 %
Loans held for sale                              777,000            6,715           3.47 %      1,158,974           11,157           3.86 %
Loans, taxable (B)                             3,520,211           35,042           3.99 %      1,696,979           19,099           4.51 %
Loans, non-taxable (B)                            24,653              178           2.90 %         14,525               97           2.68 %
Less: Allowance for loan losses                  (27,452 )                                        (26,533 )
Other interest-earning assets                     64,063              481           3.01 %         29,523              124           1.69 %

Total interest earning assets                  5,017,972           45,092           3.60 %      3,233,653           31,673           3.93 %

Non-interest earning assets                      230,017                                          144,794

Total assets                                 $ 5,247,989                                      $ 3,378,447

               Liabilities
Interest checking                            $    59,619               76           0.51 %    $    44,094               47           0.42 %
Money market                                   1,641,332            2,517           0.62 %      1,056,802            1,857           0.70 %
Other savings                                     45,289               50           0.44 %         29,621               36           0.49 %
Certificates of deposit                        1,319,357            3,084           0.94 %      1,278,898            3,196           1.00 %

Total interest bearing deposits                3,065,597            5,727           0.75 %      2,409,415            5,136           0.86 %
Borrowings                                     1,171,766            2,435           0.83 %        357,780              421           0.47 %

Total interest-bearing liabilities             4,237,363            8,162           0.77 %      2,767,195            5,557           0.81 %

Non-interest-bearing deposits                    585,370                                          269,618

Total deposits & borrowings                    4,822,733                            0.68 %      3,036,813                            0.73 %
Other non-interest bearing liabilities            16,622                                           15,266

Total liabilities                              4,839,355                                        3,052,079
Shareholders' Equity                             408,634                                          326,368

Total liabilities and shareholders' equity   $ 5,247,989                                      $ 3,378,447

Net interest earnings                                              36,930                                           26,116
Tax equivalent adjustment (C)                                          96                                               52

Net interest earnings                                         $    37,026                                      $    26,168

Interest spread                                                                     2.92 %                                           3.19 %

Net interest margin                                                                 2.95 %                                           3.24 %

Net interest margin tax equivalent (C)                                              2.96 %                                           3.25 %

(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.


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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 June 30,
                                                      2014 vs. 2013
                                          Increase (decrease) due
                                                to change in
                                            Rate             Volume        Total
      (amounts in thousands)
      Interest income:
      Interest earning deposits         $         (1 )      $     20      $     19
      Investment securities                      (53 )         1,514         1,461
      Loans held for sale                     (1,052 )        (3,390 )      (4,442 )
      Loans, taxable                          (2,437 )        18,380        15,943
      Loans, non-taxable                           9              72            81
      Other interest-earning assets              143             214           357

      Total interest income                   (3,391 )        16,810        13,419

      Interest expense:
      Interest checking                           11              18            29
      Money market deposit accounts             (260 )           920           660
      Savings                                     (4 )            18            14
      Certificates of deposit                   (211 )            99          (112 )

      Total interest bearing deposits           (464 )         1,055           591
      Borrowings                                 507           1,507         2,014

      Total interest expense                      43           2,562         2,605

      Net interest income               $     (3,434 )      $ 14,248      $ 10,814

Net interest income for the three months ended June 30, 2014 was $36.9 million, an increase of $10.8 million, or 41.4%, when compared to net interest income of $26.1 million for the three months ended June 30, 2013. This net increase was primarily the result of an increase of $1.8 billion in average interest-earning assets, offset by a decrease of 33 basis points in the average yield on interest-earning assets. Although average interest-bearing liabilities for the three months ended June 30, 2014 increased by $1.5 billion when compared to average interest-bearing liabilities for the three months ended June 30, 2013, the related average cost of interest-bearing liabilities decreased 4 basis points; and as a result, these changes had a minimal net impact on net interest income for the same time period.

As evidenced by the table above, both rate and volume changes within "Loans, taxable" had a significant effect on net interest income. Within "Loans, taxable," changes in the following categories primarily were responsible for the net increase in loan volume:

$1.1 billion increase in the average balance of multi-family loans due to growth of the multi-family lending business; and

$366.4 million increase in the average balance of commercial loans primarily due to the growth of the commercial and industrial loan portfolio, including owner occupied commercial real estate loans.

These particular increases in loan volume were the result of concentrated efforts by Customers Bank's lending teams to execute an organic growth strategy.

The key measure of net interest income is net interest margin. Customers' net interest margin (tax equivalent) decreased 29 basis points to 2.96% for the three months ended June 30, 2014 when compared to the net interest margin (tax equivalent) of 3.25% for the same period in 2013. The decrease resulted primarily from a decrease in the average yield on loans from 4.51% to 3.99%, due to the maturity of higher-yielding loans and the growth of multi-family loan products, which have higher credit quality but yield less than the average yield on the current loan portfolio.

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


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of the portfolio and the adequacy of the allowance for loan losses. At June 30, 2014, approximately 1.16% 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 $0.8 million to $2.9 million for the three months ended June 30, 2014, compared to $2.1 million for the same period in 2013. The increase in the 2014 provision was principally the result of growth in the portfolio of loans held for investment as asset quality continues to improve.

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 table below presents the components of non-interest income for the three
months ended June 30, 2014 and 2013.



                                                 Three Months Ended June 30,
                                                  2014                2013
      (amounts in thousands)
      Mortgage warehouse transactional fees   $       2,215       $       3,868
      Mortgage loan and banking income                1,554                   0
      Bank-owned life insurance                         836                 567
      Gain on sale of SBA loans                         572                 358
      Gain on sale of investment securities             359                   0
      Deposit fees                                      212                 159
      Other                                           1,163                 598

      Total non-interest income               $       6,911       $       5,550

Non-interest income increased $1.4 million during the three months ended June 30, 2014 to $6.9 million, compared to $5.6 million for the three months ended June 30, 2013. The increase in 2014 is attributable to mortgage loan and banking income, which includes a gain realized from the sale of loans from Flagstar Bank (up $1.6 million), management advisory fees earned in conjunction with an equity investment in a foreign entity (up $0.5 million), gains realized from sales of investment securities (up $0.4 million), increased income from bank owned life insurance (up $0.3 million), and increased gains realized from sales of SBA loans (up $0.2 million), offset in part by decreased mortgage warehouse transactional fees (down $1.7 million).

Non-Interest Expense

The table below presents the components of non-interest expense for the three
months ended June 30, 2014 and 2013.



                                                      Three Months Ended June 30,
                                                       2014                 2013
 (amounts in thousands)
 Salaries and employee benefits                   $       11,591       $        8,508
 FDIC assessments, taxes and regulatory fees               3,078                1,058
 Occupancy                                                 2,595                2,110
 Professional services                                     1,881                1,252
 Technology, communications and bank operations            1,621                1,061
 Other real estate owned                                     890                  525
 Loan workout                                                477                   72
 Advertising and promotion                                   428                  408
 Other                                                     2,644                1,901

 Total non-interest expense                       $       25,205       $       16,895


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Non-interest expense was $25.2 million for the three months ended June 30, 2014, an increase of $8.3 million from non-interest expense of $16.9 million for the three months ended June 30, 2013.

Salaries and employee benefits, which represent the largest component of non-interest expense, increased $3.1 million (36.2%) to $11.6 million for the three months ended June 30, 2014. The primary reason for this increase was an increase in the number of employees from 332 full-time equivalents at June 30, 2013 to 407 full-time equivalents at June 30, 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.

FDIC assessments, taxes and regulatory fees increased by $2.0 million, or 190.9% to $3.1 million for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 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.

Occupancy expense increased by $0.5 million, or 23.0%, rising to $2.6 million for the three months ended June 30, 2014 from $2.1 million for the three months ended June 30, 2013. The increase was related to building the infrastructure to support growth and expansion into new markets.

Professional services expense increased by $0.6 million, or 50.2%, to $1.9 million for the three months ended June 30, 2014 from $1.3 million for the three months ended June 30, 2013. This increase was primarily attributable to higher legal and consulting expenses in 2014 related to loan workout, litigation and other general regulatory matters.

Technology, communication and bank operations increased by $0.6 million, or 52.8%, rising to $1.6 million for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 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.

Other expenses increased by $0.7 million, or 39.1%, to $2.6 million for the three months ended June 30, 2014, compared to $1.9 million for the three months ended June 30, 2013 reflecting increased general expenses to support a rapidly growing business.

Income Taxes

Income tax expense was $5.5 million and $4.4 million, respectively, for the three months ended June 30, 2014 and 2013. The increase in the income tax provision was primarily due to the increase in net income before taxes of approximately $3.1 million.

The effective tax rate for the three months ended June 30, 2014 and 2013 was approximately 35 percent.

Six months ended June 30, 2014 compared to the six months ended June 30, 2013

. . .

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