10-Q 1 d553885d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2013

 

¨ Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

333-166225

(Commission File number)

 

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   27-2290659

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1015 Penn Avenue

Suite 103

Wyomissing PA 19610

(Address of principal executive offices)

(610) 933-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

On August 6, 2013, 19,970,122 shares of Voting Common Stock and 4,691,897 shares of Class B Non-Voting Common Stock were issued and outstanding.

 

 

 


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Customers Bancorp, Inc.

Table of Contents

 

Part I   
Item 1.  

Customers Bancorp, Inc. Consolidated Financial Statements as of June 30, 2013 and for the three and six month periods ended June 30, 2013 (unaudited)

     3   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     54   
Item 4.  

Controls and Procedures

     54   
PART II   
Item 1.  

Legal Proceedings

     55   
Item 1A.  

Risk Factors

     55   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     57   
Item 3.  

Defaults Upon Senior Securities

     57   
Item 4.  

Mine Safety Disclosures

     57   
Item 5.  

Other Information

     57   
Item 6.  

Exhibits

     58   
SIGNATURES      59   
Ex-31.1     
Ex-31.2     
Ex-32.1     
Ex-32.2     
Ex-101     

 

2


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

 

     June 30,
2013
    December 31,
2012
 
    

(dollars in thousands,

except share data)

 
ASSETS     

Cash and due from banks

   $ 10,728      $ 12,908   

Interest earning deposits

     194,957        173,108   
  

 

 

   

 

 

 

Cash and cash equivalents

     205,685        186,016   

Investment securities available for sale, at fair value

     182,314        129,093   

Loans held for sale (including $1,148,001 and $1,248,935 of mortgage warehouse loans at fair value at June 30, 2013 and December 31, 2012, respectively)

     1,414,943        1,439,889   

Loans receivable not covered under Loss Sharing Agreements with the FDIC

     1,753,658        1,216,941   

Loans receivable covered under Loss Sharing Agreements with the FDIC

     91,614        107,526   

Less: Allowance for loan losses

     (28,142     (25,837
  

 

 

   

 

 

 

Total loans receivable, net

     1,817,130        1,298,630   

FDIC loss sharing receivable

     14,169        12,343   

Bank premises and equipment, net

     10,170        9,672   

Bank-owned life insurance

     67,762        56,191   

Other real estate owned (2013 $4,362; 2012 $4,109 covered under Loss Sharing Agreements with the FDIC)

     10,607        8,114   

Goodwill and other intangibles

     3,683        3,689   

Restricted stock

     33,188        30,163   

Accrued interest receivable and other assets

     33,607        27,434   
  

 

 

   

 

 

 

Total assets

   $ 3,793,258      $ 3,201,234   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Liabilities:

    

Deposits:

    

Demand, non-interest bearing

   $ 265,842      $ 219,687   

Interest bearing

     2,509,867        2,221,131   
  

 

 

   

 

 

 

Total deposits

     2,775,709        2,440,818   

Federal funds purchased

     120,000        5,000   

Other borrowings

     505,000        471,000   

Subordinated debt

     2,000        2,000   

Accrued interest payable and other liabilities

     10,776        12,941   
  

 

 

   

 

 

 

Total liabilities

     3,413,485        2,931,759   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Preferred stock, no par value or as set by the board; 100,000,000 shares authorized; none issued

     0        0   

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 24,709,638 shares issued and 24,662,019 outstanding at June 30, 2013 and 18,507,121 shares issued and 18,459,502 outstanding at December 31, 2012

     24,710        18,507   

Additional paid in capital

     305,364        212,090   

Retained earnings

     53,729        38,314   

Accumulated other comprehensive (loss) income

     (3,530     1,064   

Less: cost of treasury stock; 47,619 shares at June 30, 2013 and December 31, 2012

     (500     (500
  

 

 

   

 

 

 

Total shareholders’ equity

     379,773        269,475   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,793,258      $ 3,201,234   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (dollars in thousands, except per share data)  

Interest income:

           

Loans held for sale

   $ 11,157       $ 1,469       $ 22,041       $ 2,491   

Loans receivable, taxable, including fees

     19,099         15,881         35,126         30,482   

Loans receivable, non-taxable, including fees

     97         41         169         55   

Investment securities, taxable

     1,082         2,219         1,911         5,131   

Investment securities, non-taxable

     0         21         0         43   

Other

     114         69         222         134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     31,549         19,700         59,469         38,336   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     5,136         5,424         10,272         10,496   

Federal funds purchased

     74         1         79         3   

Borrowed funds

     330         106         568         240   

Subordinated debt

     17         17         33         35   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     5,557         5,548         10,952         10,774   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     25,992         14,152         48,517         27,562   

Provision for loan losses

     4,620         2,738         5,720         4,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     21,372         11,414         42,797         23,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income

           

Deposit fees

     159         117         289         233   

Mortgage warehouse transactional fees

     3,868         3,384         7,536         5,483   

Bank-owned life insurance

     567         323         1,043         589   

Gain on sale of investment securities

     0         8,797         0         9,006   

Accretion of FDIC loss sharing receivable

     2,505         0         3,722         655   

Gain on sale of loans

     358         339         408         339   

Other

     721         278         1,295         665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

     8,178         13,238         14,293         16,970   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense

           

Salaries and employee benefits

     8,508         5,598         15,905         11,095   

Occupancy

     2,110         1,849         4,020         3,228   

Technology, communications and bank operations

     1,061         691         1,902         1,338   

Advertising and promotion

     408         301         523         576   

Professional services

     1,252         769         1,958         1,655   

FDIC assessments, taxes, and regulatory fees

     1,058         867         2,405         1,536   

Other real estate owned

     525         709         561         815   

Loan workout

     72         543         746         902   

Loss contingency

     0         0         2,000         0   

Stock-offering expenses

     0         1,340         0         1,340   

Other

     1,901         1,907         3,355         2,716   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     16,895         14,574         33,375         25,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     12,655         10,078         23,715         14,793   

Income tax expense

     4,429         3,574         8,300         5,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 8,226       $ 6,504       $ 15,415       $ 9,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.39       $ 0.57       $ 0.78       $ 0.85   

Diluted earnings per share

     0.38         0.56         0.76         0.83   

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2013     2012     2013     2012  
     (dollars in thousands)  

Net income

   $ 8,226      $ 6,504      $ 15,415      $ 9,616   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized holding gains (losses) on securities arising during the period

     (5,976     543        (7,069     629   

Income tax effect

     2,092        (190     2,475        (220

Unrealized holding gain on securities transferred from the held-to-maturity category into the available-for-sale category

     0        8,509        0        8,509   

Income tax effect

     0        (2,978     0        (2,978

Reclassification adjustment for gains included in net income

     0        (8,797     0        (9,006

Income tax effect

     0        3,079        0        3,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (3,884     166        (4,594     86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,342      $ 6,670      $ 10,821      $ 9,702   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

 

     For the Six Months Ended June 30, 2013 and 2012  
     Shares of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
     (dollars in thousands)  

Balance, January 1, 2012

     11,347,683       $ 11,395       $ 122,602       $ 14,496       $ (245   $ (500   $ 147,748   

Comprehensive income

              9,616         86          9,702   

Share-based-compensation expense

           1,266                1,266   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     11,347,683       $ 11,395       $ 123,868       $ 24,112       $ (159   $ (500   $ 158,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Shares of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
    Total  
     (dollars in thousands)  

Balance, January 1, 2013

     18,459,502       $ 18,507       $ 212,090       $ 38,314       $ 1,064      $ (500   $ 269,475   

Comprehensive income

              15,415         (4,594       10,821   

Share-based-compensation expense

           1,535                1,535   

Public offering of common stock, net of costs of $5,811

     6,179,104         6,179         91,511                97,690   

Issuance of common stock under share-based-compensation arrangements

     23,413         24         228                252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

     24,662,019       $ 24,710       $ 305,364       $ 53,729       $ (3,530   $ (500   $ 379,773   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

 

Six Months Ended June 30,

   2013     2012  
     (dollars in thousands)  

Cash Flows from Operating Activities

    

Net income

   $ 15,415      $ 9,616   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     5,720        4,538   

Loss contingency

     2,000        0   

Provision for depreciation and amortization

     1,279        687   

Stock-based compensation

     1,535        1,266   

Deferred taxes

     1        188   

Net amortization of investment securities premiums and discounts

     228        193   

Gain on sale of investment securities

     0        (9,006

Gain on sale of loans

     (408     (339

Origination/purchase of loans held for sale

     (12,445,164     (1,359,676

Proceeds from the sale of loans held for sale

     12,467,413        1,251,140   

Net increase in FDIC loss sharing receivable

     (4,815     (741

Amortization (accretion) of fair value discounts

     (273     46   

Net loss on sales of other real estate owned

     180        601   

Impairment charges on other real estate owned

     13        0   

Change in investment in bank-owned life insurance

     (1,043     (633

(Increase) decrease in accrued interest receivable and other assets

     (3,492     471   

Decrease in accrued interest payable and other liabilities

     (1,913     (3,185
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Operating Activities

     36,676        (104,834
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Proceeds from maturities, calls and principal repayments of investment securities available for sale

     9,252        23,543   

Proceeds from sales of investment securities available for sale

     0        306,610   

Purchases of investment securities available for sale

     (69,770     (108,249

Proceeds from maturities and principal repayments of investment securities held to maturity

     0        50,968   

Net increase in loans

     (377,601     (312,624

Purchase of loan portfolio

     (155,306     0   

Proceeds from sales of SBA loans

     3,900        3,689   

Purchases of bank-owned life insurance

     (10,465     (10,000

Net (purchases of) proceeds from restricted stock

     (3,025     1,693   

Reimbursements from the FDIC on loss sharing agreements

     3,128        1,442   

Purchases of bank premises and equipment

     (1,344     (1,558

Proceeds from sales of other real estate owned

     2,599        4,022   
  

 

 

   

 

 

 

Net Cash Used In Investing Activities

     (598,632     (40,464
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net increase in deposits

     334,935        346,780   

Net increase (decrease) in short-term borrowed funds

     99,000        (153,000

Proceeds from FHLB borrowings

     50,000        0   

Net proceeds from stock offering

     97,690        0   
  

 

 

   

 

 

 

Net Cash Provided by Financing Activities

     581,625        193,780   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     19,669        48,482   

Cash and Cash Equivalents - Beginning

     186,016        73,570   
  

 

 

   

 

 

 

Cash and Cash Equivalents - Ending

   $ 205,685      $ 122,052   
  

 

 

   

 

 

 

Supplementary Cash Flows Information

    

Interest paid

   $ 10,955      $ 10,916   

Income taxes paid

     5,574        4,855   

Non-cash items:

    

Transfer of loans to other real estate owned

   $ 5,424      $ 4,941   

Transfer of held to maturity investments to available for sale

     0        268,671   

See accompanying notes to the unaudited consolidated financial statements.

 

7


Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a Pennsylvania corporation formed on April 7, 2010 to facilitate the reorganization of Customers Bank (the “Bank” or “Customers Bank”) into a bank holding company structure. The reorganization was completed on September 17, 2011.

The unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations, although the Bancorp believes that the disclosures made are adequate to make the information not misleading. The Bancorp’s unaudited consolidated interim financial statements reflect all adjustments that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. Certain amounts reported in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation. These reclassifications did not significantly impact the Bancorp’s financial position or results of operations.

The accounting policies of Customers Bancorp, Inc. and Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as disclosed on pages 85 through 93 of Customers’ Annual Report on Form 10-K for the fiscal year ended December 31, 2012. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the latest Form 10-K.

Operating results for the three and six-month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

The Bancorp evaluated its June 30, 2013 consolidated financial statements for subsequent events through the date the financial statements were issued. The Bancorp is not aware of any additional subsequent events which would require recognition or disclosure in the financial statements.

NOTE 2 — ACQUISITION ACTIVITY

CMS Bancorp Acquisition

Effective as of April 22, 2013, the Bancorp entered into an Amendment to the 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.

 

8


Table of Contents

Acacia Federal Savings Bank Acquisition

On April 4, 2013, Customers Bancorp, Inc., Acacia Life Insurance Company (“Acacia”) and Ameritas Life Insurance Corp. (together with Acacia, “Sellers”) announced their 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 Company 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. Costs related to the acquisition 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 has been drawn at the date of acquisition. 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.

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES

Purchased Loans

The Bancorp believes that the varying circumstances under which it purchases loans and the diverse quality of loans purchased should drive the decision as to whether or not loans in a portfolio should be deemed to be purchased-credit-impaired loans (“PCI” loans). Therefore, loan acquisitions are and will be evaluated on a case-by-case basis to determine the appropriate accounting treatment. Loans acquired that do not have evidence of credit deterioration at the purchase date are and will be accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs, and loans acquired with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are and will be accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Loans that are purchased that do not have evidence of credit deterioration

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for the acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Loans that are purchased that have evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected

For purchases of this type of loan, evidence of deteriorated credit quality may include past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages.

The fair value of loans with evidence of credit deterioration is recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is not included in the carrying amount of acquired loans. Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of those cash flows.

PCI loans acquired in the same fiscal quarter may be aggregated into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. On a quarterly basis, the Bank re-estimates the total cash flows (both principal and interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that reflect then-current market conditions. If the timing and/or amounts of expected cash flows on PCI loans were determined not to be reasonably estimable, no interest would be accreted and the loans would be reported as non-accrual loans; however, when the timing and amounts of expected cash flows for PCI loans are reasonably estimable, interest is being accreted and the loans are being reported as performing loans.

 

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Recently Issued Accounting Standards

In January, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with relevant accounting guidance or subject to an enforceable master netting arrangement or similar agreement. The guidance in this ASU was effective for the first interim or annual period beginning on or after January 1, 2013 (the same effective date for ASU 2011-11) and is to be applied retrospectively. See “NOTE 13 — DISCLOSURES ABOUT OFFSETTING ASSETS AND LIABILITIES” for the required disclosures.

In October, 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution (a consensus of the FASB Emerging Issues Task Force). This ASU requires an entity to subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. The amendments in this ASU were effective for the first interim periods or annual period beginning on or after December 15, 2012 and are to be applied prospectively. Adoption of this ASU has not had a significant impact on the Bancorp’s results of operations or financial position.

In February, 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The ASU requires entities to disclose additional information about reclassification adjustments, including (1) changes in accumulated other comprehensive income balances by component and (2) significant items reclassified out of AOCI. The new disclosure requirements were effective for fiscal years and interim periods beginning after December 15, 2012 for public companies. See “NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT” for the required disclosures.

NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (a)

 

     Unrealized Gains
and Losses on
Available-for-Sale
Securities
 
     (dollars in thousands)  

Beginning balance - April 1, 2013

   $ 354   
  

 

 

 

Other comprehensive loss before reclassifications

     (3,884

Amounts reclassified from accumulated other comprehensive income

     0   
  

 

 

 

Net current-period other comprehensive loss

     (3,884
  

 

 

 

Ending balance - June 30, 2013

   $ (3,530
  

 

 

 
     Unrealized Gains
and Losses on
Available-for-Sale
Securities
 
     (dollars in thousands)  

Beginning balance - January 1, 2013

   $ 1,064   
  

 

 

 

Other comprehensive loss before reclassifications

     (4,594

Amounts reclassified from accumulated other comprehensive income

     0   
  

 

 

 

Net current-period other comprehensive loss

     (4,594
  

 

 

 

Ending balance - June 30, 2013

   $ (3,530
  

 

 

 

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

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NOTE 5 — EARNINGS PER SHARE

The following are the components and results of the Bancorp’s earnings per share calculation for the periods presented:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (dollars in thousands, except per share data)  

Net income allocated to common shareholders

   $ 8,226       $ 6,504       $ 15,415       $ 9,616   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares - basic

     21,266,904         11,347,683         19,876,779         11,347,683   

Share-based compensation plans

     398,229         188,673         342,019         183,859   

Warrants

     189,516         102,712         172,734         100,809   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of common shares - diluted

     21,854,649         11,639,068         20,391,532         11,632,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.39       $ 0.57       $ 0.78       $ 0.85   

Diluted earnings per share

   $ 0.38       $ 0.56       $ 0.76       $ 0.83   

The following is a summary of securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the periods presented:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Weighted average anti-dilutive securities:

           

Share-based compensation awards

     55,561         1,590,162         81,572         1,594,976   

Warrants

     118,745         567,329         118,745         569,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total anti-dilutive securities

     174,306         2,157,491         200,317         2,164,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 6 — INVESTMENT SECURITIES

In May 2012, Customers Bancorp reclassified its $269.0 million held-to-maturity investment portfolio to available for sale. Due to its strong outlook for loan growth, falling interest rates, and its decision to postpone its initial public offering of stock, the Bancorp decided to proceed with this reclassification to provide liquidity. In accordance with regulatory and accounting requirements, the Bancorp is prohibited from classifying security purchases as held to maturity for a period of two years.

The amortized cost and approximate fair value of investment securities as of June 30, 2013 and December 31, 2012 are summarized as follows:

 

     June 30, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (dollars in thousands)  

Available for Sale:

          

Mortgage-backed securities (1)

   $ 162,739       $ 37       $ (5,433   $ 157,343   

Corporate notes

     25,000         65         (100     24,965   

Equities

     6         0         0        6   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 187,745       $ 102       $ (5,533   $ 182,314   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes private-label securities with an aggregate amortized cost of $561 and an aggregate fair value of $549.

 

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Table of Contents
     December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (dollars in thousands)  

Available for Sale:

          

Mortgage-backed securities (1)

   $ 102,449       $ 1,795       $ (109   $ 104,135   

Corporate notes

     25,000         89         (137     24,952   

Equities

     6         0         0        6   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 127,455       $ 1,884       $ (246   $ 129,093   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes private-label securities with an aggregate amortized cost of $629 and an aggregate fair value of $612.

The following table shows proceeds from the sale of available-for-sale investment securities and gross gains and gross losses realized on those sales for the three and six months ended June 30, 2013 and 2012:

 

     Three months ended June 30,      Six months ended June 30,  
     2013      2012      2013      2012  
     (dollars in thousands)  

Proceeds from sale of available-for-sale securities

   $ 0       $ 257,645       $ 0       $ 306,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross gains

   $ 0       $ 8,797       $ 0       $ 9,006   

Gross losses

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains

   $ 0       $ 8,797       $ 0       $ 9,006   
  

 

 

    

 

 

    

 

 

    

 

 

 

These gains and losses were determined using the specific identification method and were included in non-interest income.

The following table shows available-for-sale debt securities by stated maturity. Debt securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and are, therefore, classified separately with no specific maturity date:

 

     June 30, 2013  
     Amortized
Cost
     Fair
Value
 
     (dollars in thousands)  

Due in one year or less

   $ 0       $ 0   

Due after one year through five years

     25,000         24,965   

Due after five years through ten years

     0         0   

Due after ten years

     0         0   

Mortgage-backed securities

     162,739         157,343   
  

 

 

    

 

 

 

Total debt securities

   $ 187,739       $ 182,308   
  

 

 

    

 

 

 

The Bancorp’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012 were as follows:

 

     June 30, 2013  
     Less Than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
     (dollars in thousands)  

Available for Sale:

               

Mortgage-backed securities

   $ 155,124       $ (5,419   $ 323       $ (14   $ 155,447       $ (5,433

Corporate notes

     4,912         (88     4,988         (12     9,900         (100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 160,036       $ (5,507   $ 5,311       $ (26   $ 165,347       $ (5,533
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2012  
     Less Than 12 Months     12 Months or More     Total  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
     (dollars in thousands)  

Available for Sale:

               

Mortgage-backed securities

   $ 5,695       $ (87   $ 429       $ (22   $ 6,124       $ (109

Corporate notes

     0         0        9,862         (137     9,862         (137
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 5,695       $ (87   $ 10,291       $ (159   $ 15,986       $ (246
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2013, there were 20 available-for-sale investment securities in the less-than-twelve-month category and seven available-for-sale investment securities in the twelve-month-or-more category. At December 31, 2012, there were two available-for-sale investment securities in the less-than-twelve-month category and eight available-for-sale investment securities in the twelve-month-or-more category. In management’s opinion, the unrealized losses reflect primarily changes in interest rates due to changes in economic conditions and the liquidity of the market, and not credit quality. In addition, the Bancorp does not believe that it will be more likely than not that the Bancorp will be required to sell the securities prior to maturity or market-price recovery.

During June 2012, Moody’s downgraded all five corporate bonds in the Bancorp’s portfolio. This downgrade was anticipated since Moody’s placed these bonds on negative watch in February 2012. The Bancorp analyzed these bonds in more detail at the time of downgrade. The Bancorp does not intend to sell these debt securities prior to recovery, and it is more likely than not that the Bancorp will not have to sell these debt securities prior to recovery. These bonds continue to pay their scheduled interest payments on time. No additional downgrades are anticipated at this time. The holdings are all in the financial services industry and all issuers are well capitalized.

At June 30, 2013 and December 31, 2012, Customers Bank had pledged investment securities aggregating $156.8 million and $103.5 million, respectively, as collateral for borrowings from the FHLB.

NOTE 7 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of net loans receivable was as follows:

 

     June 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Construction

   $ 25,769      $ 27,792   

Commercial real estate

     35,901        44,901   

Commercial and industrial

     7,226        11,153   

Residential real estate

     19,213        19,952   

Manufactured housing

     3,505        3,728   
  

 

 

   

 

 

 

Total loans receivable covered under FDIC loss sharing agreements (1)

     91,614        107,526   
  

 

 

   

 

 

 

Construction

     33,459        28,897   

Commercial real estate

     1,255,481        835,488   

Commercial and industrial

     189,013        75,118   

Mortgage warehouse

     7,560        9,565   

Manufactured housing

     145,927        154,703   

Residential real estate

     120,782        109,430   

Consumer

     1,808        2,061   
  

 

 

   

 

 

 

Total loans receivable not covered under FDIC loss sharing agreements

     1,754,030        1,215,262   
  

 

 

   

 

 

 

Total loans receivable

     1,845,644        1,322,788   

Deferred (fees) costs, net

     (372     1,679   

Allowance for loan losses

     (28,142     (25,837
  

 

 

   

 

 

 

Loans receivable, net

   $ 1,817,130      $ 1,298,630   
  

 

 

   

 

 

 

 

(1) Loans that were acquired in two FDIC-assisted transactions and are covered under loss sharing agreements with the FDIC are referred to as “covered” loans throughout these financial statements.

 

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Table of Contents

Customers Bank takes advantage of Federal Home Loan Bank (“FHLB”) programs for overnight and term borrowings. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying first-mortgage loans.

Non-Covered Nonaccrual Loans and Loans Past Due

The following tables summarize non-covered loans, by class:

 

     June 30, 2013  
     30-89 Days
Past Due (1)
     Greater
Than
90 Days (1)
     Total Past
Due (1)
     Non-
Accrual
     Current (2)      PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 0       $ 0       $ 0       $ 500       $ 186,057       $ 2,456       $ 189,013   

Commercial real estate

     341         0         341         14,296         1,199,236         41,608         1,255,481   

Construction

     0         0         0         2,613         30,072         774         33,459   

Residential real estate

     307         0         307         951         108,674         10,850         120,782   

Consumer

     1         0         1         56         1,308         443         1,808   

Mortgage warehouse

     0         0         0         0         7,560         0         7,560   

Manufactured housing (3)

     6,388         2,435         8,823         1,152         130,444         5,508         145,927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,037       $ 2,435       $ 9,472       $ 19,568       $ 1,663,351       $ 61,639       $ 1,754,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     30-89 Days
Past Due (1)
     Greater
Than
90 Days (1)
     Total Past
Due (1)
     Non-
Accrual
     Current (2)      PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 38       $ 0       $ 38       $ 288       $ 72,715       $ 2,077       $ 75,118   

Commercial real estate

     1,437         0         1,437         17,770         770,508         45,773         835,488   

Construction

     0         0         0         2,423         25,022         1,452         28,897   

Residential real estate

     381         0         381         1,669         95,396         11,984         109,430   

Consumer

     0         0         0         56         1,486         519         2,061   

Mortgage warehouse

     0         0         0         0         9,565         0         9,565   

Manufactured housing (3)

     9,234         1,966         11,200         141         135,924         7,438         154,703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,090       $ 1,966       $ 13,056       $ 22,347       $ 1,110,616       $ 69,243       $ 1,215,262   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loan balances do not include non-accrual loans.
(2) Loans where payments are due within 29 days of the scheduled payment date.
(3) Purchased manufactured housing loans, purchased in 2010, are subject to cash reserves held at the Bank that are used to fund the past-due payments when the loan becomes 90-days or more delinquent.
(4) Loans exclude deferred costs and fees.
(5) PCI loans that were aggregated into pools are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because we recognize interest income on each pool of loans, they are all considered to be performing. PCI loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and being reported as performing loans.

 

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Table of Contents

Covered Nonaccrual Loans and Loans Past Due

The following tables summarize covered loans, by class:

 

     June 30, 2013  
     30-89 Days
Past Due (1)
     Greater Than
90 Days
Past Due (1)
     Total Past
Due (1)
     Non-
Accrual
     Current
(2)(3)
     PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 0       $ 0       $ 0       $ 53       $ 4,470       $ 2,703       $ 7,226   

Commercial real estate

     0         0         0         3,267         16,209         16,425         35,901   

Construction

     0         0         0         4,055         5,924         15,790         25,769   

Residential real estate

     297         0         297         564         14,082         4,270         19,213   

Manufactured housing

     52         0         52         41         3,352         60         3,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 349       $ 0       $ 349       $ 7,980       $ 44,037       $ 39,248       $ 91,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     30-89 Days
Past Due (1)
     Greater Than
90 Days
Past Due (1)
     Total Past
Due (1)
     Non-
Accrual
     Current
(2)(3)
     PCI
Loans (5)
     Total
Loans (4)
 
     (dollars in thousands)  

Commercial and industrial

   $ 220       $ 0       $ 220       $ 100       $ 8,404       $ 2,429       $ 11,153   

Commercial real estate

     0         0         0         3,712         20,859         20,330         44,901   

Construction

     0         0         0         5,244         6,472         16,076         27,792   

Residential real estate

     0         0         0         1,358         14,226         4,368         19,952   

Manufactured housing

     48         0         48         90         3,527         63         3,728   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 268       $ 0       $ 268       $ 10,504       $ 53,488       $ 43,266       $ 107,526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Loans balances do not include nonaccrual loans.
(2) Loans receivable that were not identified upon acquisition as a loan with credit deterioration.
(3) Loans where payments are due within 29 days of the scheduled payment date.
(4) Loans exclude deferred costs and fees.
(5) PCI loans that were aggregated into pools are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because we recognize interest income on each pool of loans, they are all considered to be performing. PCI loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and being reported as performing loans.

 

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Table of Contents

Impaired Loans — Covered and Non-Covered

The following table presents a summary of impaired loans:

 

     June 30, 2013      For the Six Months Ended
June 30, 2013
 
     Unpaid
Principal
Balance (1)
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial and industrial

   $ 7,970          $ 5,249       $ 118   

Commercial real estate

     28,187            24,277         554   

Construction

     5,609            7,075         10   

Consumer

     77            100         0   

Residential real estate

     2,272            2,436         14   

With an allowance recorded:

           

Commercial and industrial

     2,177       $ 602         886         63   

Commercial real estate

     5,157         1,818         8,095         105   

Construction

     5,361         1,533         6,172         3   

Consumer

     0         0         45         0   

Residential real estate

     629         327         1,035         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,439       $ 4,280       $ 55,370       $ 869   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Also represents the recorded investment.

 

     December 31, 2012      For the Six Months Ended
June 30, 2012
 
     Unpaid
Principal
Balance (1)
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (dollars in thousands)  

With no related allowance recorded:

           

Commercial and industrial

   $ 3,844          $ 5,593       $ 72   

Commercial real estate

     26,626            20,329         303   

Construction

     6,588            7,788         16   

Consumer

     101            101         0   

Residential real estate

     3,188            2,131         10   

With an allowance recorded:

           

Commercial and industrial

     374       $ 295         806         4   

Commercial real estate

     8,708         2,505         8,955         81   

Construction

     5,116         1,541         7,196         100   

Consumer

     100         14         20         1   

Residential real estate

     1,331         270         822         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,976       $ 4,625       $ 53,741       $ 596   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Also represents the recorded investment.

 

16


Table of Contents

Troubled Debt Restructurings

At June 30, 2013, there were $9.2 million in loans categorized as troubled debt restructurings (“TDR”), and at June 30, 2012, there were $7.7 million in loans categorized as troubled debt restructurings. All TDRs are considered impaired loans in the calendar year of their restructuring. In subsequent years, a TDR may cease being classified as impaired if the loan was modified at a market rate and has performed according to the modified terms for at least six months. A loan that has been modified at a below-market rate will be returned to performing status if it satisfies the six-month performance requirement; however, it will remain classified as impaired.

Modification of PCI loans that are accounted for within loan pools in accordance with the accounting standards for PCI loans do not result in the removal of these loans from the pool even if modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not TDRs.

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and six months ended June 30, 2013 and 2012. There were no modifications that involved forgiveness of debt.

 

     TDRs in
Compliance
with Their
Modified
Terms and
Accruing
Interest
     TDRs in
Compliance
with Their
Modified
Terms and
Not
Accruing
Interest
     Total  
     (dollars in thousands)  

Three months ended June 30, 2013

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     0         0         0   

Interest-rate reductions

     93         910         1,003   
  

 

 

    

 

 

    

 

 

 

Total

   $ 93       $ 910       $ 1,003   
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2013

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     0         0         0   

Interest-rate reductions

     93         1,167         1,260   
  

 

 

    

 

 

    

 

 

 

Total

   $ 93       $ 1,167       $ 1,260   
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2012

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     47         0         47   

Interest-rate reductions

     241         0         241   
  

 

 

    

 

 

    

 

 

 

Total

   $ 288       $ 0       $ 288   
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2012

        

Extended under forbearance

   $ 0       $ 0       $ 0   

Multiple extensions resulting from financial difficulty

     47         0         47   

Interest-rate reductions

     268         0         268   
  

 

 

    

 

 

    

 

 

 

Total

   $ 315       $ 0       $ 315   
  

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

The following table provides, by class, the number of loans modified in troubled debt restructurings and the recorded investments and unpaid principal balances during the three and six months ended June 30, 2013 and 2012.

 

     TDRs in Compliance with Their
Modified Terms and Accruing
Interest
     TDRs in
Compliance
with Their
Modified
Terms and Not
Accruing Interest
 
     Number
of Loans
     Recorded
Investment
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Three months ended June 30, 2013

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     2         60         7         910   

Residential real estate

     0         0         0         0   

Consumer

     1         33         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 93         7       $ 910   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2013

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     2         60         10         1,167   

Residential real estate

     0         0         0         0   

Consumer

     1         33         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 93         10       $ 1,167   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2012

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     5         288         0         0   

Residential real estate

     0         0         0         0   

Consumer

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 288         0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2012

           

Commercial and industrial

     0       $ 0         0       $ 0   

Commercial real estate

     0         0         0         0   

Construction

     0         0         0         0   

Manufactured housing

     6         315         0         0   

Residential real estate

     0         0         0         0   

Consumer

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 315         0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2013 and 2012, there were no commitments to lend additional funds to debtors whose terms have been modified in troubled debt restructuring.

All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses. There was $0 in specific reserves resulting from the addition of TDR modifications for both the three and six months ended June 30, 2013 and 2012. There were no TDRs that defaulted in the three and six month periods ended June 30, 2013 and 2012.

 

18


Table of Contents

Credit Quality Indicators

Credit quality indicators for commercial and industrial, commercial real estate, residential real estate, and construction loans are based on an internal risk-rating system and are assigned at the loan origination and reviewed on a periodic or on an “as needed” basis. Consumer, mortgage warehouse, and manufactured housing loans are evaluated on the basis of the payment activity of the loan.

To facilitate the monitoring of credit quality within the commercial and industrial, commercial real estate, construction portfolio, and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory, special mention, substandard, and doubtful. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment and estimates, the risk rating process is intended to permit management to identify riskier credits in a timely manner and allocate the appropriate resources to managing the loans.

The Bank assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan and the Bank’s credit position.

The Bank assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans in this category also are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans. When it is determined that these loans are uncollectible they are charged off in the period in which they are determined to be uncollectible.

Risk ratings are not established for home equity loans, consumer loans, and installment loans, mainly because these portfolios consist of a larger number of homogenous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based on aggregate payment history, through the monitoring of delinquency levels and trends and are classified as performing and nonperforming.

The following presents the credit quality tables as of June 30, 2013 and December 31, 2012 for the non-covered loan portfolio.

 

     June 30, 2013  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 178,927       $ 1,217,390       $ 30,364       $ 117,946   

Special Mention

     9,526         19,638         389         1,070   

Substandard

     560         18,453         2,706         1,766   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 189,013       $ 1,255,481       $ 33,459       $ 120,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
     Consumer      Mortgage
Warehouse
     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 1,751       $ 7,560       $ 145,917   

Nonperforming (1)

     57         0         10   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,808       $ 7,560       $ 145,927   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes loans that are on nonaccrual status at June 30, 2013.

 

     December 31, 2012  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 70,955       $ 794,187       $ 26,020       $ 105,490   

Special Mention

     3,836         18,737         454         1,017   

Substandard

     327         21,801         1,971         2,919   

Doubtful

     0         763         452         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 75,118       $ 835,488       $ 28,897       $ 109,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Consumer      Mortgage
Warehouse
     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 2,005       $ 9,565       $ 154,562   

Nonperforming (1)

     56         0         141   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,061       $ 9,565       $ 154,703   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes loans that are on nonaccrual status at December 31, 2012.

The following presents the credit quality tables as of June 30, 2013 and December 31, 2012 for the covered loan portfolio.

 

     June 30, 2013  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 4,827       $ 16,930       $ 1,976       $ 14,170   

Special Mention

     121         3,063         3,949         455   

Substandard

     2,278         15,908         19,844         4,588   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,226       $ 35,901       $ 25,769       $ 19,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 3,412   

Nonperforming (1)

     93   
  

 

 

 

Total

   $ 3,505   
  

 

 

 

 

(1) Includes loans that are on nonaccrual status at June 30, 2013.

 

20


Table of Contents
     December 31, 2012  
     Commercial
and
Industrial
     Commercial
Real Estate
     Construction      Residential
Real Estate
 
     (dollars in thousands)  

Pass/Satisfactory

   $ 8,888       $ 26,195       $ 2,434       $ 14,021   

Special Mention

     51         225         4,038         455   

Substandard

     2,214         18,481         21,320         5,476   

Doubtful

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,153       $ 44,901       $ 27,792       $ 19,952   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Manufactured
Housing
 
     (dollars in thousands)  

Performing

   $ 3,638   

Nonperforming (1)

     90   
  

 

 

 

Total

   $ 3,728   
  

 

 

 

 

(1) Includes loans that are on nonaccrual status at December 31, 2012.

Allowance for loan losses

The changes in the allowance for loan losses for the three and six months ended June 30, 2013 and 2012 and the loans and allowance for loan losses by loan segment based on impairment evaluation method are as follows. Please read in conjunction with disclosures in the Bancorp’s 2012 Annual Report on Form 10-K.

 

    Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential
Real  Estate
    Manufactured
Housing
    Consumer     Mortgage
Warehouse
    Unallocated     Total  
    (dollars in thousands)  

Three months ended June 30, 2013

 

Beginning Balance, April 1, 2013

  $ 1,990      $ 15,223      $ 4,279      $ 3,248      $ 846      $ 141      $ 54      $ 658      $ 26,439   

Charge-offs

    (76     (1,481     (1,471     (65     0        0        0        0        (3,093

Recoveries

    154        8        0        10        0        4        0        0        176   

Provision for loan losses

    417        2,935        1,509        359        (168     (39     2        (395     4,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2013

  $ 2,485      $ 16,685      $ 4,317      $ 3,552      $ 678      $ 106      $ 56      $ 263      $ 28,142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

                 

Beginning Balance, January 1, 2013

  $ 1,477      $ 15,439      $ 3,991      $ 3,233      $ 750      $ 154      $ 71      $ 722      $ 25,837   

Charge-offs

    (96     (1,891     (1,471     (198     0        0        0        0        (3,656

Recoveries

    165        60        0        7        0        9        0        0        241   

Provision for loan losses

    939        3,077        1,797        510        (72     (57     (15     (459     5,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2013

  $ 2,485      $ 16,685      $ 4,317      $ 3,552      $ 678      $ 106      $ 56      $ 263      $ 28,142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2013

                 

Loans:

                 

Individually evaluated for impairment

  $ 10,147      $ 33,344      $ 10,970      $ 2,901      $ 0      $ 77      $ 0        $ 57,439   

Collectively evaluated for impairment

    180,933        1,200,004        31,695        121,973        143,925        1,228        7,560          1,687,318   

Loans acquired with credit deterioration

    5,159        58,034        16,563        15,121        5,507        503        0          100,887   
                 

 

 

 
                  $ 1,845,644   
                 

 

 

 

Allowance for loan losses:

                 

Individually evaluated for impairment

  $ 602      $ 1,818      $ 1,533      $ 327      $ 0      $ 0      $ 0      $ 0      $ 4,280   

Collectively evaluated for impairment

    1,477        9,402        279        1,022        76        48        56        263        12,623   

Loans acquired with credit deterioration

    406        5,465        2,505        2,203        602        58        0        0        11,239   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,485      $ 16,685      $ 4,317      $ 3,552      $ 678      $ 106      $ 56      $ 263      $ 28,142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents
    Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential
Real  Estate
    Manufactured
Housing
    Consumer     Mortgage
Warehouse
    Unallocated     Total  
    (dollars in thousands)  

Three months ended June 30, 2012

                 

Beginning Balance, April 1, 2012

  $ 1,464      $ 7,117      $ 5,099      $ 775      $ 33      $ 95      $ 763      $ 54      $ 15,400   

Charge-offs

    0        (938     (979     (179     0        (10     0        0        (2,106

Recoveries

    66        14        0        1        0        5        0        0        86   

Provision for loan losses

    (27     2,073        232        483        8        (16     39        (54     2,738   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2012

  $ 1,503      $ 8,266      $ 4,352      $ 1,080      $ 41      $ 74      $ 802      $ 0      $ 16,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2012

                 

Beginning Balance, January 1, 2012

  $ 1,441      $ 7,029      $ 4,656      $ 844      $ 18      $ 61      $ 929      $ 54      $ 15,032   

Charge-offs

    (34     (1,143     (2,191     (200     0        (10     0        0        (3,578

Recoveries

    66        50        0        5        0        5        0        0        126   

Provision for loan losses

    30        2,330        1,887        431        23        18        (127     (54     4,538   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2012

  $ 1,503      $ 8,266      $ 4,352      $ 1,080      $ 41      $ 74      $ 802      $ 0      $ 16,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2012

                 

Loans:

                 

Individually evaluated for impairment

  $ 3,232      $ 25,648      $ 14,309      $ 1,754      $ 0      $ 83      $ 0      $ 0      $ 45,026   

Collectively evaluated for impairment

    68,212        405,632        7,809        89,617        96,713        5,141        801,994        0        1,475,118   

Loans acquired with credit deterioration

    12,253        77,378        23,203        22,413        9,097        722        0        0        145,066   
                 

 

 

 
                  $ 1,665,210   
                 

 

 

 

Allowance for loan losses:

                 

Individually evaluated for impairment

  $ 481      $ 1,651      $ 3,007      $ 45      $ 0      $ 0      $ 0      $ 0      $ 5,184   

Collectively evaluated for impairment

    868        4,995        181        994        41        57        802        0        7,938   

Loans acquired with credit deterioration

    154        1,620        1,164        41        0        17        0        0        2,996   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,503      $ 8,266      $ 4,352      $ 1,080      $ 41      $ 74      $ 802      $ 0      $ 16,118   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The non-covered manufactured housing portfolio was purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the Purchase Agreement for defaults of the underlying borrower and other specified items. At June 30, 2013 and 2012, funds available for reimbursement, if necessary, were $2.7 million and $5.0 million, respectively. Quarterly, these funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.

The changes in accretable yield related to PCI loans since origination for the three and six months ended June 30, 2013 and 2012 were as follows:

 

For the Three Months Ended June 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 29,665      $ 44,703   

Accretion to interest income

     (1,601     0   

Reclassification from nonaccretable difference and disposals, net

     (415     (1,473
  

 

 

   

 

 

 

Balance, end of period

   $ 27,649      $ 43,230   
  

 

 

   

 

 

 

 

For the Six Months Ended June 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 32,174      $ 45,358   

Accretion to interest income

     (3,672     (2,059

Reclassification from nonaccretable difference and disposals, net

     (853     (69
  

 

 

   

 

 

 

Balance, end of period

   $ 27,649      $ 43,230   
  

 

 

   

 

 

 

 

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FDIC Loss Sharing Receivable

The following table summarizes the activity related to the FDIC loss sharing receivable for the three and six months ended June 30, 2013 and 2012:

 

Three Months Ended June 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 12,043      $ 14,149   

Change in FDIC loss sharing receivable

     2,884        (449

Reimbursement from the FDIC

     (758     (1,324
  

 

 

   

 

 

 

Balance, end of period

   $ 14,169      $ 12,376   
  

 

 

   

 

 

 

 

Six Months Ended June 30,

   2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 12,343      $ 13,077   

Change in FDIC loss sharing receivable

     4,954        741   

Reimbursement from the FDIC

     (3,128     (1,442
  

 

 

   

 

 

 

Balance, end of period

   $ 14,169      $ 12,376   
  

 

 

   

 

 

 

NOTE 8 — SHAREHOLDERS’ EQUITY

On May 22, 2013, the Bancorp raised $103.5 million in gross proceeds by issuing 6,179,104 shares of its voting common stock at a price to the public of $16.75 per share. The net proceeds to Customers after deducting underwriting discounts and commissions and offering expenses were $97.7 million.

During the third quarter of 2012, the Bancorp sold 7,111,819 shares of common stock in private offerings. The proceeds, net of offering costs, were $94.6 million.

On May 8, 2012, the Bancorp announced that, due to market conditions, it had postponed its initial public offering of voting common stock. Costs related to this postponed offering in the amount of $1.3 million were expensed.

NOTE 9 — SHARE-BASED COMPENSATION

Stock Options

Options to purchase an aggregate of 617,910 and 92,687 shares of voting common stock, representing 10% and 1.5% of the number of shares issued in the May 2013 offering of voting common stock, were granted to the Chief Executive Officer and the Chief Operating Officer in connection with the completion of the offering pursuant to their existing employment agreements, respectively. The options will vest over five years from the date of grant, subject to a 50% increase in the value options to purchase of the Bancorp’s Voting Common Stock and have a term of 10 years. In addition, in matters unrelated to the May 2013 offering, options to purchase an aggregate of 50,000 shares of Voting Common Stock were granted to certain other officers. The fair values of the options were estimated using the Black-Scholes option pricing model. The following table presents the weighted-average assumptions used and the resultant weighted-average fair value of the options.

 

     2013     2012  

Weighted-average risk-free interest rate

     1.39     1.15

Expected dividend yield

     0.00     0.00

Weighted-average expected volatility

     6.54     17.47

Expected life (in years)

     7.00        6.98   

Weighted-average fair value

   $ 2.04      $ 3.04   

 

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The following table summarizes stock option activity for the six months ended June 30, 2013.

 

     Number
of Options
     Weighted-
average
Exercise
Price
     Weighted-
average
Remaining
Contractual
Term in Years
     Aggregate
Intrinsic
Value
 
     (aggregate intrinsic value in thousands)  

Outstanding at January 1, 2013

     2,003,889       $ 12.49         

Granted

     760,597         16.66         
  

 

 

          

Outstanding at June 30, 2013

     2,764,486       $ 13.64         8.40       $ 7,650   
  

 

 

          

Vested and expected to vest at June 30, 2013

     2,764,486         13.64         8.40         7,650   

Exercisable at June 30, 2013

     14,438       $ 20.06         3.82       $ 13   

NOTE 10 — REGULATORY MATTERS

The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bancorp’s consolidated financial statements. At June 30, 2013, the Bank and the Bancorp met all capital adequacy requirements to which they are subject.

The Bank experienced rapid loan growth during the final days of 2012. During the standard closing process of the Bank’s December 2012 financial statements, management determined on January 30, 2013 that the rapid loan growth resulted in a reduction in the Bank’s capital ratios, causing the Bank to become adequately capitalized as of December 31, 2012. Management immediately transferred sufficient capital from the Bancorp to the Bank, returning the Bank to well-capitalized status. Sufficient cash is maintained at the Bancorp to ensure that the Bank remains well capitalized, and management remains committed to taking all steps necessary to ensure that both the Bancorp and the Bank remain well capitalized going forward. The Bank is well capitalized as of June 30, 2013. Since the Bank was adequately capitalized at December 31, 2012, regulatory approval was required to accept, renew or roll over any brokered deposits. Effective January 1, 2013, the interest rate paid for deposits by institutions that are less than well capitalized is limited to 75 basis points above the national rate for similar products unless the institution can support to the FDIC that prevailing rates in its market area exceed the national average. This has been subsequently lifted based upon the well-capitalized status as of June 30, 2013.

 

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The Bancorp’s and the Bank’s capital amounts and ratios at June 30, 2013 and December 31, 2012 are as follows:

 

     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized
Under
Prompt Corrective  Action
Provisions
 
(dollars in thousands)    Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of June 30, 2013:

               

Total capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 406,314         13.32   $ 244,036         8.0     N/A         N/A   

Customers Bank

   $ 378,972         12.43   $ 243,915         8.0   $ 304,894         10.0

Tier 1 capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 377,617         12.38   $ 122,018         4.0     N/A         N/A   

Customers Bank

   $ 350,275         11.49   $ 121,958         4.0   $ 182,937         6.0

Tier 1 capital (to average assets)

               

Customers Bancorp, Inc.

   $ 377,617         11.20   $ 134,895         4.0     N/A         N/A   

Customers Bank

   $ 350,275         10.39   $ 134,845         4.0   $ 168,556         5.0

As of December 31, 2012:

               

Total capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 289,035         11.26   $ 205,443         8.0     N/A         N/A   

Customers Bank

   $ 244,710         9.53   $ 205,442         8.0   $ 256,802         10.0

Tier 1 capital (to risk weighted assets)

               

Customers Bancorp, Inc.

   $ 262,719         10.23   $ 102,722         4.0     N/A         N/A   

Customers Bank

   $ 218,394         8.50   $ 102,721         4.0   $ 154,081         6.0

Tier 1 capital (to average assets)

               

Customers Bancorp, Inc.

   $ 262,719         9.30   $ 112,939         4.0     N/A         N/A   

Customers Bank

   $ 218,394         7.74   $ 112,896         4.0   $ 141,120         5.0

NOTE 11 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Bancorp uses fair value measurements to record fair value adjustments to certain assets and to disclose the fair value of its financial instruments. FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Bancorp, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair value disclosure purposes, the Bancorp utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurement, as explained below.

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Investment Securities:

The fair value of investment securities available for sale and held to maturity are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3).

The carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities.

 

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Table of Contents

Loans held for sale:

The fair value of loans receivable held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.

Loans held for sale — Mortgage warehouse loans:

The Fair Value Option

The Bancorp elected the fair value option for warehouse lending transactions documented under a Master Repurchase Agreement originated after July 1, 2012 in order to more accurately represent the short-term nature of the transaction and its inherent credit risk. This adoption was in accordance with the parameters established by Accounting Standards Codification (“ASC”) 825-10-25, Financial Instruments-Overall-Recognition: The Fair Value Option. As a result of this election, warehouse lending transactions are classified as “Loans held for sale” on the balance sheet. The interest income from the warehouse lending transactions is classified in “Interest Income — Loans held for sale on the income statement. An allowance for loan losses is not recorded for the warehouse lending transactions when measured at fair value since the exit price (the repurchase price) for warehouse lending transactions considers the effect of expected credit losses.

The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by the mortgage company as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not expected to be recognized since at inception of the transaction the underlying loans have already been sold to an approved investor or they have been hedged by the mortgage company. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 17 days from purchase to sale.

Loans receivable, net:

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired loans:

Impaired loans are those that are accounted for under FASB ASC 450, Contingencies, in which the Bancorp has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

FDIC loss sharing receivable:

The FDIC loss sharing receivable is measured separately from the related covered assets, as it is not contractually embedded in the assets and is not transferable with the assets should the assets be sold. Fair value is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses using the applicable loss share percentages and the estimated true-up payment. These cash flows are discounted to reflect the estimated timing of the receipt of the loss share reimbursement from the FDIC.

Other real estate owned:

The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes in market conditions (Level 3 Inputs). All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”). Appraisals are certified to the Bancorp and performed by appraisers on the Bancorp’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”.

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities:

The fair values disclosed for deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

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Table of Contents

Federal funds purchased:

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Borrowings:

Borrowings consist of FHLB advances. The carrying amount of short-term FHLB borrowings approximates its fair value. Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Subordinated debt:

Fair values of subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

Derivatives (Assets and Liabilities):

The fair values of interest rate swaps are determined using models that incorporate readily observable market data into a market standard methodology. The methodology nets the discounted future fixed cash receipts and the discounted expected variable cash payments. The discounted variable cash payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Bancorp and its counterparties.

Off-balance-sheet financial instruments:

Fair values for the Bancorp’s off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The following information should not be interpreted as an estimate of the fair value of the entire Bancorp since a fair value calculation is only provided for a limited portion of the Bancorp’s assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Bancorp’s disclosures and those of other companies may not be meaningful.

 

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Table of Contents

The estimated fair values of the Bancorp’s financial instruments were as follows at June 30, 2013 and December 31, 2012.

 

                   Fair Value Measurements at June 30, 2013  
     Carrying
Amount
     Estimated
Fair Value
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (dollars in thousands)  

Assets:

              

Cash and cash equivalents

   $ 205,685       $ 205,685       $ 205,685       $ 0       $ 0   

Investment securities, available for sale

     182,314         182,314         6         182,308         0   

Loans held for sale

     1,414,943         1,414,943         0         1,414,943         0   

Loans receivable, net

     1,817,130         1,817,362         0         0         1,817,362   

FDIC loss sharing receivable

     14,169         14,169         0         14,169         0   

Derivatives not designated as hedging instruments

     1,919         1,919         0         1,919         0   

Restricted stock

     33,188         33,188         0         33,188         0   

Fraudulent loans receivable (1)

     669         669         0         0         669   

Accrued interest receivable

     7,077         7,077         7,077         0         0   

Liabilities:

              

Deposits

   $ 2,775,709       $ 2,763,089       $ 265,842       $ 2,497,247       $ 0   

Federal funds purchased

     120,000         120,000         120,000         0         0   

Other borrowings

     505,000         506,228         0         506,228         0   

Subordinated debt

     2,000         2,000         0         2,000         0   

Derivatives not designated as hedging instruments

     1,868         1,868         0         1,868         0   

Accrued interest payable

     1,534         1,534         1,534         0         0   

 

(1) Included in Other Assets

 

                   Fair Value Measurements at December 31, 2012  
     Carrying
Amount
     Estimated
Fair Value
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 
     (dollars in thousands)  

Assets:

              

Cash and cash equivalents

   $ 186,016       $ 186,016       $ 186,016       $ 0       $ 0   

Investment securities, available for sale

     129,093         129,093         6         129,087         0   

Loans held for sale

     1,439,889         1,439,889         0         1,439,889         0   

Loans receivable, net

     1,298,630         1,307,049         0         0         1,307,049   

FDIC loss sharing receivable

     12,343         12,343         0         12,343         0   

Restricted stock

     30,163         30,163         0         30,163         0   

Accrued interest receivable

     5,790         5,790         5,790         0         0   

Liabilities: