Edgar Filing: Customers Bancorp, Inc.

customers10q.htm

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 September 30, 2011

¨	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)

CUSTOMERS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	27-2290659
(State or other jurisdiction	(IRS Employer
of incorporation or organization)	Identification No.)

1015 Penn Avenue

Suite 103

Wyomissing PA 19610

(Address of principal executive offices)

(610) 933-2000

(Issuer’s telephone number)

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 Web site, 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 ¨
Non-accelerated filer x	Smaller reporting company ¨
(Do not check if a 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 November 14, 2011, 8,551,462 shares of the registrant's Common Stock were outstanding, and 2,844,142 shares of the registrant’s Class B Non-Voting Common Stock were outstanding.

Customers Bancorp, Inc.

Table of Contents



Part I


Item 1.	Customers Bancorp, Inc. Financial Statements as of September 30, 2011 and for the three and nine month periods ended September 30, 2011	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51




PART II


Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	53

Item 5.	Other Information	53

Item 6.	Exhibits	54

SIGNATURES		56

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

CUSTOMERS BANCORP, INC. AND SUBSIDIARY

BALANCE SHEETS - UNAUDITED

(dollar amounts in thousands, except per share data)

	September 30,			December 31,
	2011			2010
ASSETS	(unaudited)			(unaudited)
Cash and due from banks	$	7,847		$	6,396
Interest earning deposits		44,820			225,635
Federal funds sold		163			6,693
Cash and cash equivalents		52,830			238,724
Investment securities available for sale, at fair value		155,971			205,828
Investment securities, held-to-maturity (fair value 2011 $377,050; 2010 $0)		361,256			—
Loans receivable held for sale		205,027			199,970
Loans receivable not covered by loss sharing agreements with the FDIC		873,861			514,087
Loans receivable covered under loss sharing agreements with the FDIC		140,511			164,885
Less: Allowance for loan losses		(14,025	)		(15,129	)
Total loans receivable, net		1,000,347			663,843
FDIC loss sharing receivable		11,860			16,702
Bank premises and equipment, net		8,832			4,700
Bank owned life insurance		29,005			25,649
Other real estate owned (2011 $4,883; 2010 $5,342 covered under loss sharing agreements with the FDIC)		12,128			7,248
Goodwill		2,465			—
Accrued interest receivable and other assets		22,891			11,743
Total assets	$	1,862,612		$	1,374,407
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	110,762		$	72,268
Interest bearing		1,471,063			1,173,422
Total deposits		1,581,825			1,245,690
Securities sold under agreements to repurchase		110,000			—
Other borrowings		11,000			11,000
Subordinated debt		2,000			2,000
Accrued interest payable and other liabilities		8,121			10,577
Total liabilities		1,712,946			1,269,267
Stockholders’ equity:
Preferred stock, par value $1,000 per share; 100,000,000 shares authorized; 2,892 Series A, 5% dividend and 145 Series B shares, 9% dividend issued and outstanding in 2011 and no shares in 2010		3,037			—
Common stock, par value $1.00 per share; 200,000,000 shares authorized; shares issued and outstanding 2011 – 11,395,604; 2010 – 8,398,013		11,395			8,398
Additional paid in capital		122,413			88,132
Retained earnings		11,312			10,506
Accumulated other comprehensive income (loss)		1,509			(1,896	)
Total stockholders’ equity		149,666			105,140
Total liabilities and stockholders’ equity	$	1,862,612		$	1,374,407

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARY

STATEMENTS OF OPERATIONS - UNAUDITED

(dollar amounts in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2011			2010		2011		2010
Interest income:
Loans receivable, including fees		$	11,297	$	9,204	$	31,024	$	17,900
Investment Securities, taxable			3,973		115		10,341		933
Investment Securities, non-taxable			22		22		65		88
Other			117		125		515		219
Total interest income			15,409		9,466		41,945		19,140

Interest expense:
Deposits			5,564		3,111		16,660		6,656
Securities sold under repurchase agreements			21		92		28		276
Other borrowings			111		17		353		49
Total interest expense			5,696		3,220		17,041		6,981
Net interest income			9,713		6,246		24,904		12,159
Provision for loan losses			900		4,075		6,550		9,547
Net interest income after provision for loan losses			8,813		2,171		18,354		2,612
Non-interest income:
Service fees			156		266		463		456
Mortgage warehouse transactional fees			1,366		780		3,754		1,483
Bank owned life insurance			264		59		1,128		175
Gains on sales of securities			1,413		35		1,413		1,111
Gains on sales of SBA loans			299		—		377		—
Bargain purchase gains on bank acquisitions			—		40,254		—		40,254
Accretion of FDIC loss sharing receivable			—		149		1,709		149
Other			93		117		402		197
Total non-interest income			3,591		41,660		9,246		43,825

Non-interest expense:
Salaries and employee benefits			3,866		7,552		11,930		10,773
Occupancy			749		601		2,236		1,234
Technology, communication and bank operations			829		1,049		2,299		1,759
Advertising and promotion			206		239		639		567
Professional services			1,177		795		3,785		1,493
Merger related expenses			530		—		530		—
FDIC assessments, taxes, and regulatory fees			346		463		1,599		1,078
Loan workout and other real estate owned			695		531		1,557		1,174
Other			731		312		1,915		609
Total non-interest expense			9,129		11,542		26,490		18,687
Income before tax expense			3,275		32,289		1,110		27,750
Income tax expense			930		4,455		299		4,455
Net income		$	2,345	$	27,834	$	811	$	23,295
Dividends on preferred stock			5		—		5		—
Net income available to common stockholders		$	2,340	$	27,834	$	806	$	23,295
Basic earnings per common share		$	0.24	$	3.86	$	0.08	$	3.96
Diluted earnings per common share		$	0.23	$	3.81	$	0.08	$	3.92

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARY

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

For the nine months ended September 30, 2011 and 2010

(dollar amounts in thousands, except share and per share data)

	Shares of preferred stock		Shares of common stock		Preferred Stock		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated other compre- hensive income (loss)			Total
Balance, December 31, 2010		—		8,398,013	$	—	$	8,398	$	88,132	$	10,506		$	(1,896	)	$	105,140

Comprehensive income:
Net income		—		—		—		—		—		811			—			811
Change in net unrealized gains on investment securities available-for-sale, net of taxes		—		—		—		—		—		—			3,405			3,405
Total comprehensive income		—		—		—		—		—		—			—			4,216
Stock-based compensation expense	__		__		__		__			515	__							515
Common stock shares issued		—		1,388,753		—		1,389		14,137		—			—			15,526
Sale of 984,848 shares at $13.20 per share		—		984,848		—		985		12,015		—			—			13,000
Shares issued in the acquisition of Berkshire Bancorp, Inc.		3,037		623,990		3,037		623		7,614		—			—			11,274
Dividends – preferred stock												(5	)					(5	)
Balance, September 30, 2011		3,037		11,395,604	$	3,037	$	11,395	$	122,413	$	11,312		$	1,509		$	149,666

	Shares of common stock		Common Stock		Additional Paid in Capital		Retained Earnings (Accumulated Deficit)			Accumulated other comprehensive loss			Total
Balance, December 31, 2009		1,840,902	$	1,841	$	32,924	$	(13,229	)	$	(33	)	$	21,503

Comprehensive income:
Net income		—		—		—		23,295			—			23,295
Change in net unrealized losses on securities available- for-sale, net of taxes		—		—		—		—			(52	)		(52	)
Total comprehensive income		—		—		—		—			—			23,243
Stock-based compensation expense		—		—		1,952		—			—			1,952
Common stock shares issued		4,953,072		4,953		45,462		—			—			50,415

Balance, September 30, 2010		6,793,974	$	6,794	$	80,338	$	10,066		$	(85	)	$	97,113

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDIARY

STATEMENTS OF CASH FLOWS - UNAUDITED

(dollar amounts in thousands, except per share data)

Nine months ended September 30,	2011			2010
Cash Flows from Operating Activities
Net income		806			23,295
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		6,550			9,547
Provision for depreciation and amortization		967			274
Net (accretion) amortization of investment securities premiums and discounts		(282	)		105
Gain on sale of investment securities		(1,413	)		(1,111	)
Gain on sale of SBA loans		(377	)		-
Bargain purchase gain on bank acquisitions		-			(40,254	)
Gain on sale of other real estate owned		(235	)		-
Amortization (accretion) of fair value discounts, net		330			(212	)
Increase in FDIC loss sharing receivables		(1,709	)		(161	)
Fair value adjustments on other real estate owned		1,156			628
Earnings on investment in bank owned life insurance		(1,128	)		(175	)
Stock-based compensation expense		515			1,952
Origination of loans held for sale		(1,685,972	)		-
Proceeds from the sale of loans held for sale		1,680,915			-
(Increase) in accrued interest receivable and other assets		(22,459	)		(9,017	)
(Decrease) increase in other liabilities		(2,456	)		5,512
Net Cash Used in Operating Activities		(24,792	)		(9,617	)
Cash Flows from Investing Activities
Purchases of investment securities available-for-sale		(72,960	)		(101,633	)
Purchases of investment securities held-to-maturity		(396,835	)		-
Proceeds from maturities and principal repayments on investment securities held-to-maturity		35,647			-
Proceeds from maturities and principal repayments on investment securities available-for-sale		16,847			5,035
Proceeds from sales of securities available-for-sale		112,757			139,436
Net (increase) in loans		(220,626	)		(315,679	)
Purchase of loan portfolio		(13,000	)		(94,633	)
Purchases of bank premises and equipment		(1,725	)		(2,402	)
Purchase of restricted stock		(10,364	)		(2,256	)
Proceeds from the sale of SBA loans		5,172			-
Net cash proceeds from bank acquisitions		19,207			72,930
Reimbursements under FDIC loss sharing agreements		6,551			-
Proceeds from sales of other real estate owned		5,377			268
Proceeds from bank owned life insurance		273			-
Net Cash Used in Investing Activities		(513,679	)		(298,934	)
Cash Flows From Financing Activities
Net increase in deposits		214,269			339,180
Net increase in short-term borrowings		110,000			-
Payment of preferred dividends		(218	)		-
Proceeds from issuance of common stock, net of issuance costs		28,526			50,415
Net Cash Provided by Financing Activities		352,577			389,595
Net (decrease) increase in Cash and Cash Equivalents		(185,894	)		81,044
Cash and Cash Equivalents - Beginning		238,724			68,807
Cash and Cash Equivalents - Ending	$	52,830		$	149,851
Supplementary Cash Flows Information
Interest paid	$	17,212		$	6,006
Income taxes (refund) paid		2,816			(1,046	)

Non-cash items:
Transfer of loans to other real estate owned		7,793			3,296
Other real estate owned from bank acquisitions		3,385			-
Loans from bank acquisitions		98,387			-
Restricted stock from bank acquistions		947			-
Fixed assets from bank acquisitions		3,374			-
Bank owned life insurance from bank acquisitions		2,501			-
Goodwill from bank acquisitions		2,465			-
Deposits from bank acquisitions		121,866			-
Preferred stock from bank acquisitions		3,037			-
Common stock issued in bank acquisition		8,237			-
Effect on common shares from reorganization		(3,037	)		-
Fair value adjustment for available for sale securities		5,160			-

Acquisitions:
Assets acquired	$	134,110		$	285,605
Liabilitites assumed		122,836			264,842

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANCORP, INC. AND SUBSIDAIRY

NOTES TO UNAUDITED FINANCIAL STATEMENTS

(Dollars in thousands except for per share data)

NOTE 1 – DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Customers Bancorp, Inc. (the “Bancorp”) is a Pennsylvania corporation formed on April 7, 2010 to facilitate the reorganization of Customers Bank (the “Bank") into a bank holding company structure. The reorganization was completed on September 17, 2011. Any interim financial information for periods prior to September 17, 2011 contained herein reflect those of Customers Bank as the predecessor entity. The unaudited 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. The Bancorp’s unaudited 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 2010 financial statements have been reclassified to conform to the 2011 presentation. These reclassifications did not significantly impact the Bank’s financial position or results of operations.

The Bancorp evaluated its September 30, 2011 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 – REORGANIZATION AND ACQUISITION ACTIVITY

Reorganization into Customers Bancorp, Inc.

The Bancorp and the Bank entered into a Plan of Merger and Reorganization effective September 17, 2011 pursuant to which all of the issued and outstanding common stock of the Bank was exchanged on a three to one basis for shares of common stock and Non-Voting common stock of the Company. The Bank became a wholly-owned subsidiary of the Bancorp (the “Reorganization”). The Bancorp is authorized to issue up to 100,000,000 shares of common stock, 100,000,000 shares of Class B Non-Voting Common Stock and 100,000,000 shares of preferred stock. All share and per share information has been retrospectively restated to reflect the Reorganization including the three for one consideration used in the Reorganization.

In the Reorganization, the Bank’s issued and outstanding shares of common stock of 22,525,825 shares and Class B Non-Voting common stock of 6,834,895 shares converted into 7,508,473 shares of the Bancorp’s common stock and 2,278,294 shares of the Bancorp’s Class B Non-Voting common stock. Cash will be paid in lieu of fractional shares. Outstanding warrants to purchase 1,410,732 shares of the Bank’s common stock with an weighted average exercise price of $3.55 per share and 243,102 shares of the Bank’s Class B Non-Voting common stock with an weighted average exercise price of $3.50 per share were converted into warrants to purchase 470,260 shares of the Bancorp’s common stock with a weighted average exercise price of $10.64 per share and warrants to purchase 81,036 shares of the Bancorp’s Class B Non-Voting common stock with a weighted average exercise price of $10.50 per share. Outstanding stock options to purchase 2,572,404 shares of the Bank’s common stock with a weighted average exercise price of $3.50 per share and stock options to purchase 231,500 shares of the Bank’s Class B Non-Voting common stock with a weighted average exercise price of $4.00 per share were converted into stock options to purchase 855,774 shares of the Bancorp’s common stock with a weighted average exercise price of $10.49 per share and stock options to purchase 77,166 shares of the Bancorp’s Class B Non-Voting common stock with a weighted average exercise price of $12.00 per share.

Berkshire Bancorp Acquisition

On September 17, 2011, the Bancorp completed its acquisition of Berkshire Bancorp, Inc. (“BBI”) and its subsidiary Berkshire Bank (collectively, “Berkshire”). Berkshire Bank merged within and into the Bank immediately following the acquisition. BBI served Berks County, Pennsylvania through the five branches of its subsidiary, Berkshire Bank. Under the terms of the merger agreement, each outstanding share of BBI common stock (a total of 4,067,729) was exchanged for 0.1534 shares of the Bancorp common stock, resulting in the issuance of 623,990 shares of the Bancorp’s common stock. Cash will be paid in lieu of fractional shares. The most recent price for the sale of CBI common stock, $13.20, was used to determine the fair value of the Bancorp stock issued. The total purchase price was approximately $11.3 million.

The table below illustrates the calculation of the consideration effectively transferred.

Reconcilement of Pro Forma Shares Outstanding
Berkshire shares outstanding	4,067,729
Exchange ratio	0.1534
Bancorp shares to be issued to Berkshire	623,990
Customers shares outstanding	9,786,765
Pro Forma Customers shares outstanding	10,410,755
Percentage ownership for Customers	94.01	%
Percentage ownership for Berkshire	5.99	%

As a result of the Berkshire Merger, the Bancorp recognized assets acquired and liabilities assumed at their acquisition date

(September 17, 2011) fair value as presented below.


Total purchase price			$	11,274

Net Assets Acquired:
Cash	19,207
Restricted investments	947
Loans	98,387
Accrued interest receivable	276
Premises & equipment, net	3,374
Deferred tax assets	3,244
Other assets	6,210
Time deposits	(45,721	)
Deposits other than time deposits	(76,145	)
Accrued interest payable	(48	)
Other liabilities	(922	)
				8,809
Goodwill resulting from Berkshire Merger			$	2,465

In addition, the Bancorp exchanged each share of BBI’s shares of Series A Preferred Securities and Series B Preferred Shares to the U.S. Treasury for one share of the Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock for the total issuance of 2,892 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) and 145 shares of Series B Fixed Rate Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”) with a par value of $1.00 per share and a liquidation of $1,000 per share. Cumulative dividends on the Series A Preferred Stock are 5% per year and Series B Preferred Stock are 9%. Upon the exchange of the Series A and B preferred shares, the Bancorp paid $218 of cumulative dividends to the Treasury which were previously unpaid. The Bancorp’s next scheduled dividend payment for the Series A and B Preferred Stock will be November 2011.

(Dollars in thousands except for per share data)

NOTE 2 – REORGANIZATION AND ACQUISITION ACTIVITY (continued)

In addition, 774,571 warrants to purchase shares of BBI common stock were converted into warrants to purchase 118,853 shares of the Bancorp’s common stock with an exercise price ranging from $21.38 to $68.82 per share. The warrants were extended for a five year period and will expire on September 17, 2016.

BBI’s operating results are included in the Bancorp’s financial results from the date of acquisition, September 17, 2011 through September 30, 2011. BBI had total assets of approximately $134.1 million including total loans of $98.4 million and total liabilities of approximately $122.9 million, including total deposits of $121.9 million on September 17, 2011. Goodwill as a result of the merger was approximately $2.5 million. The assets acquired and liabilities assumed from Berkshire are recorded at their fair value. The fair value adjustments made to the assets and liabilities are preliminary estimates and are subject to change as further data is analyzed to complete the valuation based upon information available at the closing date.

Loan Portfolio Acquisition

On September 30, 2011, the Bancorp purchased from Tammac Holding Corporation ("Tammac") $19.3 million of loans and a 1.50% interest only strip security with an estimated value of $3 million secured by a pool of $70 million of loans originated by Tammac. The total purchase price for these assets was $13 million.

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

The Bancorp’s unaudited interim financial statements reflect all adjustments, such as normal recurring accruals, that are, in the opinion of management, necessary for fair statement of the results of interim periods presented. The results of operations for the three and nine months ended September 30, 2011 presented do not necessarily indicate the results that the Bancorp will achieve for all of 2011. These interim financial statements should be read in conjunction with the financial statements and accompanying notes of Customers Bank that are presented in the financial statements for the Bank for the year ended December 31, 2010.

Acquired Loans Receivable

An acquisition of a business is accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. The Bancorp considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the amount deemed paid for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Bancorp records a discount on these loans at acquisition to record them at their realizable cash flows. In accordance with FASB ASC Topic 310-30, the Bancorp aggregated loans that have common risk characteristics into pools within the following loan categories: real estate loan pool (Berkshire acquisition) and the manufactured housing loan pool (Tammac loan purchase).

(Dollars in thousands except for per share data)

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (continued)

Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for under this guidance. As a result, related discounts are recognized subsequently through accretion based on the expected cash flow of the acquired loans. Pursuant to an AICPA letter dated December 18, 2009, the AICPA summarized the view of the SEC regarding the accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase. Regarding the accounting for such loan receivables, that in the absence of further standard setting, the AICPA understands that the SEC would not object to an accounting policy based on contractual cash flows or an accounting policy based on expected cash flows. Management believes the approach using expected cash flows is a more appropriate option to follow in accounting for the fair value discount.

Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Bancorp’s initial investment in the loans should be accreted into interest income on a level-yield basis over the life of the loan. Decreases in cash flows expected to be collected should be recognized as impairment through the provision for loan losses.

New Accounting Pronouncements

In June 2011, the FASB issued accounting guidance updating the requirements regarding the presentation of comprehensive income to increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS. Under the new guidance, the components of net income and the components of other comprehensive income can be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity. This amendment will be applied prospectively and the amendments are effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted. Adoption of the guidance is not expected to have a significant impact on the Bancorp’s financial statements.

In May 2011, the FASB issued new accounting guidance on fair value measurement and disclosure requirements. This guidance is the result of work by the FASB and IASB to develop common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). As a result, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. The guidance is to be applied prospectively, and early application by public entities is not permitted. Adoption of the guidance is not expected to have a significant impact on the Bancorp’s financial statements.

In April 2011, the FASB issued Accounting Standards Update 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, providing additional guidance to creditors for evaluating troubled debt restructurings. The amendments clarify the guidance in ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors, which requires a creditor to classify a restructuring as a troubled debt restructuring (TDR) if: (1) the restructuring includes a concession by the creditor to the borrower, and, (2) the borrower is experiencing financial difficulties. The amended guidance requires a creditor to consider all aspects of the restructuring to determine whether it has granted a concession. It further clarifies that a creditor must consider the probability that a debtor could default in the foreseeable future when determining whether the debtor is facing financial difficulty, even though the debtor may not be in default at the date of restructuring. This new guidance requires a company to retrospectively evaluate all restructurings occurring on or after the beginning of the fiscal year of adoption to determine if the restructuring is a TDR. As a result of the Bancorp’s adoption, the notes to the financial statements have been updated to include the expanded disclosures.

New Accounting Pronouncements (Continued)

In September, 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment. The purpose of this ASU is to simplify how entities test goodwill for impairment by adding a new first step to the preexisting goodwill impairment test under ASC Topic 350, Intangibles – Goodwill and other. This amendment gives the entity the option to first assess a variety of qualitative factors such as economic conditions, cash flows, and competition to determine whether it was more likely than not that the fair value of goodwill has fallen below its carrying value. If the entity determines that it is not likely that the fair value has fallen below its carrying value, then the entity will not have to complete the original two-step test under Topic 350. The amendments in this ASU are effective for impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Bancorp is evaluating the impact of this ASU on its consolidated financial statements.

(Dollars in thousands except for per share data)

NOTE 4 – EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if (i) options to purchase common stock were exercised and (ii) warrants to purchase common stock were exercised. Potential common shares that may be issued related to outstanding stock options are determined using the treasury stock method. The following are the components of the Bancorp’s earnings per share for the periods presented:

	For the three months ended September 30,				For the nine months ended September 30,
	2011		2010		2011		2010
Net income available to common stockholders	$	2,340	$	27,834	$	806	$	23,295

Weighted average number of common shares outstanding – basic		9,876,004		7,215,132		9,621,548		5,879,870
Warrants		73,258		21,248		64,360		7,440
Stock-based compensation plans		144,560		68,612		127,561		53,184

Weighted average number of common shares - diluted		10,093,822		7,304,992		9,813,469		5,940,494

Basic earnings per common share	$	0.24	$	3.86	$	0.08	$	3.96

Diluted earnings per common share	$	0.23	$	3.81	$	0.08	$	3.92

Stock options outstanding for 34,130 shares of common stock with exercise prices ranging from $12.96 to $33.00 per share and warrants for 130,047 shares of common stock with an exercise price of $16.50 to $68.82 per share for the three and nine months ended September 30, 2011 were not dilutive, because the exercise price was greater than the average market price. Stock options outstanding for 9,617 shares of common stock with exercise prices ranging from $30.75 to $33.00 and warrants for 11,197 shares of common stock with an exercise price of $16.50 for the three and nine month periods ended September 30, 2010 were not dilutive because the exercise price was greater than the average market price.

NOTE 5 – INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities as of September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale:
U.S. Treasury and government agencies	$	1,489	$	5	$	—		$	1,494
Mortgage-backed securities (1)		129,471		2,494		(101	)		131,864
Asset-backed securities		648		5		—			653
Municipal securities		2,075		—		(86	)		1,989
Corporate notes		20,000		—		(29	)		19,971
	$	153,683	$	2,504	$	(216	)	$	155,971

Held-to-Maturity:
Mortgage-backed securities	$	361,256	$	15,794	$	—		$	377,050

(1) Includes an interest only strip security of $3 million.

(Dollars in thousands except for per share data)

NOTE 5 – INVESTMENT SECURITIES (continued)

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Available-for-Sale:
U.S. Treasury and government agencies	$	1,711	$	—	$	(30	)	$	1,681
Mortgage-backed securities		204,182		561		(3,169	)		201,574
Asset-backed securities		719		3		—			722
Municipal securities		2,088		—		(237	)		1,851
	$	208,700	$	564	$	(3,436	)	$	205,828

The following table shows proceeds from the sale of available for sale investment securities, gross gains and gross losses on those sales of securities:

	For the nine months ended September 30,
	2011		2010
Proceeds from sale of available-for-sale investment securities	$	112,757	$	139,436
Gross gains		1,413		1,113
Gross losses		—		(2	)

The following table shows investment securities by stated maturity. Investment 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:

	September 30, 2011
	Available-for-Sale						Held-to-Maturity
	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Due in one year or less		$	1,170		$	1,171		$	—		$	—
Due after one year through five years			22,882			22,775			—			—
Due after five years through ten years			119			120			—			—
Due after ten years			41			41			—			—
			24,212			24,107			—			—
Mortgage-backed securities			129,471			131,864			361,256			377,050
Total investment securities		$	153,683			155,971		$	361,256		$	377,050

(Dollars in thousands except for per share data)

NOTE 5 – INVESTMENT SECURITIES (continued)

The Bancorp’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale:
Mortgage-backed securities	$	65	$	(1	)	$	418	$	(100	)	$	483	$	(101	)
Municipal securities		—		—			1,989		(86	)		1,989		(86	)
Corporate notes		4,971		(29	)		—		—			4,971		(29	)
Total investment securities available-for-sale	$	5,036	$	(30	)	$	2,407	$	(186	)	$	7,443	$	(216	)

	December 31, 2010
	Less than 12 months							12 months or more							Total
	Fair Value			Unrealized Losses				Fair Value			Unrealized Losses				Fair Value			Unrealized Losses
Available-for-Sale:
U.S. Treasury and government agencies		$	1,457		$	(29	)		$	116		$	(1	)		$	1,573		$	(30	)
Mortgage-backed securities			134,068			(3,104	)			524			(65	)			134,592			(3,169	)
Municipal securities			—			—				1,851			(237	)			1,851			(237	)
Total investment securities available-for-sale		$	135,525		$	(3,133	)		$	2,491		$	(303	)		$	138,016		$	(3,436	)

At September 30, 2011, there were eight available for sale investment securities in the less than twelve month category and five available for sale investment securities in the twelve month or more category. At December 31, 2010, there were thirty-three available-for-sale investment securities in the less than twelve month category and six 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, such as but not limited to changes in economic conditions and the liquidity of the market, subsequent to the acquisition of specific securities. 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.

(Dollars in thousands except for per share data)

NOTE 6 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of net loans receivable at September 30, 2011 and December 31, 2010 is as follows:

	2011			2010
Construction	$	42,116		$	50,964
Commercial real estate		61,276			72,281
Commercial and industrial		11,733			13,156
Residential real estate		21,212			23,822
Manufactured housing		4,174			4,662
Total loans receivable covered under FDIC loss sharing agreements (1)		140,511			164,885
Construction		16,625			13,387
Commercial real estate		231,591			144,849
Commercial and industrial		54,708			35,942
Mortgage warehouse		416,670			186,113
Manufactured housing		102,404			102,924
Residential real estate		49,800			28,964
Consumer		1,698			1,581
Deferred costs (fees), net		365			327
Total loans receivable not covered under FDIC loss sharing agreements		873,861			514,087
Allowance for loan losses		(14,025	)		(15,129	)
Loans receivable, net	$	1,000,347		$	663,843

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

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of September 30, 2011:

	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due(1)		Non- Accrual		Current(2)		Total Loans (4)
Commercial and industrial	$	572	$	—	$	572	$	3,537	$	50,599		$	54,708
Commercial real estate		6,008		132		6,140		23,624		201,827			231,591
Construction		455		—		455		4,381		11,789			16,625
Residential real estate
First mortgages		844		—		844		1,042		22,256			24,142
Home equity		213		—		213		1,101		24,344			25,658
Acquired with credit deterioration		—		—		—		—		—			—
Consumer		76		—		76		59		1,563			1,698
Mortgage warehouse		—		—		—		—		416,670			416,670
Manufactured housing (3)		2,937		31		2,968		—		99,436			102,404

Total	$	11,105	$	163	$	11,268	$	33,744	$	828,484		$	873,496

(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 are subject to cash reserves held at the Bank and are used to fund the past due payments when the loan reaches 90 days or more delinquent.

(4)	Loans exclude deferred costs and fees.

(Dollars in thousands except for per share data)

NOTE 6 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (continued)

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of December 31, 2010:

	30-89 Days Past Due(1)		Greater Than 90 Days(1)		Total Past Due(1)		Non- Accrual		Current(2)		Total Loans(4)

Commercial and industrial	$	—	$	—	$	—	$	705	$	35,237		$	35,942
Commercial real estate		3,545		—		3,545		15,739		125,565			144,849
Construction		51		—		51		4,673		8,663			13,387
Residential real estate
First mortgages		—		—		—		658		6,705			7,363
Home equity		400		—		400		467		20,702			21,569
Acquired with credit deterioration		—		—		—		32		—			32
Consumer		17		5		22		—		1,559			1,581
Mortgage warehouse		—		—		—		—		186,113			186,113
Manufactured housing (3)		2,698		—		2,698		—		100,226			102,924

Total	$	6,711	$	5	$	6,716	$	22,274	$	484,770		$	513,760

(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 are subject to cash reserves held at the Bank and are used to fund the past due payments when the loan reaches 90 days or more delinquent.

(4) Loans exclude deferred costs and fees.

At September 30, 2011 and December 31, 2010, the Bank had other real estate owned that was not covered by loss sharing arrangements of $7,245 and $1,906, respectively.

Covered Nonaccrual Loans and Loans Past Due

The following table summarizes covered nonaccrual loans and past due loans, by class, as of September 30, 2011:

	30-89 Days Past Due (1)		Greater than 90 days (1)		Total past due (1)		Nonaccrual		Current(3)		Total
Commercial and industrial
Acquired with credit deterioration	$	—		367	$	367	$	305	$	418	$	1,090
Remaining loans (2)		255		—		255		236		10,152		10,643
Commercial real estate
Acquired with credit deterioration		30		—		30		9,815		3,905		13,750
Remaining loans (2)		—		—		—		8,476		39,050		47,526
Construction
Acquired with credit deterioration		—		—		—		16,110		4,786		20,896
Remaining loans (2)		—		—		—		4,171		17,049		21,220
Residential real estate
Acquired with credit deterioration		—		—		—		999		1,855		2,854
First mortgages (2)		—		—		—		—		7,049		7,049
Home equity (2)		—		—		—		3,130		8,179		11,309
Manufactured housing
Acquired with credit deterioration		—		—		—		78		—		78
Remaining loans (2)		98		—		98		39		3,959		4,096
	$	383	$	367	$	750	$	43,359	$	96,402	$	140,511

(1) Loan balances do not include non-accrual loans.
(2) Loans that were not identified at the acquisition date as a loan with credit deterioration.
(3) Loans where payments are due within 29 days of the scheduled payment date.

(Dollars in thousands except for per share data)

NOTE 6 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (continued)

The following table summarizes covered nonaccrual loans and past due loans, by class, as of December 31, 2010:

	30-89 Days		Greater than		Total past		Non-
	Past Due (1)		90 days (1)		due (1)		accrual		Current(3)		Total

Commercial and industrial
Acquired with credit deterioration	$	419	$	—	$	419	$	1,790	$	1,003	$	3,212
Remaining loans (2)		53		—		53		—		9,891		9,944
Commercial real estate
Acquired with credit deterioration		1,215		—		1,215		15,242		23,778		40,235
Remaining loans (2)		795		—		795		433		30,818		32,046
Construction
Acquired with credit deterioration		3,884		—		3,884		19,869		—		23,753
Remaining loans (2)		—		—		—		1,912		25,299		27,211
Residential real estate
Acquired with credit deterioration		—		—		—		4,013		1,751		5,764
First mortgages (2)		—		—		—		—		8,254		8,254
Home equity (2)		248		—		248		4		9,552		9,804
Manufactured housing
Acquired with credit deterioration		—		—		—		95		7		102
Remaining loans (2)		113		—		113		96		4,351		4,560