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.
 
 
 
2

 
 


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-101     

 
 
3

 
 
 
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.
 
 
 
4

 
 

 
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.
 
 
 
 
5

 
 
 
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.
 
 
 
 
6

 
 
 
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.
     
 
 
 
7

 

 

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 %
 
 
 
8

 
 
 
 
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.
 
 
 
9

 
 

 
(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).
 
 
 
 
10

 
 

(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.
 
 
 
11

 
 
 
 
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.
 


 
12

 

(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.
 
 
 
13

 
 
 
(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
 

 
 
14

 
 

 
(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.
 
 
 
15

 
 

 
(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.
 
 
 
16

 
 
 
 
(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.
 
 
 
 
 
17

 
 

 
(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