Edgar Filing: Customers Bancorp, Inc.

form10q.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 June 30, 2011

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

For the transition period from _______ to _______.

__________

(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 ¨ No x

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 September 26, 2011, 7,508,608 shares of the registrant's Common Stock were outstanding, and 2,278,298 shares of the registrant’s Class B Non-Voting Common Stock were outstanding.

EXPLANATORY NOTE

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 Bancorp and Customers Bank (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 were exchanged on a three to one basis for shares of common stock of the Bancorp. The Bank became a wholly-owned subsidiary of the Bancorp (the “Reorganization). The Bancorp described the Reorganization in its Form S-1 registration statement filed with the Securities and Exchange Commission (File No. 333-166225) and became effective on August 11, 2011. On September 6, 2011, the shareholders of the Bank voted on and approved the Reorganization that closed on September 17, 2011. Through June 30, 2011, the Bancorp had no operations and no assets, liabilities, equity or cash flows. The balance sheet, statement of operations and cash flows are presented herein solely to comply with the Bancorp’s reporting obligations under the Securities Exchange Act of 1934, as amended, including its obligations to provide financial statements in XBRL format pursuant to Regulation S-T.

Beginning on page 10 of this Quarterly Report on Form 10-Q, the Bancorp has presented supplemental financial information in the form of unaudited financial statements of Customers Bank, the predecessor entity that is the accounting acquirer. The supplemental information is not the information of the Bancorp, and should not be construed as such.

Customers Bancorp, Inc.

Table of Contents



Part I


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

	Supplemental Information – Customers Bank Financial Statements as of June 30, 2011 and for the three and six month periods ended June 30, 2011	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	50




PART II


Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable	51
Item 6.	Exhibits	52

SIGNATURES

Ex-31.1	Certification By Jay S. Sidhu Pursuant To Section 302

Ex-31.2	Certification By Thomas R. Brugger Pursuant To Section 302

Ex-32.1	Certification By Jay S. Sidhu Pursuant To Section 906

Ex-32.2	Certification By Thomas R. Brugger Pursuant To Section 906

CUSTOMERS BANCORP, INC.

UNAUDITED BALANCE SHEETS

	June 30,		December 31,
	2011		2010
ASSETS
Cash	$	—	$	—
Total assets	$	—	$	—
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total liabilities	$	—	$	—
Stockholders’ equity:
Preferred stock, no par value; 100,000,000 shares authorized; no shares issued and outstanding in 2011 and 2010	$	—	$	—
Common stock, no par value; 200,000,000 shares authorized;
no shares issued and outstanding in 2011 and 2010		—		—
Retained earnings		—		—
Total stockholders’ equity		—		—
Total liabilities and stockholders’ equity	$	—	$	—

CUSTOMERS BANCORP, INC.

UNAUDITED STATEMENTS OF OPERATIONS

For the three months ended June 30, 2011

For the period April 7, 2010 through June 30, 2010

Six months ended June 30, 2011

For the period April 7, 2010 through June 30, 2010

Total interest income

—

Total interest expense

—

Net interest income

—

Provision for loan losses

—

Net interest income (loss) after provision for loan losses

—

Non-interest income:

—

Non-interest expense:

—

(Loss) income before tax expense

—

Income tax expense

—

Net income (loss)

—

Basic earnings (loss) per share

—

Diluted earnings (loss) per share

—

CUSTOMERS BANCORP, INC.

UNAUDITED STATEMENTS OF CASH FLOWS

	For the six months ended June 30, 2011		For the period April 7, 2010 through June 30, 2010
Cash Flows from Operating Activities
Net income (loss)	$	—	$	—
Adjustments to reconcile net income to cash provided by operating activities:		—		—
Net Cash Provided by Operating Activities		—		—
Cash Flows from Investing Activities
Net Cash Used in Investing Activities		—		—
Cash Flows from Financing Activities		—		—
Net Cash Provided by Financing Activities		—		—
Net (decrease) increase in Cash and Cash Equivalents		—		—
Cash and Cash Equivalents - Beginning		—		—
Cash and Cash Equivalents - Ending	$	—	$	—

CUSTOMERS BANCORP, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

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. Through June 30, 2011, the Bancorp has no operations and no assets, liabilities, equity or cash flows. The unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“USGAAP”) 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.

NOTE 2 – SUBSEQUENT EVENTS

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 were exchanged on a three to one basis for shares of common stock of the Bancorp (the “Reorganization”). Every three shares of the Bank’s outstanding common stock or Non-Voting common stock were converted into one share of the Bancorp’s common stock or Non-Voting common stock. The Bank became a wholly-owned subsidiary of the Bancorp. 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.

In the Reorganization, the Bank’s issued and outstanding common stock of 22,525,825 shares and Class B Non-Voting common stock of 6,834,895 shares converted into 7,508,608 shares of the Bancorp’s common stock and 2,278,298 shares of the Bancorp’s Non-Voting common stock. 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 470,244 shares of the Bancorp’s common stock with a weighted average exercise price of $10.64 per share and warrants to purchase 81,034 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 2,552,404 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 857,468 shares of the Bancorp’s common stock with a weighted average exercise price of $10.49 per share and stock options to purchase 77,167 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). BBI serves Berks County, Pennsylvania through its five branches of its subsidiary Berkshire Bank. Under the terms of the merger agreement, each outstanding share of BBI common stock (a total of 4,051,068) was exchanged for 0.1534 shares of Customers Bancorp, Inc. common stock, resulting in the issuance of 621,611 shares of the Bancorp common stock. 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 Preferred Stock for the issuance of 2,892 shares of Series A Preferred Stock and 145 shares of 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 assumption of the Series A and B preferred shares, the Bancorp paid $218 of cumulative dividends to the Treasury previously unpaid. The Bancorp’s next scheduled dividend payment for the Series A and B Preferred Stock will be November 2011. The total purchase price was approximately $10.9 million.

NOTE 2 – SUBSEQUENT EVENTS – (continued)

In addition, 774,571 warrants to purchase shares of BBI’s common stock were converted into warrants to purchase 118,853 shares of the Bancorp’s common stock with exercise prices 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 will be included in the Bancorp’s financial results from the date of acquisition, September 17, 2011. BBI had total assets of $137 million, total loans of $103 million, and total deposits of $119 million at June 30, 2011. The Bancorp is in the process of obtaining the fair values of the acquired assets and assumed liabilities to allocate the purchase price.

NOTE 3 – NEW ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU 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 is effective for interim and annual periods beginning on or after June 15, 2011, and 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. Management is currently evaluating the impact of this new accounting guidance.

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 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.

SUPPLEMENTAL FINANCIAL INFORMATION OF CUSTOMERS BANK

Customer Bancorp, Inc. presents supplemental financial information, the financial statements of Customers Bank, which will be considered the accounting acquirer. The following are the unaudited financial statements of Customers Bank for the three and six months ended June 30, 2011 and 2010. This supplemental information is not the information of Customers Bancorp, Inc. and should not be construed as such.

CUSTOMERS BANK

BALANCE SHEETS

(dollar amounts in thousands, except per share data)

	June 30,			December 31,
	2011			2010
ASSETS	(unaudited)
Cash and due from banks	$	5,041		$	6,396
Interest earning deposits		95,993			225,635
Federal funds sold		674			6,693
Cash and cash equivalents		101,708			238,724
Investment securities available for sale, at fair value		251,255			205,828
Investment securities, held-to-maturity (fair value 2011 $395,837; 2010 $0)		381,818			—
Loans receivable held for sale		175,000			199,970
Loans receivable not covered by loss sharing agreements with the FDIC		576,949			514,087
Loans receivable covered under loss sharing agreements with the FDIC		149,867			164,885
Less: Allowance for loan losses		(13,946	)		(15,129	)
Total loans receivable, net		712,870			663,843
FDIC loss sharing receivable		12,634			16,702
Bank premises and equipment, net		5,232			5,302
Bank owned life insurance		26,321			25,649
Other real estate owned (2011 $ 3,020; 2010 $5,342 covered under loss sharing agreements with the FDIC)		5,918			7,248
Accrued interest receivable and other assets		21,423			11,141
Total assets	$	1,694,179		$	1,374,407
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	81,602		$	72,268
Interest bearing		1,324,751			1,173,422
Total deposits		1,406,353			1,245,690
Securities sold under agreements to repurchase		125,000			—
Other borrowings		27,000			11,000
Subordinated debt		2,000			2,000
Accrued interest payable and other liabilities		10,449			10,577
Total liabilities		1,570,802			1,269,267
Stockholders’ equity:
Preferred stock, par value $1,000 per share; 1,000,000 shares authorized; no shares issued and outstanding in 2011 and 2010		—			—
Common stock, par value $1.00 per share; 100,000,000 shares authorized;
shares issued and outstanding 2011 – 29,360,720; 2010 – 25,194,041		29,361			25,194
Additional paid in capital		83,025			71,336
Retained earnings		8,975			10,506
Accumulated other comprehensive income (loss)		2,016			(1,896	)
Total stockholders’ equity		123,377			105,140
Total liabilities and stockholders’ equity	$	1,694,179		$	1,374,407

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANK

UNAUDITED STATEMENTS OF OPERATIONS

(dollar amounts in thousands, except per share data)

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011			2010
Interest income:
Loans receivable, including fees	$	10,203	$	5,225	$	19,727		$	8,696
Investment Securities, taxable		4,351		431		6,368			818
Investment Securities, non-taxable		21		28		43			66
Other		122		70		398			94
Total interest income		14,697		5,754		26,536			9,674

Interest expense:
Deposits		5,646		2,014		11,096			3,545
Securities sold under repurchase agreements		7		—		7			—
Other borrowings		137		110		242			216
Total interest expense		5,790		2,124		11,345			3,761
Net interest income		8,907		3,630		15,191			5,913
Provision for loan losses		2,850		1,100		5,650			5,472
Net interest income after provision for loan losses		6,057		2,530		9,541			441
Non-interest income:
Service fees		138		78		307			206
Mortgage warehouse transactional fees		1,277		547		2,388			703
Bank owned life insurance		243		58		864			116
Gains on sales of securities		—		774		—			1,076
Accretion of FDIC loss sharing receivable		800		—		1,709			—
Other		61		55		387			64
Total non-interest income		2,519		1,512		5,655			2,165
Non-interest expense:
Salaries and employee benefits		3,944		1,777		8,064			3,221
Occupancy		756		325		1,487			633
Technology, communication and bank operations		820		353		1,470			710
Advertising and promotion		205		232		433			328
Professional services		1,254		328		2,608			698
FDIC assessments, taxes, and regulatory fees		430		339		1,253			615
Loan workout and other real estate owned		390		156		862			643
Other		567		102		1,181			297
Total non-interest expense		8,366		3,612		17,358			7,145
Income (loss) before tax expense (benefit)		210		430		(2,162	)		(4,539	)
Income tax expense (benefit)		65		—		(631	)		—
Net income (loss)	$	145	$	430	$	(1,531	)	$	(4,539	)
Basic earnings (loss) per share	$	0.00	$	0.02	$	(0.05	)	$	(0.29	)
Diluted earnings (loss) per share	$	0.00	$	0.02	$	(0.05	)	$	(0.29	)

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANK

UNAUDITED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2011 and 2010

(dollar amounts in thousands, except per share data)

	Number of shares of common stock		Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated other comprehensive income (loss)			Total
Balance, December 31, 2010		25,194,041	$	25,194	$	71,336	$	10,506		$	(1,896	)	$	105,140

Comprehensive income:
Net loss		—		—		—		(1,531	)		—			(1,531	)
Change in net unrealized gains on investment securities available-for-sale, net of taxes		—		—		—		—			3,912			3,912
Total comprehensive income														2,381
Common stock shares issued		4,166,679		4,167		11,360		—			—			15,527
Stock-based compensation expense		—		—		329		—			—			329

Balance, June 30, 2011		29,360,720	$	29,361	$	83,025	$	8,975		$	2,016		$	123,377

	Number of shares of common stock		Common Stock		Additional Paid in Capital		Accumulated Deficit			Accumulated other comprehensive loss			Total
Balance, December 31, 2009		5,522,706	$	5,522	$	29,243	$	(13,229	)	$	(33	)	$	21,503

Comprehensive loss:
Net loss		—		—		—		(4,539	)		—			(4,539	)
Change in net unrealized losses on securities available- for-sale, net of taxes		—		—		—		—			(4	)		(4	)
Total comprehensive loss		—		—		—		—						(4,543	)
Stock-based compensation expense		—		—		92		—			—			92
Common stock shares issued		14,859,216		14,860		33,747		—			—			48,607

Balance, June 30, 2010		20,381,922	$	20,382	$	63,082	$	(17,768	)	$	(37	)	$	65,659

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANK

UNAUDITED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands, except per share data)

Six months ended June 30,	2011			2010
Cash Flows from Operating Activities
Net income (loss)	$	(1,531	)	$	(4,539	)
Adjustments to reconcile net loss to cash provided by operating activities:
Provision for loan losses		5,650			5,472
Provision for depreciation and amortization		614			357
Net amortization (accretion) of investment securities premiums and discounts		(28	)		98
Gain on sales of investment securities		—			(1,076	)
Gain on sale of SBA loan		(78	)		—
Accretion of fair value discounts, net		(311	)		—
Increase in FDIC loss sharing receivables		(1,709	)		—
Fair value adjustments on other real estate owned		197			342
Earnings on investment in bank owned life insurance		(864	)		(116	)
Stock-based compensation expense		329			92
Origination of loans held for sale		(1,080,828	)		—
Proceeds from the sale of loans held for sale		1,105,798			—
(Increase) decrease in accrued interest receivable and other assets		(56	)		340
(Decrease) increase in other liabilities		(2,143	)		458
Net Cash Provided by Operating Activities		25,040			1,428
Cash Flows from Investing Activities
Purchases of investment securities available-for-sale		(49,961	)		(101,634	)
Purchases of investment securities held-to-maturity		(396,847	)		—
Proceeds from maturities and principal repayments on investment securities held–to- maturity		15,071			—
Proceeds from maturities and principal repayments on investment securities available-for-sale		10,447			4,727
Proceeds from sales of securities available-for-sale		—			130,483
Net increase in loans		(59,885	)		(244,888	)
Purchases of bank premises and equipment		(544	)		(1,090	)
Purchase of restricted stock		(10,040	)		(1,003	)
Proceeds from the sale of an SBA loan		1,465			—
Reimbursements under FDIC loss sharing agreements		5,777			—
Proceeds from sales of foreclosed real estate		5,079			268
Proceeds from bank owned life insurance		192			—
Net Cash Used in Investing Activities		(479,246	)		(213,137	)
Cash Flows from Financing Activities
Net increase in deposits		160,663			239,100
Net increase in short-term borrowings		141,000			—
Proceeds from issuance of common stock		15,527			48,607
Net Cash Provided by Financing Activities		317,190			287,707
Net (decrease) increase in Cash and Cash Equivalents		(137,016	)		75,998
Cash and Cash Equivalents - Beginning		238,724			68,807
Cash and Cash Equivalents - Ending	$	101,708		$	144,805
Supplementary Cash Flows Information
Interest paid	$	11,344		$	3,605
Income taxes (refund) paid		2,816			—
Transfers of loans to other real estate owned		3,948			3,296

See accompanying notes to the unaudited financial statements.

CUSTOMERS BANK

NOTES TO UNAUDITED FINANCIAL STATEMENTS

(Dollars in thousands except for per share data)

NOTE 1 - BASIS OF PRESENTATION

This quarterly report presents the financial statements of Customers Bank (the “Bank”). The accounting and reporting policies of the Bank conform with accounting principles generally accepted in the United States of America (US GAAP) and predominant practices within the banking industry.

The Bank’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 six months ended June 30, 2011 presented do not necessarily indicate the results that the Bank will achieve for all of 2011. These interim financial statements should be read in conjunction with the financial statements and accompanying notes that are presented in the financial statements for the Bank for the year ended December 31, 2010.

The financial information in this quarterly report has been prepared in accordance with the Bank’s customary accounting practices. Certain information and footnote disclosures required under US GAAP have been condensed or omitted, as permitted by rules and regulations of the Securities and Exchange Commission.

Certain amounts reported in the 2010 financial statements have been reclassified to conform to the 2011 presentation. These reclassifications did not significantly impact Customers Bank’s financial position or results of operations.

The Bank evaluated its June 30, 2011 financial statements for subsequent events through the date the financial statements were issued. The Bank 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.

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 were exchanged on a three to one basis for shares of common stock and Non-Voting common stock of the Bancorp. 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.

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 7,508,608 shares of the Bancorp’s common stock and 2,278,298 shares of the Bancorp’s Non-Voting common stock. 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 470,244 shares of the Bancorp’s common stock with a weighted average exercise price of $10.64 per share and warrants to purchase 81,034 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 the Class B Non-Voting common stock with a weighted average exercise price of $4.00 per share were converted into stock options to purchase 857,468 shares of the Bancorp’s common stock with a weighted average exercise price of $10.49 per share and stock options to purchase 77,167 shares of the Bancorp’s Class B Non-Voting common stock with a weighted average exercise price of $12.00 per share.

(Dollars in thousands except for per share data)

NOTE 2 – REORGANIZATION AND ACQUISITION ACTIVITY (continued)

Berkshire Bancorp Acquisition

On September 17, 2011, the Bancorp completed its acquisition of Berkshire Bancorp, Inc. (“BBI”) and its subsidiary Berkshire Bank (collectively, “Berkshire”). 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 4,051,068) was exchanged for 0.1534 shares of the Bancorp common stock, resulting in the issuance of 621,611 shares of the Bancorp’s common stock. 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 issuance of 2,892 shares of Series A Preferred Stock and 145 shares of Series B Preferred Stock with a par value of $1.00 per share with 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 assumption of the Series A and B preferred shares, the Bancorp paid $218 of cumulative dividends to the Treasury previously unpaid. The Bancorp’s next scheduled dividend payment for the Series A and B Preferred Stock will be November 2011. The total purchase price was approximately $10.9 million.

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 will be included in the Bancorp’s financial results from the date of acquisition, September 17, 2011. BBI had total assets of approximately $137 million, total loans of $103 million, and total deposits of $119 million at June 30, 2011. The Bancorp is in the process of obtaining the fair values of the acquired assets and assumed liabilities to allocate the purchase price.

NOTE 3 – EARNINGS PER SHARE

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings(loss) 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 Bank’s earnings (loss) per share for the periods presented:

	For the three months ended June 30,				For the six months ended June 30,
	2011		2010		2011			2010
Net income (loss) allocated to common shareholders	$	145	$	430	$	(1,531	)	$	(4,539	)

Weighted average number of common shares outstanding - basic		29,360,720		20,381,922		28,478,112			15,588,436
Warrants		202,530		—		—			—
Stock-based compensation plans		364,726		—		—			—

Weighted average number of common shares - diluted		29,927,976		20,381,922		28,478,112			15,588,436

Basic earnings (loss) per share	$	0.00	$	0.02	$	(0.05	)	$	(0.29	)

Diluted earnings (loss) per share	$	0.00	$	0.02	$	(0.05	)	$	(0.29	)

Stock options outstanding for 878,264 shares of common stock with exercise prices ranging from $4.00 to $11.00 per share and warrants for 33,591 shares of common stock with an exercise price of $5.50 per share for the three month period ended June 30, 2011 were not dilutive, because the exercise price was greater than the average market price. Stock options outstanding for 2,803,904 shares of common stock with exercise prices ranging from $3.25 to $11.00 per share, restricted stock units for 106,876 shares of common stock and warrants for 1,653,834 shares of common stock for the six months ended June 30, 2011 were not dilutive due to losses.

(Dollars in thousands except for per share data)

NOTE 3 – EARNINGS PER SHARE – (continued)

Stock options to purchase 1,870,140 shares of common stock with an exercise price of $3.25 per share and warrants to purchase 1,541,783 shares of common stock with exercise prices ranging from $3.76 to $5.50 per share were outstanding and were not included in the computation of diluted earnings per share for the three months ended June 30, 2010 because the option exercise price was equal to or greater than the average market price. Stock options outstanding for 1,870,140 shares of common stock with an exercise price of $3.25 per share and warrants to purchase 1,541,783 shares of common stock with exercise prices ranging from $3.76 to $5.50 per share for the six month periods ended June 30, 2010 were not dilutive due to losses.

NOTE 4 – INVESTMENT SECURITIES

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

	June 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale:
U.S. Treasury and government agencies	$	1,635	$	3	$	(5	)	$	1,633
Mortgage-backed securities		243,818		3,936		(672	)		247,082
Asset-backed securities		667		4		—			671
Municipal securities		2,080		—		(211	)		1,869
		248,200		3,943		(888	)		251,255
Held-to-Maturity:
Mortgage-backed securities
		381,818		14,019		—			395,837
	$	381,818	$	14,019	$	—		$	395,837

	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

(Dollars in thousands except for per share data)

NOTE 4 – INVESTMENT SECURITIES (continued)

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 six months ended June 30,
	2011			2010
Proceeds from sale of available-for-sale investment securities		$	—	$	130,483
Gross gains			—		1,078
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:

	June 30, 2011
	Available-for-Sale						Held-to-Maturity
	Amortized Cost			Fair Value			Amortized Cost			Fair Value
Due in one year or less		$	1,274		$	1,270		$	—		$	—
Due after one year through five years			2,936			2,731			—			—
Due after five years through ten years			129			130			—			—
Due after ten years			43			42			—			—
			4,382			4,173			—			—

Mortgage-backed securities			243,818			247,082			381,818			395,837

Total investment securities		$	248,200		$	251,255		$	381,818		$	395,837

The Bank’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 June 30, 2011 and December 31, 2010 are as follows:

	June 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:
U.S. Treasury and government agencies	$	1,012	$	(4	)	$	113	$	(1	)	$	1,125	$	(5	)
Mortgage-backed securities		45,421		(585	)		450		(87	)		45,871		(672	)
Municipal securities		—		—			1,869		(211	)		1,869		(211	)
Total investment securities available-for-sale	$	46,433	$	(589	)	$	2,432	$	(299	)	$	48,865	$	(888	)

(Dollars in thousands except for per share data)

NOTE 4 – INVESTMENT SECURITIES (continued)

	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 June 30, 2011, there were eight 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. 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. The Bank does not intend to sell. In addition, the Bank does not believe that it will be more likely than not that the Bank will be required to sell the securities prior to maturity or market price recovery.

NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

	2011			2010
Construction	$	48,290		$	50,964
Commercial real estate		62,985			72,281
Commercial and industrial		12,135			13,156
Residential real estate		22,219			23,822
Manufactured housing		4,238			4,662
Total loans receivable covered under FDIC loss sharing agreements (1)		149,867			164,885
Construction		10,962			13,387
Commercial real estate		156,770			144,849
Commercial and industrial		43,158			35,942
Mortgage warehouse		235,420			186,113
Manufactured housing		98,338			102,924
Residential real estate		30,638			28,964
Consumer		1,299			1,581
Unearned origination costs, net		364			327
Total loans receivable not covered under FDIC loss sharing agreements		576,949			514,087
Allowance for loan losses		(13,946	)		(15,129	)
Loans receivable, net	$	712,870		$	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 the financial statements.

(Dollars in thousands except for per share data)

NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (continued)

Non-Covered Nonaccrual Loans and Loans Past Due

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

	30-89 Days Past Due (1)		Greater Than 90 Days (1)		Total Past Due(1)		Non- Accrual		Current(2)		Total Loans
Commercial and industrial	$	317	$	—	$	317	$	3,100	$	39,741		$	43,158
Commercial real estate		3,012		—		3,012		14,103		139,655			156,770
Construction		159		—		159		3,690		7,113			10,962
Residential real estate
First mortgages		210		—		210		640		10,164			11,014
Home equity		558		—		558		679		18,378			19,615
Acquired with credit deterioration		—		—		—		—		9			9
Consumer		16		—		16		47		1,236			1,299
Mortgage warehouse		—		—		—		—		235,420			235,420
Manufactured housing (3)		1,998		—		1,998		—		96,340			98,338

Total	$	6,270	$	—	$	6,270	$	22,259	$	548,056		$	576,585

(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.

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

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.

(Dollars in thousands except for per share data)

NOTE 5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (continued)

At June 30, 2011 and December 31, 2010, the Bank had other real estate owned that was not covered by loss sharing arrangements of $2,898 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 June 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	$	—		—	$	—	$	701	$	523	$	1,224
Remaining loans (2)		365		—		365		—		10,546		10,911
Commercial real estate
Acquired with credit deterioration		35		—		35		17,470		9,806		27,311
Remaining loans (2)		—		437		437		1,343		33,894		35,674
Construction
Acquired with credit deterioration		—		—		—		23,934		4,766		28,700
Remaining loans (2)		—		—		—		781		18,809		19,590
Residential real estate
Acquired with credit deterioration		—		—		—		3,680		1,647		5,327
First mortgages (2)		—		—		—		—		8,303		8,303
Home equity (2)		84		—		84		4		8,501		8,589
Manufactured housing
Acquired with credit deterioration		—		—		—		89		—		89
Remaining loans (2)		—		—		—		40		4,109		4,149
	$	484	$	437	$	921	$	48,042	$	100,904	$	149,867

(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 5 - 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
	$	6,727	$	—	$	6,727	$	43,454	$	114,704	$	164,885

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

Impaired Loans

The following table presents a summary of the impaired loans at June 30, 2011.

	Recorded Investment		Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	2,899		$	2,899		$	—		$	2,555		$	137
Commercial real estate		15,867			15,867			—			10,800			340